Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      to                     .

Commission File No. 001-37454

 

 

CSW INDUSTRIALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   47-2266942

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas   75240
(Address of principal executive offices)   (Zip Code)

(972) 233-8242

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (do not check if a smaller reporting company)    Smaller reporting company  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

As of November 4, 2016, there were 15,812,793 shares of the issuer’s common stock outstanding.

 

 

 


Table of Contents

CSW INDUSTRIALS, INC.

FORM 10-Q

TABLE OF CONTENTS

 

          Page  
             No.     

PART I - FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

  
  

Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income for the three and six months ended September 30, 2016 and 2015 (unaudited)

     1   
  

Condensed Consolidated Balance Sheets as of September 30, 2016 and March 31, 2016 (unaudited)

     2   
  

Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2016 and 2015 (unaudited)

     3   
  

Notes to the Condensed Consolidated Financial Statements (unaudited)

     4   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     23   

Item 4.

  

Controls and Procedures

     24   

PART II - OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     25   

Item 1A.

  

Risk Factors

     25   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     26   

Item 6.

  

Exhibits

     26   

SIGNATURES

     27   

EX-31.1

     

EX-31.2

     

EX-32.1

     

EX-32.2

     

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINKBASE DOCUMENT

  

EX-101 LABELS LINKBASE DOCUMENT

  

EX-101 PRESENTATION LINKBASE DOCUMENT

  

EX-101 DEFINITION LINKBASE DOCUMENT

  

 

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PART I — FINANCIAL INFORMATION

CSW INDUSTRIALS, INC.

Item 1. Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     September 30,     September 30,  
     2016     2015     2016     2015  
     (in thousands, except per share amounts)  

Revenues, net

   $ 80,131      $ 83,744      $ 164,238      $ 172,654   

Cost of revenues

     (44,468     (42,901     (90,372     (91,367
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     35,663        40,843        73,866        81,287   

Selling, general and administrative expenses

     (25,894     (20,065     (55,605     (46,221

Impairment expenses

     (2,800     —          (3,883     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     6,969        20,778        14,378        35,066   

Interest expense, net

     (742     (832     (1,490     (1,499

Other income (expense), net

     753        (113     1,291        (178
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     6,980        19,833        14,179        33,389   

Provision for income taxes

     (3,138     (6,871     (6,242     (11,777
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 3,842      $ 12,962      $ 7,937      $ 21,612   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings per common share:

        

Basic

   $ 0.24      $ 0.83      $ 0.51      $ 1.39   

Diluted

     0.24        0.83        0.50        1.38   

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     September 30,     September 30,  
     2016     2015     2016     2015  
     (in thousands)  

Net income

   $ 3,842      $ 12,962      $ 7,937      $ 21,612   

Other comprehensive (loss) income:

        

Foreign currency translation adjustments

     (608     (2,312     (1,932     (1,217

Cash flow hedging activity, net of taxes of $22, $169, $257 and $(102), respectively

     156        (313     (67     215   

Pension and other postretirement effects, net of taxes of $0, $(2,611), $0 and $(2,611), respectively

     (2     4,848        8        4,848   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (454     2,223        (1,991     3,846   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 3,388      $ 15,185      $ 5,946      $ 25,458   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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CSW INDUSTRIALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     September 30,     March 31,  
     2016     2016  
     (in thousands, except per share amounts)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 24,624      $ 25,987   

Bank time deposits

     10,373        13,278   

Accounts receivable, net of allowance of $1,168 and $1,208, respectively

     58,295        52,637   

Inventories, net

     49,414        51,634   

Prepaid expenses and other current assets

     12,498        11,985   
  

 

 

   

 

 

 

Total current assets

     155,204        155,521   

Property, plant and equipment, net of accumulated depreciation of $61,179 and $59,035, respectively

     63,524        64,357   

Goodwill

     67,375        67,757   

Intangible assets, net

     82,386        88,727   

Other assets

     15,888        15,898   
  

 

 

   

 

 

 

Total assets

   $ 384,377      $ 392,260   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 10,203      $ 9,912   

Accrued and other current liabilities

     20,258        21,090   

Current portion of long-term debt

     561        561   
  

 

 

   

 

 

 

Total current liabilities

     31,022        31,563   

Long-term debt

     71,841        89,121   

Retirement benefits payable

     1,505        1,746   

Other long-term liabilities

     13,634        11,820   
  

 

 

   

 

 

 

Total liabilities

     118,002        134,250   

Equity:

    

Common shares, $0.01 par value

     156        156   

Shares authorized – 50,000

    

Shares issued – 15,712 and 15,659, respectively

    

Preferred shares, $0.01 par value

     —          —     

Shares authorized – 10,000

    

Shares issued – 0

    

Additional paid-in capital

     34,585        31,597   

Treasury shares, at cost

     (569     —     

Retained earnings

     241,892        233,955   

Accumulated other comprehensive loss

     (9,689     (7,698
  

 

 

   

 

 

 

Total equity

     266,375        258,010   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 384,377      $ 392,260   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

CSW INDUSTRIALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended  
     September 30,  
     2016     2015  
     (in thousands)  

Cash flows from operating activities:

    

Net income

   $ 7,937      $ 21,612   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     4,208        3,256   

Amortization of intangible and other assets

     3,818        3,293   

Provision for inventory reserves

     1,083        —     

Share-based and other executive compensation

     2,988        —     

Net loss (gain) on sales of property, plant and equipment

     (320     (203

Pension plan curtailment benefit

     —          (8,020

Net pension (benefit) expense

     (542     —     

Impairment of assets

     3,883        —     

Net deferred taxes

     (1,001     8,027   

Changes in operating assets and liabilities:

    

Accounts receivable, net

     (5,488     (1,178

Inventories

     1,056        477   

Prepaid expenses and other current assets

     (718     (6,334

Other assets

     36        258   

Accounts payable and other current liabilities

     (887     393   

Retirement benefits payable and other liabilities

     2,918        14   
  

 

 

   

 

 

 

Net cash provided by operating activities

     18,971        21,595   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (5,075     (3,192

Proceeds from sale of assets

     389        71   

Net change in bank time deposits

     2,681        4,440   

Cash paid for acquisitions

     —          (68,849
  

 

 

   

 

 

 

Net cash used in investing activities

     (2,005     (67,530
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings on lines of credit

     —          70,000   

Repayments of lines of credit

     (17,281     (2,531

Purchase of treasury shares

     (569     —     

Cash contribution from Capital Southwest

     —          13,000   

Dividends paid to Capital Southwest

     —          (300
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (17,850     80,169   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and equivalents

     (479     (737
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (1,363     33,497   

Cash and cash equivalents, beginning of period

     25,987        20,448   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 24,624      $ 53,945   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

CSW INDUSTRIALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

1. ORGANIZATION AND OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES

CSW Industrials, Inc. (“CSWI,” the “Company,” “we,” “our” or “us”) is a diversified industrial growth company with well-established, scalable platforms and deep domain expertise across three segments: Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals. Our broad portfolio of leading products provides performance optimizing solutions to our customers. Our products include mechanical products for heating, ventilating and air conditioning (“HVAC”) and refrigeration applications, coatings and sealants and high performance specialty lubricants. Drawing on our innovative and proven technologies, we seek to deliver solutions to our professional customers that require superior performance and reliability. Our diverse product portfolio includes more than 100 highly respected industrial brands including RectorSeal No. 5 ™ thread sealants, KOPR KOTE™ anti-seize lubricants, Safe-T-Switch® condensate overflow shutoff devices, KATS® coatings, Air Sentry® breathers and RailPlex® tank car coatings. Additionally, we recently acquired Deacon® high temperature sealants and AC Leak Freeze® to stop refrigerant leaks. Our products are well known in the specific markets we serve and have a reputation for high quality and reliability. Markets that we serve include HVAC, industrial, rail, plumbing, architecturally-specified building products, energy, mining and other general industrial markets.

The Share Distribution

On September 30, 2015, Capital Southwest Corporation (“Capital Southwest”) spun-off certain of its industrial products, coatings, sealants and adhesives and specialty chemicals businesses by means of a distribution of the outstanding shares of common stock of CSWI on a pro rata basis to holders of Capital Southwest common stock (the “Share Distribution”). CSWI became an independent, publicly traded company at the time of the Share Distribution.

Strathmore Restructuring

During the three months ended September 30, 2016, we initiated a restructuring program related to our Strathmore business, which is included in our Coatings, Sealants & Adhesives segment. The program was initiated in response to excess capacity due to contraction in the markets served by Strathmore, which caused us to perform a facility rationalization analysis. Restructuring charges are as follows (in thousands):

 

     Severance/
Retention
     Asset Write-
down (a)
     Other (b)      Total  

Three Months Ended September 30, 2016:

           

COS

   $ 338       $ —         $ —         $ 338   

SG&A

     —           2,800         —           2,800   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 338       $ 2,800       $ —         $ 3,138   
  

 

 

    

 

 

    

 

 

    

 

 

 

Six Months Ended September 30, 2016:

           

COS

   $ 338       $ —         $ —         $ 338   

SG&A

     160         2,800         —           2,960   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 498       $ 2,800       $ —         $ 3,298   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Expected Restructuring Charges (c):

           

COS

   $ 466       $ —         $ —         $ 466   

SG&A

     160         2,800         1,699         4,659   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 626       $ 2,800       $ 1,699       $ 5,125   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The initiation of the restructuring program triggered an analysis of our intangible assets recorded upon our acquisition of Strathmore. As a result of this analysis, we recorded an impairment of our Strathmore trademark.
(b) Other consists of moving costs related to relocation of manufacturing activities, consulting fees for production and efficiency support and recruiting fees to increase staff in locations where production is being relocated. These charges will be expensed as incurred.
(c) Total expected restructuring charges represent management’s best estimate to date. As the execution of the program is still in process, the amount and nature of actual restructuring charges incurred could vary from total expected charges.

 

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Table of Contents

As of September 30, 2016, the restructuring reserve resulting from this program consisted entirely of the severance recorded during the three months ended September 30, 2016 and is included in accrued and other current liabilities on our condensed consolidated balance sheet.

Basis of Presentation

The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 (“Quarterly Report”) includes all revenues, costs, assets and liabilities directly attributable to CSWI and have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).

The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of CSWI’s financial position as of September 30, 2016, and the results of operations for the three and six months ended September 30, 2016 and 2015, respectively. All adjustments are of a normal, recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in CSWI’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 (the “Annual Report”).

Accounting Policies

We have consistently applied the accounting policies described in our Annual Report in preparing these condensed consolidated financial statements. We have not made any changes in significant accounting policies disclosed in the Annual Report.

Accounting Developments

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which has been subsequently amended with additional ASUs including ASU No. 2016-12, issued in May 2016. ASU No. 2014-09, as amended, supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605).” The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. There are also expanded disclosure requirements in this ASU. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year. As a result, public entities will apply the new standard for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early adoption as of the original public entity effective date is permitted. We are currently evaluating the impact of ASU No. 2014-09 on our consolidated financial condition and results of operations.

In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” This ASU requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. Amortization of those costs should be reported as interest expense. This ASU is effective for financial statements issued for annual and interim periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The new guidance should be applied on a retrospective basis for each period presented in the balance sheet. We adopted the amendments of this ASU for the quarter ended June 30, 2016, and it did not have a material impact on our consolidated financial condition and results of operations.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Modified retrospective application is permitted with certain practical expedients. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2016-02 on our consolidated financial condition and results of operations.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718),” which simplifies the accounting for share-based compensation. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2016-09 on our consolidated financial condition and results of operations.

 

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Table of Contents

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments,” which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows and how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The new guidance should be applied on a retrospective basis for each period presented. ASU 2016-15 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2016-15 on our consolidated financial condition and results of operations.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This ASU aligns the recognition of income tax consequences for intra-entity transfers of assets other than inventory with International Financial Reporting Standards. Specifically, International Accounting Standards No. 12, “Income Taxes,” requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (including inventory) when the transfer occurs. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2016-16 on our consolidated financial condition and results of operations.

 

2. ACQUISITIONS

AC Leak Freeze

On December 16, 2015, we acquired substantially all of the assets of AC Leak Freeze® (“Leak Freeze”), based in Baltimore, Maryland for $16.3 million in cash funded by borrowings under CSWI’s Revolving Credit Facility (discussed in Note 7). Leak Freeze is a leading manufacturer of original equipment manufacturer-approved air conditioning and refrigerant leak repair solutions. The excess of the purchase price over the fair value of the identifiable assets acquired was $5.7 million and was allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from a more extensive specialty chemical product portfolio for the HVAC market and leveraging our larger distributor network. The allocation of the fair value of the assets acquired included customer lists, trademarks and trade names and a non-compete agreement of $8.1 million, $1.4 million and $0.2 million, respectively, as well as inventory in the amount of $0.7 million. Customer lists and the non-compete agreement are being amortized over 10 years and five years, respectively, while trademarks and trade names and goodwill are not being amortized. Leak Freeze activity has been included in our Specialty Chemicals segment since the acquisition date. No pro forma information has been provided due to immateriality.

Deacon Industries, Inc.

On October 1, 2015, we acquired substantially all of the assets of Deacon Industries, Inc. (“Deacon”), based in Washington, Pennsylvania for $12.6 million. The acquisition was funded by $11.0 million of borrowings under a line of credit and $1.1 million cash on hand. The remaining $0.5 million of the purchase price represents a payment contingent upon the achievement of certain performance metrics during the fiscal year ending March 31, 2017. Deacon is a leading manufacturer of high temperature sealants and injectable packings with applications in a variety of industrial end markets, both on an emergency and maintenance basis. The excess of the purchase price over the fair value of the identifiable assets acquired was $4.1 million and was allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from a more extensive sealant and injectable packing product portfolio and leveraging our larger distributor network. The allocation of the fair value of the assets acquired included customer lists, know-how, trademarks and trade names and a non-compete agreement of $2.9 million, $2.6 million, $1.1 million, and $0.1 million, respectively, as well as property, plant, and equipment and inventory in the amounts of $0.9 million and $0.5 million, respectively. Customer lists, know-how and the non-compete agreement are being amortized over 15 years, 10 years and five years, respectively, while trademarks and trade names and goodwill are not being amortized. Deacon activity has been included in our Coatings, Sealants & Adhesives segment since the acquisition date. No pro forma information has been provided due to immateriality.

 

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3. INVENTORIES

Inventories consist of the following (in thousands):

 

     September 30, 2016      March 31, 2016  

Raw materials and supplies

   $ 23,653       $ 26,019   

Work in process

     4,207         5,432   

Finished goods

     28,160         26,087   
  

 

 

    

 

 

 

Total inventories

     56,020         57,538   

Less: LIFO reserve

     (5,302      (5,302

Less: Obsolescence reserve

     (1,304      (602
  

 

 

    

 

 

 

Inventories, net

   $ 49,414       $ 51,634   
  

 

 

    

 

 

 

 

4. INTANGIBLE ASSETS

The following table provides information about our intangible assets (in thousands, except years):

 

            September 30, 2016     March 31, 2016  
     Wtd Avg Life      Gross
Amount
     Accumulated
Amortization
    Gross
Amount
     Accumulated
Amortization
 
     (Years)                             

Finite-lived intangible assets:

             

Patents (a)

     12       $ 12,008       $ (6,735   $ 14,458       $ (8,600

Customer lists and amortized trademarks

     12         70,983         (19,930     71,475         (17,080

Non-compete agreements

     5         1,042         (262     1,310         (405

Other

     12         4,496         (570     3,769         (354
     

 

 

    

 

 

   

 

 

    

 

 

 
      $ 88,529       $ (27,497   $ 91,012       $ (26,439
     

 

 

    

 

 

   

 

 

    

 

 

 

Trade names and trademarks not being amortized (b)

      $ 21,354       $ —        $ 24,154       $ —     
     

 

 

    

 

 

   

 

 

    

 

 

 

 

(a) During the six months ended September 30, 2016, we wrote off $2.4 million of patents that were fully amortized.
(b) During the six months ended September 30, 2016, we recognized a $2.8 million non-cash impairment charge related to the Strathmore trademark.

Amortization expense for the three and six months ended September 30, 2016 was $1.9 million and $3.8 million, respectively. Amortization expense for the three and six months ended September 30, 2015 was $1.6 million and $3.3 million, respectively. The following table shows the estimated future amortization for intangible assets as of September 30, 2016, for the remainder of the current fiscal year and the next five years ending March 31 (in thousands):

 

2017

   $ 3,545   

2018

     7,233   

2019

     6,385   

2020

     6,142   

2021

     5,919   

2022

     5,484   

 

5. EXECUTIVE COMPENSATION

On August 28, 2014, the Board of Directors of Capital Southwest (our former parent company) adopted an executive compensation plan consisting of grants of nonqualified stock options, restricted stock and cash incentive awards to executive officers of Capital Southwest (the “Executive Compensation Plan”). The Executive Compensation Plan was intended to align the compensation of Capital Southwest’s executive officers with Capital Southwest’s key strategic objective of increasing the market value of Capital Southwest’s shares through a transformative transaction for the benefit of Capital Southwest’s shareholders. Under the Executive Compensation Plan, Joseph B. Armes, Kelly Tacke and Bowen S. Diehl were to receive an amount equal to 6.0% of the aggregate appreciation in Capital Southwest’s share price from August 28, 2014 (using a base price of $36.16 per share) to the Trigger Event Date (later to be determined to be December 29, 2015, as discussed below) (the “Total Payment Amount”). The initial plan component consisted of nonqualified options awarded to purchase a total of 258,000 shares of Capital Southwest common stock. The second plan component consisted of total awards of 127,000 shares of Capital Southwest restricted common stock, which have voting rights, but do not have cash dividend rights. The final plan component consisted of cash incentive payments awarded to each of Mr. Armes, Ms. Tacke and Mr. Diehl in an amount equal to the excess of each awardee’s allocable portion of the Total Payment Amount

 

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over the aggregate value of the awardee’s restricted common stock and nonqualified option awards under the Executive Compensation Plan, calculated as of the Trigger Event Date. The equity based awards vest and become exercisable as follows: (1) 1/3 on the Trigger Event Date; (2) 1/3 on the first anniversary of the Trigger Event Date; and (3) 1/3 on the second anniversary of the Trigger Event Date. Generally, entitlement to such awards is conditioned on the awardee remaining in the employment of Capital Southwest or its subsidiaries on the vesting date, or in the event the employment of the awardee was transferred to CSWI, continuing employment by CSWI. Effective immediately with the spin-off of CSWI, both Joseph B. Armes and Kelly Tacke became employees of CSWI and Bowen Diehl remained an employee of Capital Southwest.

On September 8, 2015, the Board of Directors of Capital Southwest designated the Share Distribution as a transformative transaction for purposes of the Executive Compensation Plan and amended the award agreements granted under the Executive Compensation Plan to provide for accelerated vesting of the awards held by an executive in the event of a termination of such executive’s service effected by the executive for good reason, by the employer without cause, or as a result of the disability or death of the executive. As a result of the Share Distribution completed on September 30, 2015, the Trigger Event Date was determined to be December 29, 2015.

As of December 29, 2015, the cash component of the Executive Compensation Plan was calculated based on the volume weighted average price of Capital Southwest and CSWI common stock for the 20 trading days ended December 29, 2015. Effective with the Share Distribution, CSWI entered into an Employee Matters Agreement with Capital Southwest. Under this agreement, Capital Southwest retained the obligation to fund the cash incentive awards granted under the Executive Compensation Plan, and all liabilities with respect to such cash incentive awards remained liabilities of Capital Southwest. During the three and six months ended September 30, 2016, we recorded total executive compensation expense for the cash incentive payments of $0.2 million and $1.5 million, respectively, for Mr. Armes and Ms. Tacke, and total stock compensation (reversal) expense of $(0.3) million and $0.8 million, respectively. Within those amounts, for the six months ended September 30, 2016, were $1.2 million and $1.0 million of cash incentive and stock compensation expenses, respectively, which were accelerated as a result of our chief financial officer transition in June 2016.

 

6. SHARE-BASED COMPENSATION

In September 2015, in connection with the Share Distribution, we adopted and Capital Southwest approved our 2015 Equity and Incentive Compensation Plan (the “2015 Plan”), which provides for the issuance of up to 2,000,000 shares of CSWI common stock through the grant of stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units or other share-based awards, to employees, officers and non-employee directors, as well as the issuance of awards in connection with the Share Distribution. As of September 30, 2016, 1,376,877 shares were available for issuance under the 2015 Plan, which includes the impact of 510,447 shares issued in connection with the Share Distribution to convert outstanding Capital Southwest equity awards into CSWI equity awards.

We recorded share-based compensation as follows for the three and six months ended September 30, 2016 (in thousands):

 

     Three Months Ended September 30, 2016  
     Stock Options      Restricted Shares      Total  

Share-based compensation expense

   $ (105    $ 191       $ 86   

Related income tax benefit

     37         (67      (30
  

 

 

    

 

 

    

 

 

 

Net share-based compensation expense

   $ (68    $ 124       $ 56   
  

 

 

    

 

 

    

 

 

 
     Six Months Ended September 30, 2016  
     Stock Options      Restricted Shares      Total  

Share-based compensation expense

   $ 365       $ 1,099       $ 1,464   

Related income tax benefit

     (128      (385      (513
  

 

 

    

 

 

    

 

 

 

Net share-based compensation expense

   $ 237       $ 714       $ 951   
  

 

 

    

 

 

    

 

 

 

No share-based compensation expense was recorded prior to October 1, 2015.

 

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Stock option activity is as follows:

 

     Six Months Ended September 30, 2016  
     Number of
Shares
     Weighted
Average Exercise
Price
     Remaining
Contractual Life
     Aggregate
Intrinsic Value
 
                   (Years)      (in millions)  

Outstanding at April 1, 2016

     362,513       $ 24.53         

Granted

     —           —           

Exercised

     —           —           

Canceled

     (24,897      23.11         
  

 

 

    

 

 

       

Outstanding at September 30, 2016

     337,616       $ 24.64         5.5       $ 2.6   
  

 

 

    

 

 

       

Exercisable at September 30, 2016

     193,097       $ 24.29         3.9       $ 1.6   
  

 

 

    

 

 

       

At September 30, 2016, we had unrecognized compensation cost related to non-vested stock options of $0.3 million, which will be amortized into net income over the remaining weighted average vesting period of approximately 1.5 years. No options were granted or exercised during the three or six months ended September 30, 2016 or 2015. The total fair value of stock options vested during the three and six months ended September 30, 2016 was $0.1 million and $0.4 million, respectively.

Restricted share activity is as follows:

 

     Six Months Ended September 30, 2016  
     Number of Shares      Weighted Average Grant Date
Fair Value
 

Outstanding at April 1, 2016

     181,977       $ 23.72   

Granted

     55,228         24.71   

Vested

     (29,667      15.93   

Canceled

     (18,063      29.06   
  

 

 

    

 

 

 

Outstanding at September 30, 2016

     189,475       $ 24.72   
  

 

 

    

 

 

 

During the restriction period, the holders of restricted shares are entitled to vote and receive dividends, except for restricted shares awarded under the Executive Compensation Plan (as discussed in Note 5). At September 30, 2016, we had unrecognized compensation cost related to unvested restricted shares of $2.8 million, which will be amortized into net income over the remaining weighted average vesting period of approximately 2.1 years. The total fair value of restricted shares vested during the three and six months ended September 30, 2016 was $0.1 million and $0.5 million, respectively.

Restricted shares granted during the three and six months ended September 30, 2016 includes 49,373 shares with performance-based vesting provisions, and vesting ranges from 0-100% based on pre-defined performance targets with market conditions. Performance-based restricted shares are earned upon the achievement of performance targets, and are payable in common shares. Compensation expense is recognized over a 36-month cliff vesting period based on the fair market value of our common shares on the date of grant.

 

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7. LONG-TERM DEBT

Debt consists of the following (in thousands):

 

     September 30,     March 31,  
     2016     2016  

Revolving Credit Facility, interest rate of 2.27% and 2.18%, respectively

   $ 59,539      $ 76,539   

Whitmore term loan, interest rate of 2.53% and 2.43%, respectively

     12,863        13,143   
  

 

 

   

 

 

 

Total debt

     72,402        89,682   

Less: Current portion

     (561     (561
  

 

 

   

 

 

 

Long-term debt

   $ 71,841      $ 89,121   
  

 

 

   

 

 

 

Revolving Credit Facility Agreement

On December 11, 2015, we entered into a five-year $250.0 million revolving credit facility agreement (“Revolving Credit Facility”), with an additional $50.0 million accordion feature, with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. Borrowings under this facility bear interest at a rate of prime plus 0.75% or London Interbank Offered Rate (“LIBOR”) plus 1.75%, which may be adjusted based on our leverage ratio. We pay a commitment fee 0.25% for the unutilized portion of the Revolving Credit Facility. Interest and commitment fees are payable at least quarterly and the outstanding principal balance is due at maturity. This facility is secured by substantially all of our assets. During April 2016 and August 2016, we repaid $5.0 million and $12.0 million, respectively, of the amount that was outstanding at March 31, 2016 under this facility, and as of September 30, 2016, we had $59.5 million in outstanding borrowings under this facility. Additionally, during October 2016, we repaid $8.3 million of the amount that was outstanding at September 30, 2016 under this facility. The Revolving Credit Facility contains certain customary restrictive covenants, including a requirement to maintain a minimum fixed charge coverage ratio of 1.25 to 1.00 and a maximum leverage ratio of Funded Debt to EBITDA (as defined in the agreement) of 3.00 to 1.00. Covenant compliance is tested quarterly and we were in compliance with all covenants as of September 30, 2016.

Whitmore Term Loan

As of September 30, 2016, The Whitmore Manufacturing Company (one of our wholly-owned operating subsidiaries) had a secured term loan outstanding related to a warehouse and corporate office building and the remodel of an existing manufacturing and research and development facility. The term loan matures on July 31, 2029, and we have quarterly payments of $140,000 due in each of the next four quarters. Borrowings under this term loan bear interest at a variable annual rate equal to one month LIBOR plus 2.0%. As of September 30, 2016 and March 31, 2016, Whitmore had $12.9 million and $13.1 million, respectively, in outstanding borrowings under the term loan.

Strathmore Acquisition Term Loan

Whitmore had a $70.0 million secured term loan outstanding to support the acquisition of the assets of Strathmore Products, Inc. (“Strathmore”) in April 2015. The term loan was scheduled to mature on April 27, 2020 and was secured by the assets of Whitmore and Strathmore, excluding certain real property. Borrowings under the term loan bore interest at a variable annual rate equal to one month LIBOR plus 3.0%. We made quarterly payments of $875,000 in both July 2015 and October 2015. The remaining principal balance of $68.3 million was repaid on December 11, 2015 with borrowings under the Revolving Credit Facility, and the term loan was terminated.

 

8. EARNINGS PER SHARE

On September 30, 2015, 15.6 million CSWI common shares were distributed to Capital Southwest shareholders in connection with the Share Distribution. For comparative purposes, and to provide a more meaningful calculation for weighted average shares, this amount was assumed to be outstanding throughout all periods presented up to and including September 30, 2015 in the calculation of basic weighted average shares. In addition, for the dilutive weighted average share calculations, the dilutive securities outstanding at September 30, 2015 were also assumed to be outstanding throughout all periods presented up to and including September 30, 2015.

 

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The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings per share for the three and six months ended September 30, 2016 and 2015 (amounts in thousands, except per share data):

 

     Three Months Ended      Six Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  

Net income for basic and diluted earnings per share

   $ 3,842       $ 12,962       $ 7,937       $ 21,612   

Weighted average shares:

           

Common stock

     15,481         15,441         15,484         15,441   

Participating securities

     214         142         222         142   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for basic earnings per common share

     15,695         15,583         15,706         15,583   

Potentially dilutive securities (a)

     68         128         65         128   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per common share

     15,763         15,711         15,771         15,711   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share:

           

Basic

   $ 0.24       $ 0.83       $ 0.51       $ 1.39   

Diluted

     0.24         0.83         0.50         1.38   

 

(a) No shares were excluded for anti-dilution for the three and six months ended September 30, 2016. We have excluded 32,877 shares for the three and six months ended September 30, 2015 as their effect would have been anti-dilutive.

 

9. DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING

We enter into interest rate swap agreements to hedge exposure to floating interest rates on certain portions of our debt. As of September 30, 2016 and March 31, 2016, we had $44.8 million and $46.4 million, respectively, of notional amount in outstanding designated interest rate swaps with third parties. All interest rate swaps are highly effective. At September 30, 2016, the maximum remaining length of any interest rate swap contract in place was approximately 12.8 years. The fair value of interest rate swaps designated as hedging instruments are summarized below (in thousands):

 

     September 30,      March 31,  
     2016      2016  

Current derivative liabilities

   $ 448       $ 511   

Non-current derivative liabilities

     1,535         1,366   

The impact of changes in fair value of interest rate swaps is included in Note 14.

On June 17, 2016, we entered into a foreign exchange forward contract, not designated as a hedging instrument, to hedge our exposure associated with assets denominated in British pounds. The forward contract was settled on September 29, 2016 resulting in a net gain of $0.2 million, which was included in other income (expense), net on our condensed consolidated statements of income for the six months ended September 30, 2016.

Current derivative assets are reported in our condensed consolidated balance sheets in prepaid expenses and other current assets. Current and non-current derivative liabilities are reported in our condensed consolidated balance sheets in accrued and other current liabilities and other long-term liabilities, respectively.

We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluation of our counterparties and expect all counterparties to meet their obligations. We have not experienced credit losses from our counterparties.

 

10. FAIR VALUE MEASUREMENTS

The fair value of interest rate swaps and foreign exchange forward contracts (as discussed in Note 9) are determined using Level 2 inputs. The carrying value of our debt (included in Note 7) approximates fair value as it bears interest at floating rates. The carrying amounts of other financial instruments (i.e., cash and cash equivalents, restricted cash, bank time deposits, accounts receivable, net, accounts payable) approximated their fair values at September 30, 2016 and March 31, 2016 due to their short-term nature.

The fair values of acquisition-related contingent payments are estimated using Level 3 inputs. The contingent payment related to the acquisition of the Deacon assets utilized the weighted average probability method using forecasted sales. The most significant factor in the valuation is projected net revenues resulting from sales of Deacon products. The contingent payment related to the acquisition of assets from SureSeal Manufacturing (“SureSeal”) utilized the weighted average probability method using forecasted sales and gross margin. The most significant factor in the valuation is projected net revenues resulting from sales of SureSeal products.

 

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The following table sets forth the changes in fair value recognized in our condensed consolidated financial statements (in thousands):

 

     Six months ended  
     September 30, 2016  
     Deacon      SureSeal  

Balance at beginning of period

   $ 392       $ 5,462   

Change due to accretion

     —           447   

Change in estimate

     (392      —     
  

 

 

    

 

 

 

Balance at end of period

   $ —         $ 5,909   
  

 

 

    

 

 

 

 

11. RETIREMENT PLANS

We maintain a frozen qualified defined benefit pension plan (the “Qualified Plan”) that covers certain of our U.S. employees. The Qualified Plan was previously closed to any employees hired or re-hired on or after January 1, 2015 and it was also amended to freeze benefit accruals and to modify certain ancillary benefits provided under the Qualified Plan effective as of September 30, 2015. Benefits are based on years of service and an average of the highest five consecutive years of compensation during the last ten years of employment.

The funding policy of the Qualified Plan is to contribute annual amounts that are currently deductible for federal income tax purposes. No contributions were made during the three or six month periods ended September 30, 2016 and 2015.

The following tables set forth the Qualified Plan’s net pension (benefit) expense recognized in our condensed consolidated financial statements (in thousands):

 

     Three Months Ended September 30,  
     2016      2015  

Service cost - benefits earned during the period

   $ —         $ 1,272   

Interest cost on projected benefit obligation

     584         746   

Expected return on assets

     (786      (715

Amortization of net prior year service cost (benefit)

     —           (42

Curtailment expense (benefit)

     —           (8,051
  

 

 

    

 

 

 

Net pension expense (benefit)

   $ (202    $ (6,790
  

 

 

    

 

 

 
     Six Months Ended September 30,  
     2016      2015  

Service cost - benefits earned during the period

   $ —         $ 2,042   

Interest cost on projected benefit obligation

     1,234         1,382   

Expected return on assets

     (1,804      (1,324

Amortization of net prior year service cost (benefit)

     —           (27

Curtailment expense (benefit)

     —           (8,051
  

 

 

    

 

 

 

Net pension expense (benefit)

   $ (570    $ (5,978
  

 

 

    

 

 

 

 

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We also maintain a frozen unfunded retirement restoration plan (the “Restoration Plan”) that is a non-qualified plan providing for the payment to participating employees, upon retirement, the difference between the maximum annual payment permissible under the Qualified Plan pursuant to federal limitations and the amount that would otherwise have been payable under the Qualified Plan. As with the Qualified Plan, the Restoration Plan was closed to new participants on January 1, 2015 and amended to freeze benefit accruals and to modify certain ancillary benefits effective as of September 30, 2015.

The following table sets forth the Restoration Plan’s net pension expense recognized in our condensed consolidated financial statements (in thousands):

 

     Three Months Ended September 30,  
     2016      2015  

Service cost - benefits earned during the period

   $ —         $ 10   

Interest cost on projected benefit obligation

     16         19   

Amortization of net prior service cost

     —           1   

Amortization of net actuarial loss

     (1      16   

Curtailment expense

     —           31   
  

 

 

    

 

 

 

Net pension expense

   $ 15       $ 77   
  

 

 

    

 

 

 
     Six Months Ended September 30,  
     2016      2015  

Service cost - benefits earned during the period

   $ —         $ 27   

Interest cost on projected benefit obligation

     35         36   

Amortization of net prior service cost

     —           5   

Amortization of net actuarial loss

     7         20   

Curtailment expense

     —           31   
  

 

 

    

 

 

 

Net pension expense

   $ 42       $ 119   
  

 

 

    

 

 

 

 

12. CONTINGENCIES

From time to time, we are involved in various claims and legal actions that arise in the ordinary course of business. There are not any matters pending that we currently believe are reasonably possible of having a material impact to our business, consolidated financial position, results of operations or cash flows.

 

13. INCOME TAXES

For the three months ended September 30, 2016, we earned $7.0 million before taxes and provided for income taxes of $3.1 million, resulting in an effective tax rate of 45.0%. For the six months ended September 30, 2016, we earned $14.2 million before taxes and provided for income taxes of $6.2 million, resulting in an effective tax rate of 44.0%. For the three months ended September 30, 2015, we earned $19.8 million before taxes and provided for income taxes of $6.9 million, resulting in an effective tax rate of 34.6%. For the six months ended September 30, 2015, we earned $33.4 million before taxes and provided for income taxes of $11.8 million, resulting in an effective tax rate of 35.3%. The provision for income taxes for the three months ended September 30, 2016 was impacted by $0.7 million primarily relating to reserves for uncertain tax positions, which increased our anticipated effective rate by 10.5%. The provision for income taxes for the six months ended September 30, 2016 was impacted by $1.3 million primarily relating to reserves for uncertain tax positions and the effect of changes in tax rates, which increased our anticipated effective rate by 9.5%. Other items impacting the variance in the effective tax rate from the U.S. federal statutory rate include foreign operations activity in countries with lower statutory rates and domestic operations activity in states with higher statutory rates.

 

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14. OTHER COMPREHENSIVE INCOME (LOSS)

The following table provides an analysis of the changes in accumulated other comprehensive income (loss) (in thousands):

 

     Three Months Ended  
     September 30,  
     2016     2015  

Currency translation adjustments:

    

Balance at beginning of period

   $ (6,572   $ (2,782

Adjustments for foreign currency translation

     (608     (2,312
  

 

 

   

 

 

 

Balance at end of period

   $ (7,180   $ (5,094
  

 

 

   

 

 

 

Interest rate swaps:

    

Balance at beginning of period

   $ (1,444   $ (678

Unrealized gains (losses), net of taxes of $(31) and $229, respectively (a)

     57        (433

Reclassification of losses included in interest expense, net, net of taxes of $53 and $(63), respectively

     99        120   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     156        (313
  

 

 

   

 

 

 

Balance at end of period

   $ (1,288   $ (991
  

 

 

   

 

 

 

Defined benefit plans:

    

Balance at beginning of period

   $ (1,219   $ (5,210

Amortization of net prior service benefit, net of taxes of $0 and $8, respectively (b)

     —          (15

Amortization of net loss, net of taxes of $0 and $(7), respectively (b)

     (2     13   

Curtailment, net of taxes of $(2,612)

     —          4,850   
  

 

 

   

 

 

 

Balance at end of period

   $ (1,221   $ (362
  

 

 

   

 

 

 
     Six Months Ended  
     September 30,  
     2016     2015  

Currency translation adjustments:

    

Balance at beginning of period

   $ (5,248   $ (3,877

Adjustments for foreign currency translation

     (1,932     (1,217
  

 

 

   

 

 

 

Balance at end of period

   $ (7,180   $ (5,094
  

 

 

   

 

 

 

Interest rate swaps:

    

Balance at beginning of period

   $ (1,221   $ (1,206

Unrealized gains (losses), net of taxes of $136 and $(20), respectively (a)

     (252     37   

Reclassification of losses included in interest expense, net, net of taxes of $99 and $(97), respectively

     185        178   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (67     215   
  

 

 

   

 

 

 

Balance at end of period

   $ (1,288   $ (991
  

 

 

   

 

 

 

Defined benefit plans:

    

Balance at beginning of period

   $ (1,229   $ (5,210

Amortization of net prior service benefit, net of taxes of $0 and $8, respectively (b)

     —          (15

Amortization of net loss, net of taxes of $(4) and $(7), respectively (b)

     8        13   

Curtailment, net of taxes of $(2,612)

     —          4,850   
  

 

 

   

 

 

 

Balance at end of period

   $ (1,221   $ (362
  

 

 

   

 

 

 

 

(a) We expect to recognize a loss of $0.3 million, net of deferred taxes, over the next twelve months related to designated cash flow hedges based on their fair values at September 30, 2016.
(b) Amortization of prior service costs and actuarial losses out of accumulated other comprehensive loss are included in the computation of net periodic pension expenses. See Note 11 for additional information.

 

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15. SEGMENTS

We conduct our operations through three business segments based on type of product and how we manage the business:

 

    Industrial Products includes specialty mechanical products, fire and smoke protection products, architecturally-specified building products and storage, filtration and application equipment for use with our specialty chemicals and other products for general industrial application.

 

    Coatings, Sealants and Adhesives is comprised of coatings and penetrants, pipe thread sealants, firestopping sealants and caulks and adhesives/solvent cements.

 

    Specialty Chemicals includes lubricants and greases, drilling compounds, anti-seize compounds, chemical formulations and degreasers and cleaners.

Our corporate headquarters does not constitute a separate segment. We evaluate segment performance and allocate resources based on each reportable segment’s operating income. The Eliminations and Other segment information is included to reconcile segment data to the consolidated financial statements and includes assets and expenses primarily related to corporate and other functions. No individual customer accounted for more than 10% of consolidated net revenues. Currently, we do not allocate interest expense, net or other income (expense), net by segment.

Three months ended September 30, 2016:

 

(in thousands)    Industrial
Products
     Coatings,
Sealants and
Adhesives
    Specialty
Chemicals
     Subtotal –
Reportable
Segments
     Eliminations and
Other
    Total  

Revenues, net

   $ 41,858       $ 23,006      $ 15,245       $ 80,109       $ 22      $ 80,131   

Operating income

     9,897         (1,616     1,232         9,513         (2,544     6,969   

Three months ended September 30, 2015:

 

(in thousands)    Industrial
Products
     Coatings,
Sealants and
Adhesives
     Specialty
Chemicals
     Subtotal –
Reportable
Segments
     Eliminations and
Other
    Total  

Revenues, net

   $ 36,186       $ 27,971       $ 19,771       $ 83,928       $ (184   $ 83,744   

Operating income

     11,668         4,938         4,961         21,567         (789     20,778   

Six months ended September 30, 2016:

 

(in thousands)    Industrial
Products
     Coatings,
Sealants and
Adhesives
     Specialty
Chemicals
     Subtotal –
Reportable
Segments
     Eliminations and
Other
    Total  

Revenues, net

   $ 85,333       $ 46,371       $ 32,490       $ 164,194       $ 44      $ 164,238   

Operating income

     20,504         97         2,288         22,889         (8,511     14,378   

Six months ended September 30, 2015:

 

(in thousands)    Industrial
Products
     Coatings,
Sealants and
Adhesives
     Specialty
Chemicals
     Subtotal –
Reportable
Segments
     Eliminations and
Other
    Total  

Revenues, net

   $ 76,162       $ 56,420       $ 39,934       $ 172,516       $ 138      $ 172,654   

Operating income

     21,358         6,778         7,691         35,827         (761     35,066   

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included in this Quarterly Report, as well as our consolidated financial statements and related notes for the fiscal year ended March 31, 2016 included in our Annual Report. This discussion and analysis contains forward-looking statements based on current expectations relating to future events and our future performance that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” below. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those risk factors set forth in our Annual Report and in this Quarterly Report.

The Share Distribution

On September 30, 2015, Capital Southwest Corporation (“Capital Southwest”) spun-off certain of its industrial products, coatings, sealants and adhesives and specialty chemicals businesses by means of a distribution of the outstanding shares of common stock of CSWI on a pro rata basis to holders of Capital Southwest common stock (the “Share Distribution”). CSWI became an independent, publicly traded company at the time of the Share Distribution.

Overview

We are a diversified industrial growth company with well-established, scalable platforms and domain expertise across three segments: Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals. Our broad portfolio of leading products provides performance optimizing solutions to our customers. Our products include mechanical products for HVAC and refrigeration applications, coatings and sealants and high performance specialty lubricants. Markets that we serve include HVAC, industrial, rail, plumbing, architecturally-specified building products, energy, mining and other general industrial markets. Our operations are concentrated in the U.S., but we also have operations in Australia, Canada and the United Kingdom, and our products are sold directly or through designated channels both domestically and internationally.

Many of our products are used to protect the capital assets of our customers that are expensive to repair or replace and are critical to their operations. The maintenance, repair and overhaul and consumable nature of many of our products is a source of recurring revenue for us. We also provide some custom and semi-custom products, which enhance our customer relationships. The reputation of our product portfolio is built on more than 100 well-respected brand names, such as RectorSeal No. 5, Kopr Kote, Jet-Lube Extreme, Smoke Guard, Safe-T-Switch, Mighty Bracket, Balco, Whitmore, Strathmore, American Coatings, Air Sentry, Oil Safe, Deacon, AC Leak Freeze and KATS Coatings.

Prior to the Share Distribution, we operated as separate entities. The condensed consolidated financial statements included in this Quarterly Report include all revenues, costs, assets and liabilities directly attributable to the businesses discussed above. However, the consolidated financial statements for periods prior to the Share Distribution may not include all of the expenses that would have been incurred had the businesses been operating as separate publicly traded (“standalone”) companies during those periods and may not reflect the condensed consolidated results of operations, financial position and cash flows as standalone companies during all periods presented. We expect to incur capital costs in the next few years to further integrate our operations, including the further consolidation of some of our manufacturing facilities. As a result of these efforts, we expect to generate sales synergies through greater cross-selling opportunities and expansion of product line applications and generate cost synergies through operating more efficiently and effectively. We also expect to incur additional costs as a result of being a public company, such as additional employee-related costs, costs to start up certain standalone corporate functions, information systems costs and other organizational-related costs. We expect that the synergies that may be achieved through our integration efforts may offset the additional costs in the longer term.

We believe that our broad portfolio of products and markets served and our brand recognition will continue to provide opportunities; however, we face ongoing challenges affecting many companies, such as environmental and other regulatory compliance and overall global economic uncertainty. During the three and six month periods ended September 30, 2016, we experienced headwinds caused by spending declines at many of our customers in the energy, mining and rail end markets as they adjusted to weakened demand in response to lower market prices for crude oil, gas, coal and other natural resources. These headwinds also indirectly impacted general industrial end markets that we serve. We expect that the current energy environment will persist throughout the current fiscal year. We continue to be pleased with strong sales growth in other key end markets such as HVAC, where our innovative mechanical products and chemicals have increased market penetration, and Architecturally Specified Building Products, which is currently benefitting from a robust commercial construction cycle.

 

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RESULTS OF OPERATIONS

The following discussion provides an analysis of our condensed consolidated results of operations and results for each of our segments.

The acquisitions listed below impact comparability:

 

Acquisition

   Effective Date    Segment

Leak Freeze

   December 16, 2015    Specialty Chemicals

Deacon

   October 1, 2015    Coatings, Sealants & Adhesives

The operations of each acquired business have been included in the applicable segment since the effective date of the acquisition. All acquisitions are described in Note 2 to our condensed consolidated financial statements included in this Quarterly Report.

 

     Three Months Ended September 30,     Change  
     2016     2015     Amount      Percent  
     (in thousands, except percent and per share data)  

Revenues, net

   $ 80,131      $ 83,744      $ (3,613      -4.3

Gross profit

     35,663        40,843        (5,180      -12.7

Gross profit margin

     44.5     48.8     

Operating expenses

     (28,694     (20,065     8,629         43.0

Operating income

     6,969        20,778        (13,809      -66.5

Operating margin

     8.7     24.8     

Interest expense, net

     (742     (832     (90   

Other income (expense), net

     753        (113     866      

Provision for income taxes

     (3,138     (6,871     (3,733   

Effective tax rate

     45.0     34.6     

Net income

     3,842        12,962        (9,120   

Earnings per share, diluted

     0.24        0.83        (0.59   
     Six Months Ended September 30,     Change  
     2016     2015     Amount      Percent  
     (in thousands, except percent and per share data)  

Revenues, net

   $ 164,238      $ 172,654      $ (8,416      -4.9

Gross profit

     73,866        81,287        (7,421      -9.1

Gross profit margin

     45.0     47.1     

Operating expenses

     (59,488     (46,221     13,267         28.7

Operating income

     14,378        35,066        (20,688      -59.0

Operating margin

     8.8     20.3     

Interest expense, net

     (1,490     (1,499     (9   

Other income (expense), net

     1,291        (178     1,469      

Provision for income taxes

     (6,242     (11,777     (5,535   

Effective tax rate

     44.0     35.3     

Net income

     7,937        21,612        (13,675   

Earnings per share, diluted

     0.50        1.38        (0.88   

Net Revenues

Net revenues for the three months ended September 30, 2016 decreased $3.6 million, or 4.3%, as compared with the three months ended September 30, 2015. The decrease was primarily attributable to decreases in the rail ($5.1 million), energy ($2.2 million) and mining and industrial ($1.9 million) markets, partially offset by an increase in the HVAC market ($4.0 million) and acquisition-related revenues ($1.7 million).

Net revenues for the six months ended September 30, 2016 decreased $8.4 million, or 4.9%, as compared with the six months ended September 30, 2015. The decrease was primarily attributable to decreases in the rail ($11.8 million), energy ($3.6 million) and mining and industrial ($3.5 million) markets, partially offset by an increase in the HVAC market ($7.3 million) and acquisition-related revenues ($4.1 million).

 

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Gross Profit and Gross Profit Margin

Gross profit for the three months ended September 30, 2016 decreased by $5.2 million, or 12.7%, as compared with the three months ended September 30, 2015. Gross profit margin for the three months ended September 30, 2016 of 44.5% declined when compared to the gross profit margin of 48.8% for the three months ended September 30, 2015. The negative impact of decreased sales on our absorption of fixed manufacturing costs, the pension plan curtailment benefit ($2.7 million) recorded in September 2015 that did not recur, the impact of an increase in the estimate for excess and obsolete inventory ($0.7 million) and the Strathmore restructuring costs ($0.3 million) were partially offset by favorable changes in product mix, including the addition of higher margin products acquired in the second half of the prior year.

Gross profit for the six months ended September 30, 2016 decreased by $7.4 million, or 9.1%, as compared with the six months ended September 30, 2015. Gross profit margin for the six months ended September 30, 2016 of 45.0% declined when compared to the gross profit margin of 47.1% for the six months ended September 30, 2015. The negative impact of decreased sales on our absorption of fixed manufacturing costs, the pension plan curtailment benefit ($2.7 million) recorded in September 2015 that did not recur, the impact of an increase in the estimate for excess and obsolete inventory ($0.7 million) and the Strathmore restructuring costs ($0.3 million) were partially offset by changes in product mix, including the addition of higher margin products acquired in the second half of the prior year.

Operating Expenses

Operating expenses for the three months ended September 30, 2016 increased $8.6 million, or 43.0%, as compared with the three months ended September 30, 2015. The increase was primarily attributable to the pension plan curtailment benefit ($5.3 million) recorded in September 2015 that did not recur and Strathmore restructuring costs ($2.8 million).

Operating expenses for the six months ended September 30, 2016 increased $13.3 million, or 28.7%, as compared with the six months ended September 30, 2015. The increase was primarily attributable to the pension plan curtailment benefit ($5.3 million) recorded in September 2015, our chief financial officer transition and other severance costs ($3.3 million) that we do not expect to recur, other personnel and public company costs ($3.0 million), Strathmore restructuring costs ($2.8 million) and impairment due to the consolidation of our facilities in Canada (due to restructuring) and certain patents ($1.1 million) that we do not expect to recur. These factors were partially offset by Strathmore transaction costs incurred in the prior year ($2.3 million) that did not recur.

Operating Income

Operating income for the three months ended September 30, 2016 decreased by $13.8 million, or 66.5%, as compared with the three months ended September 30, 2015. The decrease was a result of the $8.6 million increase in operating expenses and the $5.2 million decrease in gross profit, as discussed above.

Operating income for the six months ended September 30, 2016 decreased by $20.7 million, or 59.0%, as compared with the six months ended September 30, 2015. The decrease was a result of the $13.3 million increase in operating expenses and the $7.4 million decrease in gross profit, as discussed above.

Interest Expense, net

Interest expense, net of $0.7 million and $1.5 million for the three and six month periods ended September 30, 2016, respectively, was comparable to the three and six month periods ended September 30, 2015.

Other Income (Expense), net

Other income (expense), net increased by $0.9 million to income of $0.8 million for the three months ended September 30, 2016 as compared with the three months ended September 30, 2015. The increase was due primarily to an increase in gains arising from transactions in currencies other than our sites’ functional currencies ($0.7 million).

Other income (expense), net increased by $1.5 million to income of $1.3 million for the six months ended September 30, 2016 as compared with the six months ended September 30, 2015. The increase was due primarily to an increase in gains arising from transactions in currencies other than our sites’ functional currencies ($1.1 million) and also to an increase in gains from sales of non-operating assets ($0.3 million).

 

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Provision for Income Taxes and Effective Tax Rate

The provision for income taxes for the three months ended September 30, 2016 was $3.1 million, representing an effective tax rate of 45.0%, as compared with the provision of $6.9 million, representing an effective tax rate of 34.6%, for the three months ended September 30, 2015. The provision for income taxes for the three months ended September 30, 2016 was impacted by $0.7 million primarily relating to reserves for uncertain tax positions, which increased our anticipated effective rate by 10.5%.

The provision for income taxes for the six months ended September 30, 2016 was $6.2 million, representing an effective tax rate of 44.0%, as compared with the provision of $11.8 million, representing an effective tax rate of 35.3%, for the six months ended September 30, 2015. The provision for income taxes for the six months ended September 30, 2016 was impacted by $1.3 million primarily relating to reserves for uncertain tax positions and the effect of changes in tax rates, which increased our anticipated effective rate by 9.5%.

Net Income and Earnings per Share

Net income for the three months ended September 30, 2016 decreased by $9.1 million to $3.8 million, or to $0.24 per diluted share, as compared with the three months ended September 30, 2015. The decrease was primarily attributable to the $13.8 million decrease in operating income, partially offset by the $3.7 million decrease in the provision for income taxes.

Net income for the six months ended September 30, 2016 decreased by $13.7 million to $7.9 million, or to $0.50 per diluted share, as compared with the six months ended September 30, 2015. The decrease was primarily attributable to the $20.7 million decrease in operating income, partially offset by the $5.5 million decrease in the provision for income taxes.

Business Segments

We conduct our operations through three business segments based on type of product and how we manage the business. We evaluate segment performance and allocate resources based on each segment’s operating income. The key operating results for our three business segments are discussed below.

Industrial Products Segment Results

Industrial Products includes specialty mechanical products, fire and smoke protection products, architecturally-specified building products and storage, filtration and application equipment for use with our specialty chemicals and other products for general industrial application.

 

     Three Months Ended September 30,     Change  
     2016     2015     Amount      Percent  
     (in thousands, except percent and per share data)  

Revenues, net

   $ 41,858      $ 36,186      $ 5,672         15.7

Operating income

     9,897        11,668        (1,771      -15.2

Operating margin

     23.6     32.2     
     Six Months Ended September 30,     Change  
     2016     2015     Amount      Percent  
     (in thousands, except percent and per share data)  

Revenues, net

   $ 85,333      $ 76,162      $ 9,171         12.0

Operating income

     20,504        21,358        (854      -4.0

Operating margin

     24.0     28.0     

Net revenues for the three months ended September 30, 2016 increased $5.7 million, or 15.7%, as compared with the three months ended September 30, 2015. The increase was primarily attributable to increased sales volumes, as well as some improved pricing. Increases in sales volumes and pricing accounted for approximately 86% and 14%, respectively, of the increase in net revenues, and the increase in sales volumes resulted from increased sales of existing products ($4.0 million), primarily reflecting greater demand in the HVAC market.

Net revenues for the six months ended September 30, 2016 increased $9.2 million, or 12.0%, as compared with the six months ended September 30, 2015. The increase was primarily attributable to increased sales volumes, as well as some improved pricing. Increases in sales volumes and pricing accounted for approximately 85% and 15%, respectively, of the increase in net revenues, and the increase in sales volumes resulted from increased sales of existing products ($7.3 million), primarily reflecting greater demand in the HVAC market.

 

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Operating income for the three months ended September 30, 2016 decreased $1.8 million, or 15.2%, as compared with the three months ended September 30, 2015. The decrease is primarily attributable to a pension plan curtailment benefit ($3.2 million) recorded in September 2015 that did not recur, in addition to increased personnel-related expenses ($1.1 million), partially offset by the impact of increased net revenues.

Operating income for the six months ended September 30, 2016 decreased $0.9 million, or 4.0%, as compared with the six months ended September 30, 2015. The decrease is primarily attributable to a pension plan curtailment benefit ($3.2 million) recorded during September 2015 that did not recur, in addition to increased personnel-related expenses ($1.3 million), partially offset by the impact of increased net revenues.

Coatings, Sealants and Adhesives Segment Results

Coatings, Sealants and Adhesives is comprised of coatings and penetrants, pipe thread sealants, firestopping sealants and caulks and adhesives/solvent cements.

 

     Three Months Ended September 30,     Change  
     2016     2015     Amount      Percent  
     (in thousands, except percent and per share data)  

Revenues, net

   $ 23,006      $ 27,971      $ (4,965      -17.8

Operating income

     (1,616     4,938        (6,554      -132.7

Operating margin

     -7.0     17.7     
     Six Months Ended September 30,     Change  
     2016     2015     Amount      Percent  
     (in thousands, except percent and per share data)  

Revenues, net

   $ 46,371      $ 56,420      $ (10,049      -17.8

Operating income

     97        6,778        (6,681      -98.6

Operating margin

     0.2     12.0     

Net revenues for the three months ended September 30, 2016 decreased $5.0 million, or 17.8%, as compared with the three months ended September 30, 2015. The decrease was primarily attributable to decreased sales volumes into the rail market ($5.1 million), as well as decreases in most other markets ($1.7 million), partially offset by improved sealant volumes ($1.0 million) and net revenues attributable to acquisitions ($0.8 million).

Net revenues for the six months ended September 30, 2016 decreased $10.0 million, or 17.8%, as compared with the six months ended September 30, 2015. The decrease was primarily attributable to decreased sales volumes into the rail market ($11.8 million), partially offset by net revenues attributable to acquisitions ($1.7 million).

Operating income for the three months ended September 30, 2016 decreased $6.6 million, or 132.7%, as compared with the three months ended September 30, 2015. The decrease is attributable to Strathmore restructuring costs ($3.1 million) and the negative impact of reduced sales, as well as the impact of an increase in the estimate for excess and obsolete inventory ($0.3 million) and a pension plan curtailment benefit ($1.4 million) recorded during September 2015 that did not recur.

Operating income for the six months ended September 30, 2016 decreased $6.7 million, or 98.6%, as compared with the six months ended September 30, 2015. The decrease is attributable to Strathmore restructuring costs ($3.3 million), impairment costs related to the consolidation of our facilities in Canada ($0.4 million), the negative impact of reduced sales, the impact of an increase in the estimate for excess and obsolete inventory ($0.3 million) and a pension plan curtailment benefit ($1.4 million) recorded during September 2015 that did not recur. These factors were partially offset by Strathmore transaction costs incurred in the prior year ($2.3 million) that did not recur.

 

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Specialty Chemicals Segment Results

Specialty Chemicals includes lubricants and greases, drilling compounds, anti-seize compounds, chemical formulations and degreasers and cleaners.

 

     Three Months Ended September 30,     Change  
     2016     2015     Amount      Percent  
     (in thousands, except percent and per share data)  

Revenues, net

   $ 15,245      $ 19,771      $ (4,526      -22.9

Operating income

     1,232        4,961        (3,729      -75.2

Operating margin

     8.1     25.1     
     Six Months Ended September 30,     Change  
     2016     2015     Amount      Percent  
     (in thousands, except percent and per share data)  

Revenues, net

   $ 32,490      $ 39,934      $ (7,444      -18.6

Operating income

     2,288        7,691        (5,403      -70.3

Operating margin

     7.0     19.3     

Net revenues for the three months ended September 30, 2016 decreased $4.5 million, or 22.9%, as compared with the three months ended September 30, 2015. The decrease was attributable to decreased sales volumes into the energy market due to declining rig counts ($2.2 million) and the mining and industrial markets ($1.9 million), partially offset by net revenues attributable to acquisitions ($0.9 million).

Net revenues for the six months ended September 30, 2016 decreased $7.4 million, or 18.6%, as compared with the six months ended September 30, 2015. The decrease was attributable to decreased sales volumes into the energy market due to declining rig counts ($3.6 million) and the mining and industrial markets ($3.5 million), partially offset by net revenues attributable to acquisitions ($2.4 million).

Operating income for the three months ended September 30, 2016 decreased $3.7 million, or 75.2%, as compared with the three months ended September 30, 2015. The decrease is primarily attributable to the negative impact of reduced sales, as well as the impact of an increase in the estimate for excess and obsolete inventory ($0.4 million) and a pension plan curtailment benefit ($3.4 million) recorded during September 2015 that did not recur.

Operating income for the six months ended September 30, 2016 decreased $5.4 million, or 70.3%, as compared with the six months ended September 30, 2015. The decrease is primarily attributable to the negative impact of reduced sales, impairment costs related to the consolidation of our facilities in Canada ($0.6 million), the impact of an increase in the estimate for excess and obsolete inventory ($0.4 million) and a pension plan curtailment benefit ($3.4 million) recorded during September 2015 that did not recur.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Analysis

 

     Six Months Ended  
     September 30,  
     2016      2015  
     (in thousands)  

Net cash provided by operating activities

   $ 18,971       $ 21,595   

Net cash used in investing activities

     (2,005      (67,530

Net cash provided by (used in) financing activities

     (17,850      80,169   

Existing cash, cash generated by operations and borrowings available under our Revolving Credit Facility are our primary sources of short-term liquidity. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. Our sources of operating cash generally include the sale of our products and services and the conversion of our working capital, particularly accounts receivable and inventories. Our cash balance (including cash and equivalents and bank time deposits) at September 30, 2016 was $35.0 million, as compared with $39.3 million at March 31, 2016.

 

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For the six months ended September 30, 2016, our cash provided by operating activities was $19.0 million, as compared with $21.6 million for six months ended September 30, 2015. Cash flows from working capital decreased for the six months ended September 30, 2016, due primarily to higher accounts receivable ($5.5 million), higher prepaid expenses and other current assets ($0.7 million) and lower accounts payable and other current liabilities ($0.9 million). Cash flows from working capital decreased for the six months ended September 30, 2015, due primarily to higher prepaid and other current assets ($6.3 million) due to an increased tax receivable that resulted from the pension plan curtailment, as well as higher accounts receivable ($1.2 million).

Cash flows used by investing activities during the six months ended September 30, 2016 were $2.0 million as compared with $67.5 million for the six months ended September 30, 2015. Capital expenditures during the six months ended September 30, 2016 were $5.1 million, an increase of $1.9 million as compared with the six months ended September 30, 2015. Our capital expenditures are focused on capacity expansion, continuous improvement, automation and consolidation of manufacturing facilities. We are in the process of streamlining some manufacturing operations, including the consolidation of most of our lubricant and grease production into our Rockwall, Texas facility. Our total capital expenditure requirements related to this consolidation are currently expected to be approximately $3 million during the fiscal year ending March 31, 2017, and may require additional capital expenditures in later periods. We acquired the assets of Strathmore for $68.9 million, in cash, during the six months ended September 30, 2015.

Cash flows used by financing activities during the six months ended September 30, 2016 were $17.9 million as compared with cash provided of $80.2 million for the six months ended September 30, 2015. Cash outflows during the six months ended September 30, 2016 resulted primarily from repayments on our revolving credit agreement (as discussed in Note 7). Cash inflows during the six months ended September 30, 2015 resulted primarily from $70.0 million in borrowings used to acquire Strathmore.

We believe that available cash and cash equivalents, cash flows generated through operations and cash available under our Revolving Credit Facility will be sufficient to meet our liquidity needs, including capital expenditures, for at least the next 12 months.

Acquisitions and Dispositions

We regularly evaluate acquisition opportunities of various sizes. The cost and terms of any financing to be raised in conjunction with any acquisition, including our ability to raise capital, is a critical consideration in any such evaluation. Note 2 to our condensed consolidated financial statements included in this Quarterly Report contains a discussion of certain of our recent acquisitions.

Financing

Credit Facilities

See Note 7 to our condensed consolidated financial statements included in this Quarterly Report for a discussion of our indebtedness. We complied with all covenants through September 30, 2016.

We have entered into interest rate swap agreements to hedge our exposure to variable interest payments related to our indebtedness. These agreements are more fully described in Note 9 to our condensed consolidated financial statements included in this Quarterly Report, and in “Item 3. Quantitative and Qualitative Disclosures about Market Risk” below.

Off-Balance Sheet Arrangements

As of September 30, 2016, we did not have any off-balance sheet arrangements that we believe have or are reasonably likely to have a material adverse effect on our financial condition or results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations are based on our condensed consolidated financial statements and related footnotes contained within this Quarterly Report. Our critical accounting policies used in the preparation of our condensed consolidated financial statements were discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report. No significant changes to these policies, as described in our Annual Report, have occurred in the six months ended September 30, 2016.

The process of preparing condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions to determine certain of the assets, liabilities, revenues and expenses. These estimates and assumptions are based upon what we believe is the best information available at the time of the estimates or assumptions. The estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from those estimates.

 

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Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our condensed consolidated financial statements provide a meaningful and fair perspective of our consolidated financial condition and results of operations. This is not to suggest that other general risk factors, such as changes in worldwide demand, changes in material costs, performance of acquired businesses and others, could not adversely impact our consolidated financial condition, results of operations and cash flows in future periods. See “Cautionary Note Regarding Forward-Looking Statements” below.

ACCOUNTING DEVELOPMENTS

We have presented the information about pronouncements not yet implemented in Note 1 to our condensed consolidated financial statements included in this Quarterly Report.

Cautionary Note Regarding Forward-Looking Statements

Certain statements appearing in this Quarterly Report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include expected restructuring charges and the results of the restructuring, financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “expects,” “plans,” “anticipates,” “estimates,” “believes,” “potential,” “projects,” “forecasts,” “intends,” or the negative thereof or other comparable terminology. Forward-looking statements may include, but are not limited to, statements that relate to, or statements that are subject to risks, contingencies or uncertainties that relate to:

 

    the expected benefits of the Share Distribution;

 

    our business strategy;

 

    future levels of revenues, operating margins, income from operations, net income or earnings per share;

 

    anticipated levels of demand for our products and services;

 

    future levels of research and development, capital, environmental or maintenance expenditures;

 

    our beliefs regarding the timing and effects on our business of health and safety, tax, environmental or other legislation, rules and regulations;

 

    the success or timing of completion of ongoing or anticipated capital, restructuring or maintenance projects;

 

    expectations regarding the acquisition or divestiture of assets and businesses;

 

    our ability to obtain appropriate insurance and indemnities;

 

    the potential effects of judicial or other proceedings, including tax audits, on our business, financial condition, results of operations and cash flows;

 

    the anticipated effects of actions of third parties such as competitors, or federal, foreign, state or local regulatory authorities, or plaintiffs in litigation; and

 

    the effective date and expected impact of accounting pronouncements.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements for a number of important factors, including those listed under “Risk Factors” in our Annual Report and in this Quarterly Report. You should not put undue reliance on any forwarding-looking statements in this Quarterly Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely affect our consolidated financial position and results of operations. We seek to minimize these risks through regular operating and financing activities, and when deemed appropriate, through the use of interest rate swaps. It is our policy to enter into interest rate swaps only to the extent considered necessary to meet our risk management objectives. We do not purchase, hold or sell derivative financial instruments for trading or speculative purposes.

 

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Variable Rate Indebtedness

We are subject to interest rate risk on our variable rate indebtedness. Fluctuations in interest rates have a direct effect on interest expense associated with our outstanding indebtedness. As of September 30, 2016, we had outstanding variable rate indebtedness of $27.6 million, after consideration of interest rate swaps. We manage, or hedge, interest rate risks related to our borrowings by means of interest rate swap agreements. At September 30, 2016, we had interest rate swap agreements that covered $44.8 million of the $72.4 million of our total outstanding indebtedness. At September 30, 2016 unhedged variable rate indebtedness of $27.6 million had a weighted average interest rate of 2.27%. Each quarter point change in interest rates would result in a change of less than $0.1 million in our interest expense on an annual basis.

We may also be exposed to credit risk in derivative contracts we may use. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We have sought to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties.

Foreign Currency Exchange Rate Risk

We conduct a small portion of our operations outside of the U.S. in currencies other than the U.S. dollar. Our non-U.S. operations are conducted primarily in their local currencies, which are also their functional currencies, and include the British pound, Canadian dollar and Australian dollar. Foreign currency exposures arise from translation of foreign-denominated assets and liabilities into U.S. dollars and from transactions denominated in a currency other than a non-U.S. operation’s functional currency. We realized net losses associated with foreign currency translation of $0.6 million and $2.3 million for the three months ended September 30, 2016 and 2015, respectively, and $1.9 million and $1.2 million for the six months ended September 30, 2016 and 2015, respectively, which are included in accumulated other comprehensive (loss) income. We recognized foreign currency transaction net gains (losses) of $0.6 million and $(0.1) million for the three months ended September 30, 2016 and 2015, respectively, and $0.8 million and $(0.2) million for the six months ended September 30, 2016 and 2015, respectively, which are included in other income (expense), net on our condensed consolidated statements of income.

Based on a sensitivity analysis at September 30, 2016, a 10% change in the foreign currency exchange rates for the three months ended September 30, 2016 would have impacted our net earnings by a negligible amount. This calculation assumes that all currencies change in the same direction and proportion relative to the U.S. dollar and that there are no indirect effects, such as changes in non-U.S. dollar sales volumes or prices.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are controls and other procedures that are designed to ensure that the information that we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s (“SEC”) rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the preparation of this Quarterly Report, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2016.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

The disclosure contained in Note 12 to our condensed consolidated financial statements included in “Item 1. Financial Statements” of this Quarterly Report is incorporated by reference into this “Item 1. Legal Proceedings.” In addition to the foregoing, we and our subsidiaries are named defendants in certain other ordinary routine lawsuits incidental to our business and are involved from time to time as parties to governmental proceedings, all arising in the ordinary course of business. Although the outcome of lawsuits or other proceedings involving us and our subsidiaries cannot be predicted with certainty, and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, management does not currently expect the amount of any liability that could arise with respect to these matters, either individually or in the aggregate, to have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A. Risk Factors.

There are numerous factors that affect our business and results of operations, many of which are beyond our control. In addition to other information set forth in this Quarterly Report, careful consideration should be given to “Item 1A. Risk Factors” in Part I and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of our Annual Report on Form 10-K for the fiscal year ended March 31, 2016 (“2016 Annual Report”), which contain descriptions of significant factors that may cause the actual results of operations in future periods to differ materially from those currently expected or desired.

With the exception of the risk factor set forth below, there have been no material changes in risk factors discussed in our 2016 Annual Report and subsequent SEC filings. The risks described in this Quarterly Report, our 2016 Annual Report and in our other SEC filings or press releases from time to time are not the only risks we face. Additional risks and uncertainties are currently deemed immaterial based on management’s assessment of currently available information, which remains subject to change; however, new risks that are currently unknown to us may arise in the future that materially adversely affect our business, financial condition, results of operations or cash flows.

If we are not able to successfully execute and realize the expected financial benefits from our strategic restructuring and other cost-saving initiatives, our business could be adversely affected.

In August 2016, we announced a strategic manufacturing footprint rationalization initiative in the Coatings, Sealants & Adhesives segment, intended to reduce our cost structure and drive more efficient operations. This initiative will involve making structural changes in our domestic manufacturing footprint through consolidation of product manufacturing, reducing our workforce, and further selling, general and administrative expense reductions.

While we expect meaningful financial benefits from our strategic restructuring, we may not realize the full benefits that we currently expect within the anticipated time frame or at all. Adverse effects from our execution of restructuring activities could interfere with our realization of anticipated synergies, customer service improvements and cost savings from these strategic initiatives. Additionally, our ability to fully realize the benefits and implement the restructuring program may be limited by certain contractual commitments. Moreover, because such expenses are difficult to predict and are necessarily inexact, we may incur substantial expenses in connection with the execution of our restructuring plans in excess of what is currently forecasted. Further, restructuring activities are a complex and time-consuming process that can place substantial demands on management, which could divert attention from other business priorities or disrupt our daily operations. Any of these failures could, in turn, materially adversely affect our business, financial condition, results of operations and cash flows, which could constrain our liquidity.

If these measures are not successful or sustainable, we may undertake additional restructuring and cost reduction efforts, which could result in future charges. Moreover, our ability to achieve our other strategic goals and business plans may be adversely affected, and we could experience business disruptions with customers and elsewhere if our restructuring efforts prove ineffective.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Amounts shown in the table represent shares tendered by employees to satisfy minimum tax withholding amounts for restricted shares.

 

Period

   Total Number of
Shares Tendered
     Average Price
per Share
     Total Number of
Shares Purchased as
Part of Publically
Announced Program
     Maximum Number of Shares
(or Approximate Dollar Value)
That May Yet Be Purchased
Under the Program
 
                          (in millions)  

July 1 - 31

     386       $ 34.50         —         $ —     

August 1 - 31

     —           —           —           —     

September 1 - 30

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

Total

     386       $ 34.50         —        
  

 

 

    

 

 

    

 

 

    

Item 6. Exhibits.

A list of exhibits filed or furnished as part of this Quarterly Report on Form 10-Q is set forth on the Exhibits Index immediately following the signature page of this report and is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      CSW INDUSTRIALS, INC.

Date: November 10, 2016

     

/s/ Joseph B. Armes

      Joseph B. Armes
     

Chief Executive Officer

(Principal Executive Officer)

Date: November 10, 2016

     

/s/ Greggory W. Branning

      Greggory W. Branning
     

Chief Financial Officer

(Principal Financial Officer)

 

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Exhibits Index

 

Exhibit No.

  

Description

    10.1    Agreement dated July 17, 2016 by and among CSW Industrials, Inc. and the entities and natural persons listed thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 18, 2016).
    31.1+    Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    31.2+    Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    32.1++    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    32.2++    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-101+    INSTANCE DOCUMENT
EX-101+    SCHEMA DOCUMENT
EX-101+    CALCULATION LINKBASE DOCUMENT
EX-101+    LABELS LINKBASE DOCUMENT
EX-101+    PRESENTATION LINKBASE DOCUMENT
EX-101+    DEFINITION LINKBASE DOCUMENT

 

+ Filed herewith.
++ Furnished herewith.

 

28

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph B. Armes, certify that:

 

  1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 of CSW Industrials, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Intentionally omitted;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2016

 

/s/ Joseph B. Armes

Joseph B. Armes
Chief Executive Officer
(Principal Executive Officer)
EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Greggory W. Branning, certify that:

 

  1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 of CSW Industrials, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Intentionally omitted;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2016

 

/s/ Greggory W. Branning

Greggory W. Branning
Chief Financial Officer
(Principal Financial Officer)
EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph B. Armes, Chief Executive Officer of CSW Industrials, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Quarterly Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company.

Date: November 10, 2016

 

/s/ Joseph B. Armes

Joseph B. Armes
Chief Executive Officer
(Principal Executive Officer)
EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Greggory W. Branning, Chief Financial Officer of CSW Industrials, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Quarterly Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company.

Date: November 10, 2016

 

/s/ Greggory W. Branning

Greggory W. Branning
Chief Financial Officer
(Principal Financial Officer)