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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2020
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.) |
| |
5420 Lyndon B. Johnson Freeway, Suite 500, Dallas, Texas | | 75240 |
(Address of principal executive offices) | | (Zip Code) |
(214) 884-3777
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading symbol (s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | CSWI | | Nasdaq Stock Market LLC |
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, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer ☐ | Accelerated filer ☒ | Non-accelerated filer ☐ (Do not check if smaller reporting company)
| Smaller reporting company ☐ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 February 1, 2021, there were 15,652,287 shares of the issuer’s common stock outstanding.
CSW INDUSTRIALS, INC.
FORM 10-Q
TABLE OF CONTENTS
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| | Page No. |
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
SIGNATURES | |
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
CSW INDUSTRIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, | |
(Amounts in thousands, except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 | | | |
Revenues, net | | $ | 89,932 | | | $ | 83,716 | | | $ | 285,836 | | | $ | 287,373 | | | | |
Cost of revenues | | (50,594) | | | (46,025) | | | (155,009) | | | (155,043) | | | | |
Gross profit | | 39,338 | | | 37,691 | | | 130,827 | | | 132,330 | | | | |
Selling, general and administrative expenses | | (35,222) | | | (27,203) | | | (88,277) | | | (81,398) | | | | |
| | | | | | | | | | | |
Operating income | | 4,116 | | | 10,488 | | | 42,550 | | | 50,932 | | | | |
Interest expense, net | | (469) | | | (286) | | | (1,071) | | | (1,086) | | | | |
Other expense, net | | (592) | | | (848) | | | (1,259) | | | (8,302) | | | | |
Income before income taxes | | 3,055 | | | 9,354 | | | 40,220 | | | 41,544 | | | | |
Provision for income taxes | | (709) | | | (2,072) | | | (9,560) | | | (10,099) | | | | |
Income from continuing operations | | 2,346 | | | 7,282 | | | 30,660 | | | 31,445 | | | | |
Income (loss) from discontinued operations, net of tax | | — | | | 26 | | | — | | | (148) | | | | |
Net income | | $ | 2,346 | | | $ | 7,308 | | | $ | 30,660 | | | $ | 31,297 | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Basic earnings (loss) per common share: | | | | | | | | | | | |
Continuing operations | | $ | 0.16 | | | $ | 0.48 | | | $ | 2.07 | | | $ | 2.09 | | | | |
Discontinued operations | | — | | | — | | | — | | | (0.01) | | | | |
Net income | | $ | 0.16 | | | $ | 0.48 | | | $ | 2.07 | | | $ | 2.08 | | | | |
| | | | | | | | | | | |
Diluted earnings (loss) per common share: | | | | | | | | | | | |
Continuing operations | | $ | 0.16 | | | $ | 0.48 | | | $ | 2.06 | | | $ | 2.07 | | | | |
Discontinued operations | | — | | | — | | | — | | | (0.01) | | | | |
Net income | | $ | 0.16 | | | $ | 0.48 | | | $ | 2.06 | | | $ | 2.06 | | | | |
See accompanying notes to condensed consolidated financial statements.
CSW INDUSTRIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, | |
(Amounts in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | | | |
Net income | | $ | 2,346 | | | $ | 7,308 | | | $ | 30,660 | | | $ | 31,297 | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | | |
Foreign currency translation adjustments | | 2,271 | | | 1,699 | | | 4,664 | | | 1,288 | | | | | |
Cash flow hedging activity, net of taxes of $(40), $(55), $(42) and $82 respectively | | 152 | | | 207 | | | 157 | | | (307) | | | | | |
Pension and other postretirement effects, net of taxes of $3, $1, $3 and $(672), respectively | | (10) | | | (3) | | | (10) | | | 2,527 | | | | | |
Other comprehensive income | | 2,413 | | | 1,903 | | | 4,811 | | | 3,508 | | | | | |
Comprehensive income | | $ | 4,759 | | | $ | 9,211 | | | $ | 35,471 | | | $ | 34,805 | | | | | |
See accompanying notes to condensed consolidated financial statements.
CSW INDUSTRIALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | | | | |
(Amounts in thousands, except per share amounts) | | December 31, 2020 | | March 31, 2020 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 18,260 | | | $ | 18,338 | |
Accounts receivable, net of allowance for expected credit losses of $503 and $1,170, respectively | | 75,005 | | | 74,880 | |
Inventories, net | | 101,560 | | | 53,753 | |
Prepaid expenses and other current assets | | 20,998 | | | 3,074 | |
| | | | |
Total current assets | | 215,823 | | | 150,045 | |
Property, plant and equipment, net of accumulated depreciation of $77,666 and $71,355, respectively | | 86,254 | | | 57,178 | |
Goodwill | | 222,262 | | | 91,686 | |
Intangible assets, net | | 279,502 | | | 46,185 | |
Other assets | | 76,736 | | | 24,151 | |
| | | | |
Total assets | | $ | 880,577 | | | $ | 369,245 | |
| | | | |
LIABILITIES AND EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 25,667 | | | $ | 21,978 | |
Accrued and other current liabilities | | 50,531 | | | 36,607 | |
Current portion of long-term debt | | 561 | | | 561 | |
| | | | |
Total current liabilities | | 76,759 | | | 59,146 | |
Long-term debt | | 254,916 | | | 10,337 | |
Retirement benefits payable | | 1,854 | | | 1,879 | |
Other long-term liabilities | | 144,331 | | | 21,142 | |
| | | | |
Total liabilities | | 477,860 | | | 92,504 | |
Equity: | | | | |
Common shares, $0.01 par value | | 161 | | | 159 | |
Shares authorized – 50,000 | | | | |
Shares issued – 16,163 and 16,055, respectively | | | | |
Preferred shares, $0.01 par value | | — | | | — | |
Shares authorized (10,000) and issued (0) | | | | |
Additional paid-in capital | | 103,538 | | | 48,327 | |
Treasury shares, at cost (511 and 1,311 shares, respectively) | | (34,075) | | | (75,377) | |
Retained earnings | | 339,731 | | | 315,078 | |
Accumulated other comprehensive loss | | (6,638) | | | (11,446) | |
Total equity | | 402,717 | | | 276,741 | |
Total liabilities and equity | | $ | 880,577 | | | $ | 369,245 | |
See accompanying notes to condensed consolidated financial statements.
CSW INDUSTRIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | Common Stock | | Treasury Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Equity |
Balance at March 31, 2020 | | $ | 159 | | | $ | (75,377) | | | $ | 48,327 | | | $ | 315,078 | | | $ | (11,446) | | | $ | 276,741 | |
Share-based compensation | | — | | | — | | | 1,328 | | | — | | | — | | | 1,328 | |
Stock activity under stock plans | | 1 | | | (1,670) | | | (1) | | | — | | | — | | | (1,670) | |
Repurchase of common shares | | — | | | (7,291) | | | — | | | — | | | — | | | (7,291) | |
Reissuance of treasury shares | | — | | | 3,131 | | | 516 | | | — | | | — | | | 3,647 | |
Net income | | — | | | — | | | — | | | 11,960 | | | — | | | 11,960 | |
Dividends | | — | | | — | | | 12 | | | (1,996) | | | — | | | (1,984) | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 1,279 | | | 1,279 | |
Balance at June 30, 2020 | | $ | 160 | | | $ | (81,207) | | | $ | 50,182 | | | $ | 325,042 | | | $ | (10,167) | | | $ | 284,010 | |
Share-based compensation | | — | | | — | | | 1,222 | | | — | | | — | | | 1,222 | |
Stock activity under stock plans | | — | | | (6) | | | — | | | — | | | — | | | (6) | |
| | | | | | | | | | | | |
Reissuance of treasury shares | | — | | | 1,812 | | | (479) | | | — | | | — | | | 1,333 | |
Net income | | — | | | — | | | — | | | 16,354 | | | — | | | 16,354 | |
Dividends | | — | | | — | | | 11 | | | (1,999) | | | — | | | (1,988) | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 1,116 | | | 1,116 | |
Balance at September 30, 2020 | | $ | 160 | | | $ | (79,401) | | | $ | 50,936 | | | $ | 339,397 | | | $ | (9,051) | | | $ | 302,041 | |
Share-based compensation | | — | | | — | | | 1,395 | | | — | | | — | | | 1,395 | |
Stock activity under stock plans | | 1 | | | (1,136) | | | — | | | — | | | — | | | (1,135) | |
| | | | | | | | | | | | |
Reissuance of treasury shares | | — | | | 46,462 | | | 51,194 | | | — | | | — | | | 97,656 | |
Net income | | — | | | — | | | — | | | 2,346 | | | — | | | 2,346 | |
Dividends | | — | | | — | | | 13 | | | (2,012) | | | — | | | (1,999) | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 2,413 | | | 2,413 | |
Balance at December 31, 2020 | | $ | 161 | | | $ | (34,075) | | | $ | 103,538 | | | $ | 339,731 | | | $ | (6,638) | | | $ | 402,717 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | Common Stock | | Treasury Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Equity |
Balance at March 31, 2019 | | $ | 158 | | | $ | (49,964) | | | $ | 46,633 | | | $ | 277,588 | | | $ | (10,729) | | | $ | 263,686 | |
Share-based compensation | | — | | | — | | | 1,213 | | | — | | | — | | | 1,213 | |
Stock activity under stock plans | | 1 | | | (793) | | | — | | | — | | | — | | | (792) | |
Adoption of ASC 842 Leases | | — | | | — | | | — | | | (400) | | | — | | | (400) | |
Net income | | — | | | — | | | — | | | 15,204 | | | — | | | 15,204 | |
Dividends | | — | | | — | | | — | | | (2,041) | | | — | | | (2,041) | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | | | (43) | | | (43) | |
Balance at June 30, 2019 | | $ | 159 | | | $ | (50,757) | | | $ | 47,846 | | | $ | 290,351 | | | $ | (10,772) | | | $ | 276,827 | |
Share-based compensation | | — | | | — | | | 1,196 | | | — | | | — | | | 1,196 | |
| | | | | | | | | | | | |
Net income | | — | | | — | | | — | | | 8,783 | | | — | | | 8,783 | |
Dividends | | — | | | — | | | 25 | | | (2,040) | | | — | | | (2,015) | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 1,648 | | | 1,648 | |
Balance at September 30, 2019 | | $ | 159 | | | $ | (50,757) | | | $ | 49,067 | | | $ | 297,094 | | | $ | (9,124) | | | $ | 286,439 | |
Share-based compensation | | — | | | — | | | 1,367 | | | — | | | — | | | 1,367 | |
Stock activity under stock plans | | — | | | 2,251 | | | (3,434) | | | — | | | — | | | (1,183) | |
Repurchase of common shares | | — | | | (811) | | | — | | | — | | | — | | | (811) | |
Net Income | | — | | | — | | | — | | | 7,308 | | | — | | | 7,308 | |
Dividends | | — | | | — | | | 13 | | | (2,044) | | | — | | | (2,031) | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 1,903 | | | 1,903 | |
Balance at December 31, 2019 | | $ | 159 | | | $ | (49,317) | | | $ | 47,013 | | | $ | 302,358 | | | $ | (7,221) | | | $ | 292,992 | |
| | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements.
CSW INDUSTRIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | | | |
| | Nine Months Ended December 31, |
(Amounts in thousands) | | 2020 | | 2019 |
Cash flows from operating activities: | | | | |
Net income | | $ | 30,660 | | | $ | 31,297 | |
Less: Loss from discontinued operations | | — | | | (148) | |
Income from continuing operations | | 30,660 | | | 31,445 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation | | 6,079 | | | 6,008 | |
Amortization of intangible and other assets | | 5,698 | | | 5,238 | |
Provision for inventory reserves | | 1,169 | | | 183 | |
Provision for doubtful accounts | | 227 | | | 837 | |
Share-based and other executive compensation | | 3,945 | | | 3,776 | |
| | | | |
Net gain on disposals of property, plant and equipment | | (42) | | | (844) | |
Pension plan curtailment benefit | | — | | | 6,559 | |
Net pension benefit | | 121 | | | (156) | |
| | | | |
Net deferred taxes | | 456 | | | (369) | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | | 14,115 | | | 10,143 | |
Inventories | | (1,581) | | | (5,099) | |
Prepaid expenses and other current assets | | (4,494) | | | 3,236 | |
Other assets | | (340) | | | 20 | |
Accounts payable and other current liabilities | | (1,787) | | | (265) | |
Retirement benefits payable and other liabilities | | (180) | | | (359) | |
Net cash provided by operating activities, continuing operations | | 54,046 | | | 60,353 | |
Net cash used in operating activities, discontinued operations | | — | | | (442) | |
Net cash provided by operating activities | | 54,046 | | | 59,911 | |
Cash flows from investing activities: | | | | |
Capital expenditures | | (6,886) | | | (7,595) | |
| | | | |
Proceeds from sale of assets | | 604 | | | 1,239 | |
Cash paid for acquisitions | | (278,680) | | | (11,837) | |
Net cash used in investing activities, continuing operations | | (284,962) | | | (18,193) | |
Net cash provided by investing activities, discontinued operations | | — | | | — | |
Net cash used in investing activities | | (284,962) | | | (18,193) | |
Cash flows from financing activities: | | | | |
Borrowings on line of credit | | 255,000 | | | 7,500 | |
Repayments of line of credit and term loan | | (10,421) | | | (27,921) | |
Payments of deferred loan costs | | (149) | | | — | |
Purchase of treasury shares | | (10,488) | | | (2,784) | |
| | | | |
Proceeds from stock option activity | | 1,331 | | | — | |
Dividends | | (5,970) | | | (6,088) | |
Net cash provided by (used in) financing activities | | 229,303 | | | (29,293) | |
Effect of exchange rate changes on cash and equivalents | | 1,535 | | | 808 | |
Net change in cash and cash equivalents | | (78) | | | 13,233 | |
Cash and cash equivalents, beginning of period | | 18,338 | | | 26,651 | |
Cash and cash equivalents, end of period | | $ | 18,260 | | | $ | 39,884 | |
See accompanying notes to condensed consolidated financial statements.
CSW INDUSTRIALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.ORGANIZATION AND OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
CSW Industrials, Inc. (“CSWI,” “we,” “our” or “us”) is a diversified industrial growth company with well-established, scalable platforms and domain expertise across two business segments: Industrial Products and Specialty Chemicals. Our broad portfolio of leading products provides performance optimizing and life safety solutions to our customers. Our products include mechanical products for heating, ventilation, air conditioning and refrigeration (“HVAC/R”), grilles, registers and diffusers, building products and high-performance specialty lubricants and sealants. Drawing on our innovative and proven technologies, we seek to deliver solutions primarily to our professional end-use customers that place a premium on superior performance and reliability. Our diverse product portfolio includes more than 100 highly respected industrial brands including No. 5®, KOPR-KOTE®, Kats Coatings®, Safe-T-Switch®, Air Sentry®, Deacon®, Leak Freeze®, Greco® and TRUaire®.
Our products are well-known in the specific industries we serve and have a reputation for high quality and reliability. Markets that we serve include HVAC/R, architecturally-specified building products, plumbing, energy, rail, mining and general industrial markets.
The COVID-19 pandemic and its resulting impacts, including the substantial decline in crude oil prices that began in March 2020, have had an overall negative impact on our financial results in the three and nine months ended December 31, 2020, as compared with the same periods in the prior year. While the COVID-19 pandemic has contributed to increased demand in certain parts of our business, including the HVAC/R end market, we expect our overall results of operations and financial condition to continue to be adversely impacted through the duration of the pandemic when compared to pre-pandemic, prior year periods. Despite strong demand in certain of our end markets and signs of recovery in others, we cannot reasonably estimate the magnitude or length of the pandemic’s adverse impact due to continued uncertainty regarding (1) the duration and severity of the COVID-19 pandemic and (2) the continued potential for short and long-term impacts on our facilities and employees, customer demand and supply chain.
Basis of Presentation
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2020 (“Quarterly Report”), include 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 December 31, 2020, and the results of operations for the three and nine month periods ended December 31, 2020 and 2019. All adjustments are of a normal, recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation.
The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. 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, 2020 (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, with the exception of the expected credit loss accounting policy described below as a result of adopting the new expected credit loss standard.
Current Expected Credit Losses ("CECL") - We record an allowance for credit losses on trade receivables that, when deducted from the gross trade receivables balance, presents the net amount expected to be collected. We estimate the allowance based on an aging schedule and according to historical losses as determined from our billings and collections history. This may be adjusted after consideration of customer-specific factors such as financial difficulties, liquidity issues or insolvency, as well as both current and forecasted macroeconomic conditions as of the reporting date. We adjust the allowance and recognize credit losses in the income statement each period. Trade receivables are written off against the allowance in the period when the receivable is deemed to be uncollectible. Subsequent recoveries of amounts previously written off are reflected as a reduction to periodic credit losses in the income statement. Our allowance for expected credit losses for short-term receivables as of December 31, 2020 was $0.5 million, compared to $1.2 million as of March 31, 2020. The nine months activity included $0.2 million for current period adjustments.
Accounting Developments
Pronouncements Implemented
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." The ASU requires, among other things, the use of a new current expected credit loss model in order to determine an allowance for credit losses with respect to financial assets and instruments held. The CECL model requires that we estimate the lifetime of an expected credit loss for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. On April 1, 2020, we adopted the ASU on a prospective basis to determine our allowance for credit losses in accordance with the requirements of Topic 326, and we modified our accounting policy and processes to facilitate this approach. Our primary exposure to financial assets that are within the scope of CECL are trade receivables. Our adoption of ASU No. 2016-13 effective April 1, 2020 did not have a material impact on our condensed consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement." The amendments of the ASU modify the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosure requirements for assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to the financial statements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures were adopted on a retrospective basis and the new disclosures were adopted on a prospective basis. Our adoption of ASU No. 2018-13 effective April 1, 2020 did not impact our disclosures.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The ASU addresses how entities should account for costs associated with implementing a cloud computing arrangement that is considered a service contract. Per the amendments of the ASU, implementation costs incurred in a cloud computing arrangement that is a service contract should be accounted for in the same manner as implementation costs incurred to develop or obtain software for internal use as prescribed by guidance in ASC 350-40. The ASU requires that implementation costs incurred in a cloud computing arrangement be capitalized rather than expensed. Further, the ASU specifies the method for the amortization of costs incurred during implementation, and the manner in which the unamortized portion of these capitalized implementation costs should be evaluated for impairment. The ASU also provides guidance on how to present such implementation costs in the financial statements and also creates additional disclosure requirements. The amendments are effective for fiscal years beginning after December 15, 2019. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Our adoption of ASU No. 2018-15 effective April 1, 2020 did not have an impact on our condensed consolidated financial condition and results of operations.
Pronouncements not yet implemented
In August 2018, the FASB issued ASU No. 2018-14, "Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans," which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. The amendments are effective for fiscal years ending after December 15, 2020 and the amendments should be applied retrospectively to all periods presented. We are currently evaluating the impact of ASU No. 2018-14 and we anticipate that our adoption of this ASU will not have a material impact on our disclosures due to the termination of our U.S. pension plan in the prior year.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes: Simplifying the Accounting for Income Taxes." The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions and adding some requirements regarding franchise (or similar) tax, step-ups in a business combination, treatment of entities not subject to tax and when to apply enacted changes in tax laws. This ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. Early adoption is permitted. Our initial assessment of this ASU indicates it will not have a material impact on our consolidated financial condition and results of operations, but our assessment has not been completed.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and LIBOR. This ASU includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This ASU is effective immediately; however, it is only available through December 31, 2022. We are currently evaluating the potential impact of this ASU on our consolidated financial position and results of operations.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and. Economic Security ("CARES") Act, which, along with earlier issued Internal Revenue Service ("IRS") guidance, contains numerous provisions that may benefit us, including the deferral of certain taxes. The relevant tax implication impacting us is the correction of a technical issue introduced in the Tax Cuts and Jobs Act to provide for fifteen-year useful life and allow bonus depreciation for qualified improvement property. These changes were included in the fixed asset calculations for the tax year ending March 31, 2020, and we amended the tax return for the year ending March 31, 2019 to include this effect. We continue to assess the effect of the CARES Act and ongoing government guidance related to COVID-19 as it is issued.
On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 which provides for further funding of the US federal government and provides for additional COVID related relief and stimulus, including certain CARES Act extensions and expansions. Although the Company continues to assess the impact of this new law, we do not expect it to have a significant impact.
2. ACQUISITIONS
T.A. Industries
On December 15, 2020, we acquired 100% of the outstanding equity of T.A. Industries, Inc. (“TRUaire”), a leading manufacturer of grilles, registers, and diffusers for the residential and commercial HVAC/R end market, based in Santa Fe Springs, California. The acquisition also included TRUaire’s wholly-owned manufacturing facility based in Vietnam. The acquisition is expected to extend the Company’s product offerings to the HVAC market as well as add new customers and provide strategic distribution facilities.
The contractual consideration paid for TRUaire included cash of $284 million ($288.1 million after working capital and closing cash adjustments) and 849,852 shares of the Company’s common stock (valued at approximately $76.0 million at transaction signing on November 4, 2020) valued at $97.7 million at transaction close based on the closing market price of the Company's common shares on the acquisition date. The cash consideration was funded through a combination of cash on hand and borrowings under our revolving credit facility. The 849,852 shares of common stock delivered to the sellers as consideration were reissued from treasury shares.
| | | | | |
Acquisition Consideration (Amounts in thousands, except for shares) | |
Cash (a) | $ | 288,079 | |
Common stock (849,852 shares) | 97,656 | |
Total consideration transferred | $ | 385,735 | |
(a) Includes $8.3 million in tax liabilities to be paid by the Company on behalf of the sellers, within 90 days following the acquisition date, pursuant to the purchase agreement.
The TRUaire acquisition was accounted for as a business combination under FASB Accounting Standards Codification Topic 805, Business Combinations ("Topic 805"). Pursuant to Topic 805, the Company allocated the TRUaire purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, December 15, 2020. The excess of the purchase price over those fair values was recorded to goodwill. The Company's evaluation of the facts and circumstances available of December 15, 2020, to assign fair values to assets acquired and liabilities assumed, including income tax related amounts, is ongoing. As we complete further analysis of tangible assets, intangible assets and liabilities assumed, additional information impacting the assets acquired and the related allocation thereof, may become available. A change in information related to the net assets acquired may change the amount of the purchase price assigned to goodwill, and, as a result, the preliminary fair values set forth below are subject to adjustments when additional information is obtained and valuations are completed. Provisional adjustments, if any, will be recognized during the reporting period in which the adjustments are determined. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date. The following table summarizes the Company's best initial estimate of the aggregate fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands).
| | | | | |
Assets Acquired | |
Current Assets | |
Cash | $ | 1,471 | |
Accounts Receivable, net | 13,467 | |
Inventory | 46,313 | |
Short-Term Indemnity Assets (a) | 5,000 | |
Other Assets | 1,285 | |
Total Current Assets | 67,536 | |
| |
Long-Term Assets | |
Property, Plant and Equipment | 28,832 | |
Trade Name (indefinite life) | 43,500 | |
Customer Lists (useful life of 15 years) | 194,000 | |
Right-Of-Use Assets | 49,040 | |
Long-Term Indemnity Assets (a) | 7,500 | |
| |
Other Long-term Assets | 2,850 | |
Total Long-Term Assets (b) | 325,722 | |
| |
Total Assets Acquired | 393,258 | |
| |
Liabilities Acquired | |
Current Liabilities | |
Accounts Payable | 4,074 | |
Accrued and Other Current Liabilities | 3,149 | |
Income Tax Payable | 529 | |
Lease Liabilities - Short-Term | 4,811 | |
Total Current Liabilities | 12,563 | |
| |
Long-Term Liabilities | |
| |
Deferred Tax Liabilities | 56,249 | |
Tax Contingency Reserve | 22,511 | |
Lease Liabilities - Long-Term | 45,369 | |
Total Long-Term Liabilities (c) | 124,129 | |
| |
Total Liabilities Assumed | 136,692 | |
| |
Total Identifiable Net Assets | 256,566 | |
| |
Goodwill | $ | 129,169 | |
(a) Short-term and long-term indemnity assets represents the $12.5 million of the purchase price held in the escrow account to offset potential income tax contingencies.
(b) Included in other assets.
(c) Included in other liabilities.
Goodwill of $129.2 million represents the excess of the purchase price over the fair value of the underlying tangible and intangible assets acquired and liabilities assumed. The acquisition goodwill represents the value expected to be obtained from expanding the Company’s product offerings more broadly across the HVAC end market. The goodwill recorded as part of this acquisition is included in the Industrial Products segment. The goodwill associated with the acquisition will not be amortized for financial reporting purposes and will not be deductible for income tax purposes.
During the three and nine months ended December 31, 2020, the Company incurred $6.9 million and $7.1 million of transaction expenses in connection with the TRUaire acquisition, which are included in selling, general and administrative expenses in the Condensed Consolidated Statement of Income. As of December 31, 2020, $0.2 million related to these expenses were included in accrued and other current liabilities in the Condensed Consolidated Balance Sheet. TRUaire activity has been included in our Industrial Products segment since the acquisition date.
Pursuant to Topic 805, unaudited supplemental proforma results of operations for the three and nine months ended December 31, 2020 and 2019, as if the acquisition of TRUaire had occurred on April 1, 2019, the first day of the Company's 2019 fiscal year, are presented below (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | 2020 | | | 2019 | | 2020 | | 2019 | |
Revenue, net | | $ | 114,169 | | | | $ | 109,409 | | | $ | 362,451 | | | $ | 358,693 | | |
Net Income | | 5,341 | | | | 5,656 | | | 38,345 | | | 19,588 | | |
| | | | | | | | | | |
Net earnings per common share: | | | | | | | | | | |
Diluted | | $ | 0.34 | | | | $ | 0.35 | | | $ | 2.43 | | | $ | 1.22 | | |
Basic | | 0.34 | | | | 0.35 | | | 2.45 | | | 1.23 | | |
These proforma results do not present financial results that would have been realized had the acquisition occurred on April 1, 2019, nor are they intended to be a projection of future results. The unaudited proforma results include certain proforma adjustments to net income that were directly attributable to the acquisition, as if the acquisition had occurred on April 1, 2019, including the following:
•Transactions expenses of $0 and $7.1 million for the three and nine months ended December 31, 2019, respectively, that would have been recognized by the Company related to the TRUaire acquisition;
•Additional depreciation expense of $0.1 million for both the three months ended December 31, 2020 and 2019, and $0.4 million for both the nine months ended December 31, 2020 and 2019, that would have been recognized as a result of the fair value step-up of the property, plant and equipment;
•Additional amortization expense of $0 and $3.5 million for the three months ended December 31, 2020 and 2019, respectively, and $0 and $9.2 million for the nine months ended December 31, 2020 and 2019, respectively, that would have been recognized as a result of the fair value step-up of the inventory;
•Additional amortization expense of $3.2 million for both the three months ended December 31, 2020 and 2019, and $9.7 million for both the nine months ended December 31, 2020 and 2019, that would have been recognized as a result of the allocation of purchase consideration to customer lists subject to amortization;
•Estimated additional interest expense of $1.0 million for both the three months ended December 31, 2020 and 2019, and $3.1 million for both the nine months ended December 31, 2020 and 2019, as a result of incurring additional borrowing;
•Income tax effect of the proforma adjustments calculated using a blended statutory income tax rate of 24.0% of $1.1 million and $1.9 million for the three months ended December 31, 2020 and 2019, respectively, and $3.2 million and $6.4 million for the nine months ended December 31, 2020 and 2019, respectively.
Petersen Metals
On April 2, 2019, we acquired the assets of Petersen Metals, Inc. (“Petersen”), based near Tampa, Florida, for $11.8 million, of which $11.5 million was paid at closing and funded through our revolving credit facility, and the remaining $0.3 million represented a working capital adjustment paid in July 2019. Petersen is a leading designer, manufacturer and installer of architecturally-specified, engineered metal products and railings, including aluminum and stainless steel railings products for interior and exterior applications. The excess of the purchase price over the fair value of the identifiable assets acquired was $6.1 million allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from enabling geographic, end market and product diversification and expansion as Petersen is a strategic complement to our existing line of architecturally-specified building products. The allocation of the fair value of the net assets acquired included customer lists of $3.2 million and backlog of $0.4 million, as well as accounts receivable, inventory and equipment of $2.2 million, $0.8 million and $0.7 million, respectively, net of current liabilities of $1.5 million. Customer lists are being amortized over 15 years, backlog is amortized over 1.5 years and goodwill is not being amortized. Petersen activity has been included in our Industrial Products segment since the acquisition date. No pro forma information has been provided due to immateriality.
3. DISCONTINUED OPERATIONS
During the quarter ended December 31, 2017, we commenced a sale process to divest our Coatings business to allow us to focus resources on our core growth platforms. Our Coatings business manufactured specialized industrial coating products including urethanes, epoxies, acrylics and alkyds. As of December 31, 2017, the Coatings business met the held-for-sale criteria under ASC 360, "Property, Plant and Equipment," and accordingly, we classified and accounted for the assets and liabilities of the Coatings business as held-for-sale in the accompanying condensed consolidated balance sheets, and as discontinued operations, net of tax, in the accompanying condensed consolidated statements of income and cash flows. We completed an initial assessment of the assets and liabilities of the Coatings business and recorded a $46.0 million impairment based on our best estimates as of the date of issuance of financial results for the quarter ended December 31, 2017. No adjustments to previously recorded estimates have been made.
On July 31, 2018, we consummated a sale of assets related to our Coatings business to an unrelated third party, the terms of which were not disclosed due to immateriality. During the three months ended September 30, 2018, we received an aggregate of $6.9 million for the sale of assets related to our Coatings business in multiple transactions. This resulted in gains on disposal of $6.9 million due to write-downs of long-lived assets in prior periods.
On March 17, 2020, we completed the sale of the last remaining real property owned by the former Coatings business to an unrelated third party, the terms of which were not disclosed due to immateriality. The sale resulted in proceeds and a gain on disposal of $1.5 million due to write-downs of long-lived assets in prior periods. The last remaining asset of the former Coatings business is a long-term lease that expires in March 2027. We were unable to terminate the lease, but we have sub-let the property for the remainder of the lease term. As such, this lease was moved back into continuing operations, effective March 31, 2020, and the related right-of-use ("ROU") assets and lease liabilities were reported as continuing operations as of March 31, 2020.
Summarized selected financial information for the Coatings business for the three and nine months ended December 31, 2020 and 2019 is presented in the following table (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | |
Revenues, net | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | |
Income (loss) from discontinued operations before income taxes | | — | | | 19 | | | — | | | (204) | | | | |
Income tax benefit | | — | | | 7 | | | — | | | 56 | | | | |
Loss from discontinued operations, net | | $ | — | | | $ | 26 | | | $ | — | | | $ | (148) | | | | |
4. INVENTORIES
Inventories consist of the following (in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2020 | | March 31, 2020 |
Raw materials and supplies | | $ | 28,460 | | | $ | 20,935 | |
Work in process | | 6,216 | | | 6,076 | |
Finished goods | | 74,742 | | | 33,771 | |
Total inventories | | 109,418 | | | 60,782 | |
Less: LIFO reserve | | (4,816) | | | (4,816) | |
Less: Obsolescence reserve | | (3,042) | | | (2,213) | |
Inventories, net | | $ | 101,560 | | | $ | 53,753 | |
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill as of December 31, 2020 and March 31, 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Industrial Products | | Specialty Chemicals | | Total |
Balance at March 31, 2020 | | $ | 60,123 | | | $ | 31,563 | | | $ | 91,686 | |
T.A Industries acquisition | | 129,169 | | | — | | | 129,169 | |
Currency translation | | 1,407 | | | — | | | 1,407 | |
Balance at December 31, 2020 | | $ | 190,699 | | | $ | 31,563 | | | $ | 222,262 | |
The following table provides information about our intangible assets (in thousands, except years):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 | | March 31, 2020 |
| Wtd Avg Life (Years) | | Ending Gross Amount | | Accumulated Amortization | | Ending Gross Amount | | Accumulated Amortization |
Finite-lived intangible assets: | | | | | | | | | |
Patents | 11 | | $ | 9,637 | | | $ | (7,520) | | | $ | 9,635 | | | $ | (6,935) | |
Customer lists and amortized trademarks | 15 | | 258,403 | | | (37,622) | | | 62,806 | | | (33,098) | |
Non-compete agreements | 5 | | 1,722 | | | (1,849) | | | 1,653 | | | (1,494) | |
Other | 8 | | 5,280 | | | (3,135) | | | 5,219 | | | (2,628) | |
| | | $ | 275,042 | | | $ | (50,126) | | | $ | 79,313 | | | $ | (44,155) | |
Trade names and trademarks not being amortized: | | | $ | 54,586 | | | $ | — | | | $ | 11,027 | | | $ | — | |
Amortization expenses for the three and nine months ended December 31, 2020 were $2.1 million and $5.4 million, respectively. Amortization expenses for the three and nine months ended December 31, 2019 were $1.7 million and $5.1 million, respectively. The following table shows the estimated future amortization for intangible assets, as of December 31, 2020, for the remainder of the current fiscal year and the next four fiscal years ending March 31 (in thousands):
| | | | | |
2021 | $ | 4,795 | |
2022 | 18,458 | |
2023 | 17,518 | |
2024 | 16,764 | |
2025 | 16,041 | |
6. SHARE-BASED COMPENSATION
Refer to Note 6 to our consolidated financial statements included in our Annual Report for a description of the 2015 Equity and Incentive Compensation Plan (the "2015 Plan"). As of December 31, 2020, 667,381 shares were available for issuance under the 2015 Plan.
We recorded share-based compensation expense as follows for the three and nine months ended December 31, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | | | | |
Share-based compensation expense | | $ | 1,394 | | | $ | 1,366 | | | $ | 3,944 | | | $ | 3,776 | | | | | | | |
Related income tax benefit | | (335) | | | (328) | | | (947) | | | (906) | | | | | | | |
Net share-based compensation expense | | $ | 1,059 | | | $ | 1,038 | | | $ | 2,997 | | | $ | 2,870 | | | | | | | |
Stock option activity was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended December 31, 2020 |
| | Number of Shares | | Weighted Average Price | | Remaining Contractual Life (Years) | | Aggregate Intrinsic Value (in Millions) |
Outstanding at April 1, 2020 | | 115,858 | | | $ | 25.30 | | | | | |
Exercised | | (52,445) | | | 25.40 | | | | | |
| | | | | | | | |
Outstanding at December 31, 2020 | | 63,413 | | | 25.23 | | | 3.7 | | $ | 5.5 | |
Exercisable at December 31, 2020 | | 63,413 | | | $ | 25.23 | | | 3.7 | | $ | 5.5 | |
All compensation costs related to stock options were recognized prior to April 1, 2019. No options were granted or vested during the three and nine months ended December 31, 2020 and 2019.
Restricted share activity was as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended December 31, 2020 |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding at April 1, 2020: | | 202,466 | | | $ | 60.78 | |
Granted | | 119,193 | | | 75.79 | |
Vested | | (124,218) | | | 52.75 | |
Canceled | | (15,484) | | | 68.69 | |
Outstanding at December 31, 2020 | | 181,957 | | | $ | 70.64 | |
During the restriction period, the holders of restricted shares are entitled to vote and receive dividends. Unvested restricted shares outstanding as of December 31, 2020 and March 31, 2020 included 88,425 and 93,249 shares (at target), respectively, with performance-based vesting provisions, and vesting ranges from 0%-200% based on pre-defined performance targets with market conditions. Performance-based awards accrue dividend equivalents, which are settled upon (and to the extent of) vesting of the underlying award, but do not have the right to vote until vested. Performance-based awards are earned upon the achievement of objective performance targets and are payable in common shares. Compensation expense is calculated based on the fair market value as determined by a Monte Carlo simulation and is recognized over a 36-month cliff vesting period. No awards with performance-based vesting provisions were granted during the three months ended December 31, 2020 and 2019. We granted 26,966 and 31,594 awards with performance-based vesting provisions during the nine months ended December 31, 2020 and 2019, respectively, with a vesting range of 0%-200%.
At December 31, 2020, we had unrecognized compensation cost related to unvested restricted shares of $8.6 million, which will be amortized into net income over the remaining weighted average vesting period of approximately 2.0 years. The total fair value of restricted shares granted during the three months ended December 31, 2020 and 2019 was $4.0 million and $3.8 million, respectively. The total fair value of restricted shares granted during the nine months ended December 31, 2020 and 2019 was $6.5 million and $6.4 million, respectively. The total fair value of restricted shares vested during the three months ended December 31, 2020 and 2019 was $4.1 million and $4.1 million, respectively. The total fair value of restricted shares vested during the nine months ended December 31, 2020 and 2019 was $8.4 million and $6.2 million, respectively.
7. LONG-TERM DEBT
Debt consists of the following (in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2020 | | March 31, 2020 |
Revolving Credit Facility, interest rate of 1.61% and 2.24%, respectively | | $ | 245,000 | | | $ | — | |
Whitmore Term Loan, interest rate of 2.14% and 2.99%, respectively | | 10,477 | | | 10,898 | |
Total debt | | 255,477 | | | 10,898 | |
Less: Current portion | | (561) | | | (561) | |
Long-term debt | | $ | 254,916 | | | $ | 10,337 | |
Revolving Credit Facility
As discussed in Note 8 to our consolidated financial statements included in our Annual Report, we have a five-year, $250.0 million revolving credit facility agreement, with an additional $50.0 million accordion feature, which matures on September 15, 2022 (the “Revolving Credit Facility”). On December 1, 2020, the Company entered into an amendment of the Revolving Credit Facility to utilize the accordion feature and increase the commitment from $250.0 million to $300.0 million, which also reduced the available incremental commitment by a corresponding amount. Until we report our leverage ratio at December 31, 2020, borrowings under this facility bear interest at a rate of prime plus 0.25% or London Interbank Offered Rate ("LIBOR") plus 1.25%. Once our quarter end leverage ratio is reported to the Revolving Credit Facility lenders, the interest rates for our borrowings will increase 0.5% in accordance with the existing terms as our reported leverage ratio will exceed 2.00x. We pay a commitment fee of 0.15% 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 the maturity date. The Revolving Credit Facility is secured by substantially all of our domestic assets. During the nine months ended December 31, 2020, we borrowed $255.0 million and repaid $10.0 million under this facility. As of December 31, 2020 and March 31, 2020, we had $245.0 million and $0, respectively, in outstanding balance, which resulted in borrowing capacity of $55.0 million and $300.0 million, respectively. Covenant compliance is tested quarterly, and we were in compliance with all covenants as of December 31, 2020.
Whitmore Term Loan
As of December 31, 2020, Whitmore Manufacturing (one of our wholly-owned operating subsidiaries) had a secured term loan ("Whitmore Term Loan") outstanding related to a warehouse and corporate office building and the remodel of an existing manufacturing and research and development facility. The Whitmore Term Loan was entered into in July 2014 and matures on July 31, 2029 and requires payments of $140,000 each quarter. Borrowings under this term loan bear interest at a variable annual rate equal to one month LIBOR plus 2.0%. As of December 31, 2020 and March 31, 2020, Whitmore Manufacturing had $10.5 million and $10.9 million, respectively, in principal amount outstanding under the term loan. Interest payments under the Whitmore Term Loan are hedged under an interest rate swap agreement as described in Note 9.
8. LEASES
We have operating leases for manufacturing facilities, offices, warehouses, vehicles and certain equipment. Our leases have remaining lease terms of 1 year to 27.1 years, some of which include escalation clauses and/or options to extend or terminate the leases.
We do not currently have any financing lease arrangements.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Components of Operating Lease Expenses | | | | | | |
Operating lease expense (a) | | $ | 1,128 | | | $ | 846 | | | $ | 2,819 | | | $ | 2,639 | |
Short-term lease expense | | 130 | | | 48 | | | 295 | | | 201 | |
Total operating lease expense | | $ | 1,258 | | | $ | 894 | | | $ | 3,114 | | | $ | 2,840 | |
(a) Included in cost of revenues and selling, general and administrative expense | | | | |
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2020 | | March 31, 2020 |
Operating Lease Assets and Liabilities | | | | |
ROU assets, net (b) | | $ | 63,672 | | | $ | 16,383 | |
| | | | |
Short-term lease liabilities (c) | | $ | 7,968 | | | $ | 3,056 | |
Long-term lease liabilities (c) | | 58,737 | | | 15,179 | |
Total operating lease liabilities | | $ | 66,705 | | | $ | 18,235 | |
(b) Included in other assets | | | | |
(c) Included in accrued and other current liabilities and other long-term liabilities | | | | |
| | | | | | | | | | | | | | |
| | Nine Months Ended December 31, |
(in thousands) | | 2020 | | 2019 |
Supplemental Cash Flow | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities (a) | | $ | 3,106 | | | $ | 2,554 | |
ROU assets obtained in exchange for new operating lease obligations | | 68 | | | 2,419 | |
(a) Included in our condensed consolidated statement of cash flows, operating activities in accounts payable and other current liabilities |
| | | | |
Other Information for Operating Leases | | | | |
Weighted average remaining lease term (in years) | | 8.1 | | 6.2 |
Weighted average discount rate (percent) | | 2.5 | % | | 4.3 | % |
| | | | | |
Maturities of operating lease liabilities were as follows (in thousands): | |
Year Ending March 31, 2021 (excluding the nine months ended December 31, 2020) | $ | 2,427 | |
2022 | 9,532 | |
2023 | 8,991 | |
2024 | 8,894 | |
2025 | 8,785 | |
Thereafter | 35,304 | |
Total lease liabilities | 73,933 | |
Less: Imputed interest | (7,228) | |
Present value of lease liabilities | $ | 66,705 | |
9. DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING
We have an interest rate swap agreement to hedge exposure to floating interest rates on the Whitmore Term Loan, as discussed in Note 7. As of December 31, 2020 and March 31, 2020, we had $10.5 million and $10.9 million, respectively, of notional amount outstanding designated as an interest rate swap with third parties. The interest rate swap is highly effective. At December 31, 2020, the maximum remaining length of the interest rate swap contract was approximately 8.6 years. The fair value of the interest rate swap designated as a hedging instrument is summarized below (in thousands):
| | | | | | | | | | | |
| December 31, 2020 | | March 31, 2020 |
| | | |
Current derivative liabilities | $ | 302 | | | $ | 271 | |
Non-current derivative liabilities | 1,259 | | | 1,492 | |
The impact of changes in fair value of the interest rate swap is included in Note 16.
Current and non-current derivative assets are reported in our condensed consolidated balance sheets in prepaid expenses and other current assets and other assets, respectively. 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. EARNINGS PER SHARE
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings per share for the three and nine months ended December 31, 2020 and 2019 (amounts in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | | | | | | |
Income from continuing operations | | $ | 2,346 | | | $ | 7,282 | | | $ | 30,660 | | | $ | 31,445 | | | | | | | | | |
Income (loss) from discontinued operations | | — | | | 26 | | | — | | | (148) | | | | | | | | | |
Net income | | $ | 2,346 | | | $ | 7,308 | | | $ | 30,660 | | | $ | 31,297 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Weighted average shares: | | | | | | | | | | | | | | | | |
Common stock | | 14,868 | | | 14,976 | | | 14,707 | | | 14,931 | | | | | | | | | |
Participating securities | | 93 | | | 108 | | | 98 | | | 113 | | | | | | | | | |
Denominator for basic earnings per common share | | 14,961 | | | 15,084 | | | 14,805 | | | 15,044 | | | | | | | | | |
Potentially dilutive securities | | 118 | | | 169 | | | 106 | | | 178 | | | | | | | | | |
Denominator for diluted earnings per common share | | 15,079 | | | 15,253 | | | 14,911 | | | 15,222 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic earnings (loss) per common share: | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.16 | | | $ | 0.48 | | | $ | 2.07 | | | $ | 2.09 | | | | | | | | | |
Discontinued operations | | — | | | — | | | — | | | (0.01) | | | | | | | | | |
Net income | | $ | 0.16 | | | $ | 0.48 | | | $ | 2.07 | | | $ | 2.08 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Diluted earnings (loss) per common share: | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.16 | | | $ | 0.48 | | | $ | 2.06 | | | $ | 2.07 | | | | | | | | | |
Discontinued operations | | — | | | — | | | — | | | (0.01) | | | | | | | | | |
Net income | | $ | 0.16 | | | $ | 0.48 | | | $ | 2.06 | | | $ | 2.06 | | | | | | | | | |
11. SHAREHOLDERS' EQUITY
Share Repurchase Program
On November 7, 2018, we announced that our Board of Directors authorized a program to repurchase up to $75.0 million of our common stock over a two-year period. On October 30, 2020, we announced that our Board of Directors authorized a new program to repurchase up to $100.0 million of our common stock, which replaced the previously announced $75.0 million program. Under the newly-authorized program, shares may be repurchased from time to time in the open market or in privately negotiated transactions. Repurchases will be made at our discretion, based on ongoing assessments of the capital needs of the business, the market price of our common stock and general market conditions. Our Board of Directors has established an expiration of December 31, 2022, for completion of the new repurchase program; however, the program may be limited or terminated at any time at our discretion without notice. No shares were repurchased during the three months ended December 31, 2020, and 12,494 shares were repurchased under the prior $75.0 million share repurchase program during the three months ended December 31, 2019. As of December 31, 2020, a total of 740,137 shares had been repurchased for an aggregate amount of $46.0 million under the previously announced $75.0 million program.
Dividends
In April 2019, we commenced a quarterly dividend program at a quarterly rate of $0.135 per share. Total dividends of $2.0 million and $2.0 million were paid during the three months ended December 31, 2020 and 2019, respectively. Total dividends of $6.0 million and $6.1 million were paid during the nine months ended December 31, 2020 and 2019, respectively.
On January 15, 2021, we announced a quarterly dividend of $0.135 per share payable on February 12, 2021 to shareholders of record as of January 29, 2021. Any future dividends at the existing $0.135 per share quarterly rate or otherwise will be reviewed individually and declared by our Board of Directors in its discretion.
12. FAIR VALUE MEASUREMENTS
The fair value of the interest rate swap contract (as discussed in Note 9) is determined using Level 2 inputs. The carrying value of our debt (discussed 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, accounts receivable, net, accounts payable) approximate their fair values at December 31, 2020 and March 31, 2020 due to their short-term nature.
13. RETIREMENT PLANS
Refer to Note 14 to our consolidated financial statements included in our Annual Report for a description of our retirement and post-retirement benefits.
The following tables set forth the combined net pension benefit recognized in our condensed consolidated financial statements for all plans (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | |
Service cost, benefits earned during the period | | $ | 10 | | | $ | 18 | | | $ | 30 | | | $ | 53 | | | | |
Interest cost on projected benefit obligation | | 36 | | | 37 | | | 107 | | | 1,082 | | | | |
Expected return on assets | | (24) | | | (27) | | | (71) | | | (1,334) | | | | |
Amortization of net actuarial loss | | 18 | | | 12 | | | 55 | | | 38 | | | | |
Pension plan termination | | — | | | — | | | — | | | 7,019 | | | | |
Net pension benefit | | $ | 40 | | | $ | 40 | | | $ | 121 | | | $ | 6,858 | | | | |
The components of net periodic cost for retirement and postretirement benefits, other than service costs, are included in other expense, net in our condensed consolidated statements of income.
During the six months ended September 30, 2019, we offered lump sum payments to eligible active and terminated vested participants in our qualified U.S. pension plan (the “Qualified Plan”), representing approximately 42% of our liability. Approximately 74% of those participants accepted the lump sum offer for an aggregate payment of $17.0 million in August 2019. We entered into an annuity purchase contract for the remaining liability in September 2019, and terminated the Qualified Plan effective September 30, 2019. The termination required an additional contribution of $0.5 million, which was paid in September 2019, and resulted in an overall termination charge of $7.0 million ($5.4 million, net of tax) recorded in other (expense) income, net, due primarily to the recognition of expenses that were previously included in accumulated other comprehensive loss and the recognition of additional costs associated with the annuity purchase contract. After the participant data for the annuity purchase contract was finalized in the fiscal fourth quarter ended March 31, 2020, the Qualified Plan had excess funds of $0.5 million, which were distributed into the Defined Contribution Plan.
14. CONTINGENCIES
From time to time, we are involved in various claims and legal actions that arise in the ordinary course of business. There are no matters pending that we currently believe have a reasonable possibility of having a material impact to our business, consolidated financial position, results of operations or cash flows.
15. INCOME TAXES
For the three months ended December 31, 2020, we earned $3.1 million from continuing operations before taxes and provided for income taxes of $0.7 million, resulting in an effective tax rate of 23.2%. For the nine months ended December 31, 2020, we earned $40.2 million from continuing operations before taxes and provided for income taxes of $9.6 million, resulting in an effective tax rate of 23.8%. The provision for income taxes differed from the statutory rate for the three and nine months ended December 31, 2020 primarily due to state income taxes, excess tax deductions related to stock compensation, a change in indefinite reinvestment assertion related to the investment in a foreign subsidiary, foreign tax credits, adjustments related to state tax returns and state R&D credits, the provision for global intangible low-taxed income ("GILTI") and a decrease in the reserves for uncertain tax provisions.
For the three months ended December 31, 2019, we earned $9.4 million from continuing operations before taxes and provided for income taxes of $2.1 million, resulting in an effective tax rate of 22.2%. For the nine months ended December 31, 2019, we earned $41.5 million from continuing operations before taxes and provided for income taxes of $10.1 million, resulting in an effective tax rate of 24.3%. The provision for income taxes differed from the statutory rate for the three and nine months ended December 31, 2019, primarily due to the provision for GILTI, adjustments related to foreign items, excess tax deductions related to stock compensation and adjustments related to state tax returns.
The examination by the state of Illinois for the fiscal years ended March 31, 2018 and 2017 was concluded with a favorable adjustment. We are currently under examination by the Internal Revenue Service for Whitmore Manufacturing's federal short period tax return for tax year ending September 30, 2015. We have not been notified of any material adjustments.
16. OTHER COMPREHENSIVE INCOME (LOSS)
The following table provides an analysis of the changes in accumulated other comprehensive loss (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, |
| | 2020 | | 2019 |
Currency translation adjustments: | | | | |
Balance at beginning of period | | $ | (6,795) | | | $ | (7,280) | |
Adjustments for foreign currency translation | | 2,271 | | | 1,699 | |
Balance at end of period | | $ | (4,524) | | | $ | (5,581) | |
| | | | |
Interest rate swaps: | | | | |
Balance at beginning of period | | $ | (1,385) | | | $ | (908) | |
Unrealized gain, net of taxes of $(25) and $(49), respectively (a) | | 94 | | | 184 | |
Reclassification of losses included in interest expense, net, net of taxes of $(15) and $(6), respectively | | 58 | | | 23 | |
| | | | |
Other comprehensive income | | 152 | | | 207 | |
Balance at end of period | | $ | (1,233) | | | $ | (701) | |
| | | | |
Defined benefit plans: | | | | |
Balance at beginning of period | | $ | (871) | | | $ | (936) | |
Amortization of net losses, net of taxes of $3 and $1, respectively (b) | | (10) | | | (3) | |
| | | | |
Other comprehensive income | | (10) | | | (3) | |
Balance at end of period | | $ | (881) | | | $ | (939) | |
| | | | | | | | | | | | | | |
| | Nine Months Ended December 31, |
| | 2020 | | 2019 |
Currency translation adjustments: | | | | |
Balance at beginning of period | | $ | (9,185) | | | $ | (6,869) | |
Adjustments for foreign currency translation | | 4,661 | | | 1,288 | |
Balance at end of period | | $ | (4,524) | | | $ | (5,581) | |
| | | | |
Interest rate swaps: | | | | |
Balance at beginning of period | | $ | (1,390) | | | $ | (394) | |
Unrealized losses, net of taxes of $3 and $94, respectively (a) | | (12) | | | (354) | |
Reclassification of losses included in interest expense, net, net of taxes of $(45) and $(12), respectively | | 169 | | | 47 | |
Other comprehensive income (loss) | | 157 | | | (307) | |
Balance at end of period | | $ | (1,233) | | | $ | (701) | |
| | | | |
Defined benefit plans: | | | | |
Balance at beginning of period | | $ | (871) | | | $ | (3,466) | |
Amortization of net gain (losses), net of taxes of $3 and $(3), respectively (b) | | (10) | | | 11 | |
Pension plan termination, net of taxes of $0 and $(669), respectively | | — | | | 2,516 | |
Other comprehensive income (loss) | | (10) | | | 2,527 | |
Balance at end of period | | $ | (881) | | | $ | (939) | |
(a) Unrealized gains (losses) are reclassified to earnings as underlying cash interest payments are made. We expect to recognize a loss of $0.2 million, net of deferred taxes, over the next twelve months related to designated cash flow hedges based on their fair values at December 31, 2020.
(b) Amortization of actuarial losses out of accumulated comprehensive loss are included in the computation of net periodic pension expense. See Note 13 for additional information.
17. REVENUE RECOGNITION
Refer to Note 19 to our consolidated financial statements included in our Annual Report for a description of our disaggregation of revenues. Disaggregation of revenues reconciled to our reportable segments is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2020 | | Nine Months Ended December 31, 2020 | |
| | Industrial Products | | Specialty Chemicals | | Total | | Industrial Products | | Specialty Chemicals | | Total | | | | | |
Build-to-order | | $ | 23,663 | | | $ | — | | | $ | 23,663 | | | $ | 65,690 | | | $ | — | | | $ | 65,690 | | | | | | |
Book-and-ship | | 35,123 | | | 31,146 | | | 66,269 | | | 126,828 | | | 93,318 | | | 220,146 | | | | | | |
Net revenues | | $ | 58,786 | | | $ | 31,146 | | | $ | 89,932 | | | $ | 192,518 | | | $ | 93,318 | | | $ | 285,836 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2019 | | Nine Months Ended December 31, 2019 | |
| | Industrial Products | | Specialty Chemicals | | Total | | Industrial Products | | Specialty Chemicals | | Total | | | | | |
Build-to-order | | $ | 19,955 | | | $ | — | | | $ | 19,955 | | | $ | 61,196 | | | $ | — | | | $ | 61,196 | | | | | | |
Book-and-ship | | 28,718 | | | 35,043 | | | 63,761 | | | 113,598 | | | 112,579 | | | 226,177 | | | | | | |
Net revenues | | $ | 48,673 | | | $ | 35,043 | | | $ | 83,716 | | | $ | 174,794 | | | $ | 112,579 | | | $ | 287,373 | | | | | | |
Contract liabilities, which are included in accrued and other current liabilities in our condensed consolidated balance sheets were as follows (in thousands):
| | | | | |
Balance at April 1, 2020: | $ | 2,892 | |
Revenue recognized during the period | (6,882) | |
| |
New contracts and revenue added to existing contracts during the period | 5,831 | |
Balance at December 31, 2020 | $ | 1,841 | |
18. SEGMENTS
As discussed in Note 20 to our consolidated financial statements in our Annual Report, we conduct our operations through two business segments based on type of product and how we manage the business: Industrial Products and Specialty Chemicals.
Three Months Ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Industrial Products | | Specialty Chemicals | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
Revenues, net | | $ | 58,786 | | | $ | 31,146 | | | $ | 89,932 | | | $ | — | | | $ | 89,932 | |
Operating income | | 2,998 | | | 4,715 | | | 7,713 | | | (3,597) | | | 4,116 | |
Three Months Ended December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Industrial Products | | Specialty Chemicals | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
Revenues, net | | $ | 48,673 | | | $ | 35,043 | | | $ | 83,716 | | | $ | — | | | $ | 83,716 | |
Operating income | | 8,643 | | | 5,414 | | | 14,057 | | | (3,569) | | | 10,488 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended December 31, 2020 | | | | | | | | |
(in thousands) | | Industrial Products | | Specialty Chemicals | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
Revenues, net | | $ | 192,518 | | | $ | 93,318 | | | $ | 285,836 | | | $ | — | | | $ | 285,836 | |
Operating income | | 39,032 | | | 14,476 | | | 53,508 | | | (10,958) | | | $ | 42,550 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended December 31, 2019 | | | | | | | | |
(in thousands) | | Industrial Products | | Specialty Chemicals | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
Revenues, net | | $ | 174,794 | | | $ | 112,579 | | | $ | 287,373 | | | $ | — | | | $ | 287,373 | |
Operating income | | 42,099 | | | 19,179 | | | 61,278 | | | (10,346) | | | $ | 50,932 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our continuing operations 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, 2020 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.
Overview
We are a diversified industrial growth company with well-established, scalable platforms and domain expertise across two business segments: Industrial Products and Specialty Chemicals. Our broad portfolio of leading products provides performance optimizing and life safety solutions to our customers. Our products include mechanical products for heating, ventilation, air conditioning and refrigeration ("HVAC/R"), grilles, registers and diffusers, building products and high-performance specialty lubricants and sealants. End markets that we serve include HVAC/R, architecturally-specified building products, plumbing, energy, rail, mining and general industrial. Our manufacturing operations are concentrated in the United States ("U.S."), Canada and Vietnam, but we also have distribution operations in U.S., Australia, Canada and the United Kingdom ("U.K."). Our products are sold directly to end users or through designated channels in over 100 countries around the world, including: Australia, Brazil, Canada, China, Colombia, the Netherlands, Russia, South Africa, Sweden, the U.K. and the U.S.
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. We have a source of recurring revenue from our end users' maintenance, repair and overhaul activities and the consumable nature of many of our products. We also provide some custom and semi-custom products that strengthen and enhance our customer relationships. The reputation of our product portfolio is built on more than 100 highly respected industrial brands including No. 5®, KOPR-KOTE®, Kats Coatings®, Safe-T-Switch®, Air Sentry®, Deacon®, Leak Freeze®, Greco® and TRUaire®.
We believe that our broad portfolio of products and markets served, as well as our brand recognition, will continue to provide opportunities; however, we face ongoing challenges affecting many companies, such as environmental and other regulatory compliance, combined with overall global economic uncertainty.
On December 15, 2020, we acquired 100% of the outstanding equity of T.A. Industries, Inc. (“TRUaire”), a leading manufacturer of grilles, registers, and diffusers for the residential and commercial HVAC/R end market, based in Santa Fe Springs, California. The acquisition also included TRUaire’s wholly-owned manufacturing facility based in Vietnam. The acquisition is expected to extend the Company’s product offerings to the HVAC market as well as add new customers and provide strategic distribution facilities. The consideration paid for TRUaire included cash of $284 million and 849,852 shares of the Company’s common stock. The cash consideration was funded through a combination of cash on hand and borrowings under our revolving credit facility, and 849,852 shares of common stock were reissued from treasury shares. TRUaire activity has been included in our Industrial Products segment since the acquisition date.
The COVID-19 pandemic and its resulting impacts, including the substantial decline in crude oil prices that began in March 2020, have had an overall negative impact on our financial results in the three and nine months ended December 31, 2020, as compared with the same periods in the prior year. While the COVID-19 pandemic has contributed to increased demand in certain parts of our business, including the HVAC/R end market, we expect our overall results of operations and financial condition to continue to be adversely impacted through the duration of the pandemic when compared to pre-pandemic, prior year periods. Despite strong demand in certain of our end markets and signs of recovery in others, we cannot reasonably estimate the magnitude or length of the pandemic’s adverse impact due to continued uncertainty regarding (1) the duration and severity of the COVID-19 pandemic and (2) the continued potential for short and long-term impacts on our facilities and employees, customer demand and supply chain.
All of our operations and products support critical infrastructure and are considered "essential" in all of the relevant jurisdictions in which we operate. In response to the COVID-19 pandemic, we took numerous measures across our operating sites to ensure we continue to place the highest priority on the health, safety and well-being of our employees, while continuing to support our customers. Through the date of this filing, our businesses have continued to operate throughout the COVID-19 pandemic with appropriate safeguards for our employees and without any material disruptions.
RESULTS OF OPERATIONS
The following discussion provides an analysis of our condensed consolidated results of continuing operations and results for each of our segments.
All acquisitions are described in Note 2 to our condensed consolidated financial statements included in this Quarterly Report. TRUaire activity has been included in our results within Industrial Products segment since the December 15, 2020 acquisition date.
Revenues, net
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, |
(Amounts in thousands) | | 2020 | | 2019 |
Revenues, net | | $ | 89,932 | | | $ | 83,716 | |
| | |
| | | | |
| | | | |
| | | | | | | | | | | | | | |
| | Nine Months Ended December 31, |
(Amounts in thousands) | | 2020 | | 2019 |
Revenues, net | | $ | 285,836 | | | $ | 287,373 | |
Net revenues for the three months ended December 31, 2020 increased $6.2 million, or 7.4%, as compared with the three months ended December 31, 2019. The increase was primarily due to the acquisition of TRUaire ($4.5 million) and increased sales volumes into HVAC/R ($4.7 million) and architecturally-specified building products ($3.7 million) end markets, partially offset by decreased sales volumes into energy ($2.0 million), rail ($1.7 million), plumbing ($1.0 million), general industrial ($0.7 million) and mining ($0.6 million) end markets.
Net revenues for the nine months ended December 31, 2020 decreased $1.5 million, or 0.5%, as compared with the nine months ended December 31, 2019. The decrease was primarily due to decreased sales volumes into energy ($7.9 million), general industrial ($7.2 million), rail ($4.6 million) and mining ($1.5 million) end markets, partially offset by the TRUaire acquisition ($4.5 million) and increased sales volumes into the HVAC/R ($13.9 million) and architecturally-specified building products ($2.8 million) end markets.
Gross Profit and Gross Profit Margin
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, |
(Amounts in thousands, except percentages) | | 2020 | | 2019 |
Gross profit | | $ | 39,338 | | | $ | 37,691 | |
Gross profit margin | | 43.7 | % | | 45.0 | % |
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| | |
| | | | |
| | | | |
| | | | |
| | | | | | | | | | | | | | |
| | Nine Months Ended December 31, |
(Amounts in thousands, except percentages) | | 2020 | | 2019 |
Gross profit | | $ | 130,827 | | | $ | 132,330 | |
Gross profit margin | | 45.8 | % | | 46.0 | % |
Gross profit for the three months ended December 31, 2020 increased $1.6 million, or 4.4%, as compared with the three months ended December 31, 2019. The increase was primarily a result of the impact of increased sales and the TRUaire acquisition. Gross profit margin of 43.7% for the three months ended December 31, 2020 decreased slightly as compared with 45.0% for the three months ended December 31, 2019. The slight decrease in gross profit margin was primarily due to costs associated with the accelerated lower margin projects in the ASBP end market.
Gross profit for the nine months ended December 31, 2020 decreased $1.5 million, or 1.1%, as compared with the nine months ended December 31, 2019. The decrease in gross profit was due to decreased sales and a $0.8 million gain on sale of property, plant and equipment in the prior year that did not recur, partially offset by increased sales from recent acquisition. Gross profit margin of 45.8% for the nine months ended December 31, 2020 decreased slightly as compared with the nine months ended December 31, 2019, due to the $0.8 million gain on sale of property, plant and equipment in the prior year.
Operating Expenses
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, |
(Amounts in thousands, except percentages) | | 2020 | | 2019 |
Operating expenses | | $ | 35,222 | | | $ | 27,203 | |
Operating expenses as a percentage of revenues, net | | 39.2 | % | | 32.5 | % |
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| | |
| | | | |
| | | | |
| | | | |
| | | | | | | | | | | | | | |
| | Nine Months Ended December 31, |
(Amounts in thousands, except percentages) | | 2020 | | 2019 |
Operating expenses | | $ | 88,277 | | | $ | 81,398 | |
Operating expenses as a percentage of revenues, net | | 30.9 | % | | 28.3 | % |
Operating expenses for the three months ended December 31, 2020 increased $8.0 million, or 29.5%, as compared with the three months ended December 31, 2019. The increase in operating expenses was due to transaction expenses related to the TRUaire acquisition ($6.9 million) and the efforts to establish a joint venture in our Specialty Chemicals segment ($1.1 million). The increase in operating expenses as a percentage of revenues was primarily attributable to increased operating expenses.
Operating expenses for the nine months ended December 31, 2020 increased $6.9 million, or 8.5%, as compared with the nine months ended December 31, 2019. The increase in operating expenses was due to transaction expenses related to the TRUaire acquisition ($7.1 million) and the efforts to establish a joint venture in our Specialty Chemicals segment ($1.1 million), and severance costs ($0.5 million) resulting from the departure of a former executive officer, partially offset by reduced spend on travel-related expenses ($2.5 million). The increase in operating expenses as a percentage of sales was attributable to increased operating expenses.
Operating Income
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, |
(Amounts in thousands, except percentages) | | 2020 | | 2019 |
Operating income | | $ | 4,116 | | | $ | 10,488 | |
Operating margin | | 4.6 | % | | 12.5 | % |
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| | | | |
| | | | |
| | | | | | | | | | | | | | |
| | Nine Months Ended December 31, |
(Amounts in thousands, except percentages) | | 2020 | | 2019 |
Operating income | | $ | 42,550 | | | $ | 50,932 | |
Operating margin | | 14.9 | % | | 17.7 | % |
Operating income for the three months ended December 31, 2020 decreased $6.4 million, or 60.8%, as compared with the three months ended December 31, 2019, primarily as a result of the increase in operating expenses, partially offset by an increase in gross profit, as discussed above.
Operating income for the nine months ended December 31, 2020 decreased $8.4 million, or 16.5%, as compared with the nine months ended December 31, 2019, primarily as a result of the increase in operating expenses and a decrease in gross profit, as discussed above.
Other Income and Expense
Net interest expense of $0.5 million for the three months ended December 31, 2020 increased $0.2 million as compared to the three months ended December 31, 2019. The increase was due to increased outstanding long-term debt, resulting from borrowings to fund our acquisition of TRUaire. Net interest expense of $1.1 million for the nine months ended December 31, 2020 was comparable with the nine months ended December 31, 2019.
Other expense, net decreased $0.3 million to net expense of $0.6 million for the three months ended December 31, 2020 as compared with net expense of $0.8 million for the three months ended December 31, 2019. The decrease was due to a lease termination loss of $0.5 million in the prior year that did not recur, partially offset by an increase in losses arising from transactions in currencies other than our sites' functional currencies. Other expense, net was a net loss of $1.3 million for the nine months ended December 31, 2020 as compared with net loss of $8.3 million for the nine months ended December 31, 2019. The decrease in net loss was due to $7.0 million of expenses recognized in connection with the termination of our U.S. defined benefit pension plan and a lease termination loss of $0.5 million in the prior year, partially offset by an increase in losses arising from transactions in currencies other than our sites' functional currencies.
Provision for Income Taxes and Effective Tax Rate
For the three months ended December 31, 2020, we earned $3.1 million from continuing operations before taxes and provided for income taxes of $0.7 million, resulting in an effective tax rate of 23.2%. For the nine months ended December 31, 2020, we earned $40.2 million from continuing operations before taxes and provided for income taxes of $9.6 million, resulting in an effective tax rate of 23.8%. The provision for income taxes differed from the statutory rate for the three and nine months ended December 31, 2020 primarily due to state income taxes, excess tax deductions related to stock compensation, a change in indefinite reinvestment assertion related to the investment in a foreign subsidiary, foreign tax credits, adjustments related to state tax returns and state R&D credits, the provision for global intangible low-taxed income ("GILTI") and a decrease in the reserves for uncertain tax provisions.
For the three months ended December 31, 2019, we earned $9.4 million from continuing operations before taxes and provided for income taxes of $2.1 million, resulting in an effective tax rate of 22.2%. For the nine months ended December 31, 2019, we earned $41.5 million from continuing operations before taxes and provided for income taxes of $10.1 million, resulting in an effective tax rate of 24.3%. The provision for income taxes differed from the statutory rate for the three and nine months ended December 31, 2019, primarily due to the provision for GILTI, adjustments related to foreign items, excess tax deductions related to stock compensation and adjustments related to state tax returns.
The examination by the state of Illinois for the fiscal years ended March 31, 2018 and 2017 was concluded with a favorable adjustment. We are currently under examination by the Internal Revenue Service for Whitmore Manufacturing's federal short period tax return for tax year ending September 30, 2015. We have not been notified of any material adjustments.
Business Segments
We conduct our operations through two 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 two 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, grilles, registers and diffusers, filtration and application equipment for use with our specialty chemicals and other products for general industrial application.
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, |
(Amounts in thousands) | | 2020 | | 2019 |
Revenues, net | | $ | 58,786 | | | $ | 48,673 | |
Operating income | | 2,998 | | | 8,643 | |
Operating margin | | 5.1 | % | | 17.8 | % |
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| | | | | | | | | | | | | | |
| | Nine Months Ended December 31, |
(Amounts in thousands) | | 2020 | | 2019 |
Revenues, net | | $ | 192,518 | | | $ | 174,794 | |
Operating income | | 39,032 | | | 42,099 | |
Operating margin | | 20.3 | % | | 24.1 | % |
Net revenues for the three months ended December 31, 2020 increased $10.1 million, or 20.8%, as compared with the three months ended December 31, 2019. The increase was primarily due to the TRUaire acquisition ($4.5 million) and increased sales volumes into HVAC/R ($4.5 million) and architecturally-specified building products ($3.7 million) end markets, partially offset by decreased sales volumes into plumbing ($1.0 million), general industrial ($0.8 million) and rail ($0.8 million) end markets.
Net revenues for the nine months ended December 31, 2020 increased $17.7 million, or 10.1%, as compared with the nine months ended December 31, 2019. The increase was primarily due to the TRUaire acquisition ($4.5 million) and increased sales volumes into HVAC/R ($13.9 million) and architecturally-specified building products ($4.5 million) end markets, partially offset by decreased sales volumes into general industrial ($2.8 million) and rail ($2.4 million) end markets.
Operating income for the three months ended December 31, 2020 decreased $5.6 million, or 65.3%, as compared with the three months ended December 31, 2019. The decrease was primarily due to $6.9 million transaction expenses related to the acquisition of TRUaire, partially offset by increased sales.
Operating income for the nine months ended September 30, 2019 decreased $3.1 million, or 7.3%, as compared with the nine months ended December 31, 2019. The decrease was due primarily to $7.1 million transaction expenses related to the acquisition of TRUaire, partially offset by increased sales.
Specialty Chemicals Segment Results
Specialty Chemicals is comprised of pipe thread sealants, firestopping sealants and caulks, adhesives/solvent cements, lubricants and greases, drilling compounds, anti-seize compounds, chemical formulations, and degreasers and cleaners.
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| | Three Months Ended December 31, |
(Amounts in thousands) | | 2020 | | 2019 |
Revenues, net | | $ | 31,146 | | | $ | 35,043 | |
Operating income | | 4,715 | | | 5,414 | |
Operating margin | | 15.1 | % | | 15.4 | % |
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| | Nine Months Ended December 31, |
(Amounts in thousands) | | 2020 | | 2019 |
Revenues, net | | $ | 93,318 | | | $ | 112,579 | |
Operating income | | 14,476 | | | 19,179 | |
Operating margin | | 15.5 | % | | 17.0 | % |
Net revenues for the three months ended December 31, 2020 decreased $3.9 million, or 11.1%, as compared with the three months ended December 31, 2019. The decrease was primarily due to decreased sales volumes into energy ($2.0 million), rail ($0.9 million) and mining ($0.6 million) end markets.
Net revenues for the nine months ended December 31, 2020 decreased $19.3 million, or 17.1%, as compared with the three months ended December 31, 2019. The decrease was primarily due to decreased sales volumes into energy ($7.9 million), general industrial ($4.4 million), rail ($2.3 million), architecturally-specified building products ($1.7 million) and mining ($1.5 million) end markets.
Operating income for the three months ended December 31, 2020 decreased $0.7 million, or 12.9%, as compared with the three months ended December 31, 2019. The decrease was due to decreased sales and $1.1 million of transaction expenses related to efforts to establish a joint venture, partially offset by decreases in travel-related expenses, personnel-related expenses, and sales commissions.
Operating income for the nine months ended December 31, 2020 decreased $4.7 million, or 24.5%, as compared with the three months ended December 31, 2019. The decrease was due to decreased revenues, $1.1 million of transaction expenses related to efforts to establish a joint venture and a $0.8 million gain on sale of property, plant and equipment in the prior year that did not recur, partially offset by decreases in travel-related expenses, personnel-related expenses, and sales commissions.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Analysis
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| | Nine Months Ended December 31, |
(Amounts in thousands) | | 2020 | | 2019 |
Net cash provided by operating activities, continuing operations | | $ | 54,046 | | | $ | 60,353 | |
Net cash used in investing activities, continuing operations | | (284,962) | | | (18,193) | |
Net cash provided by (used in) financing activities | | 229,303 | | | (29,293) | |
Existing cash, cash generated by continuing 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 cash equivalents) at December 31, 2020 was $18.3 million, as compared with $18.3 million at March 31, 2020.
For the nine months ended December 31, 2020, our cash provided by operating activities from continuing operations was $54.0 million, as compared with $60.4 million for nine months ended December 31, 2019.
•Working capital provided cash for the nine months ended December 31, 2020 due to lower accounts receivable ($14.1 million), partially offset by higher prepaid expenses and other current assets ($4.5 million), lower accounts payable and other current liabilities ($1.8 million), higher inventories ($1.6 million) and higher other assets ($0.3 million).
•Working capital provided cash for the nine months ended December 31, 2019 due to lower accounts receivable ($10.1 million) and lower prepaid expenses and other current assets ($3.2 million), partially offset by higher inventories ($5.1 million) and lower accounts payable and other current liabilities ($0.3 million).
Cash flows used in investing activities from continuing operations during the nine months ended December 31, 2020 were $285.0 million, as compared with $18.2 million for the nine months ended December 31, 2019.
•Capital expenditures during the nine months ended December 31, 2020 and 2019 were $6.9 million and $7.6 million, respectively. Our capital expenditures have been focused on new product introductions, capacity expansion, ERP systems, continuous improvement and automation.
•During the nine months ended December 31, 2020, we acquired TRUaire for $279.8 million in cash consideration (after working capital and closing cash adjustments and excluding tax liabilities to be paid by the Company on behalf of the sellers) and stock consideration valued at $97.7 million, as discussed in Note 2 to our condensed consolidated financial statements included in this Quarterly Report.
•During the nine months ended December 31, 2019, we acquired Petersen for $11.8 million, as discussed in Note 2 to our condensed consolidated financial statements included in this Quarterly Report.
Cash flows provided by (used in) financing activities during the nine months ended December 31, 2020 and 2019 were $229.3 million and $(29.3) million, respectively. Cash inflows (outflows) resulted from:
•Net borrowings (repayments) on our line of credit and term loan (as discussed in Note 7 to our condensed consolidated financial statements included in this Quarterly Report) of $244.6 million and $(20.4) million during the nine months ended December 31, 2020 and 2019, respectively.
•Repurchases of shares under our share repurchase program (as discussed in Note 11 to our condensed consolidated financial statements included in this Quarterly Report) of $7.3 million and $0.8 million during the nine months ended December 31, 2020 and 2019, respectively.
•Dividend payments of $6.0 million and $6.1 million during the nine months ended December 31, 2020 and 2019, respectively.
We believe that available cash and cash equivalents, cash flows generated through continuing 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 the 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 were in compliance with all covenants as of December 31, 2020.
We have entered into an interest rate swap agreement to hedge our exposure to variable interest payments related to our indebtedness. This agreement is 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 December 31, 2020, 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 nine months ended December 31, 2020.
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.
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:
•our business strategy;
•adverse changes in global economic conditions, including changes resulting from the effects of the COVID-19 pandemic;
•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;
•the effective date and expected impact of accounting pronouncements; and
•our ability to complete any acquisition we have announced or will announce in the future, realize the anticipated cost savings and synergies of the TRUaire acquisition or any other acquisition we have announced or will announce in the future, and successfully integrate TRUaire or any other company we may acquire with our business without material delay, higher than anticipated costs or difficulty or loss of key personnel.
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. We assume no obligation to update or revise these forward-looking statements, except as required by law.
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 the risk associated with changes in interest rates through regular operating and financing activities, and when deemed appropriate, through the use of an interest rate swap. 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.
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 December 31, 2020, we had $245.0 million in outstanding variable rate indebtedness, after consideration of our interest rate swap. We manage, or hedge, interest rate risks related to our borrowings by means of an interest rate swap agreement. At December 31, 2020, we had an interest rate swap agreement that covered 4.1% of our $255.5 million total outstanding indebtedness. Each quarter point change in interest rates would result in a $0.6 million change 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 Australian dollar, British pound, Canadian dollar and Vietnamese dong. 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 recognized foreign currency transaction net losses of $0.5 million and $0.4 million for the three months ended December 31, 2020 and 2019, respectively, and $1.0 million and $0.6 million for the nine months ended December 31, 2020 and 2019, respectively, which are included in other expense, net on our condensed consolidated statements of income. We realized a net gain associated with foreign currency translation of $2.3 million and $1.7 million for the three months ended December 31, 2020 and 2019, respectively, and $4.7 million and $1.3 million for the nine months ended December 31, 2020 and 2019, respectively, which are included in accumulated other comprehensive income (loss).
Based on a sensitivity analysis at December 31, 2020, a 10% change in the foreign currency exchange rates for the three and nine months ended December 31, 2020 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
The Company's management, with the participation of the Company's Chief Executive Officer and Executive Vice President and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, (the "Exchange Act")) as of the end of the period covered by this Quarterly Report. Based on such evaluation, the Company's Chief Executive Officer and Executive Vice President and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures were effective.
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 quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
The disclosure contained in Note 14 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 from time to time named defendants in certain lawsuits incidental to our business, including product liability claims that are insured, subject to applicable deductibles, 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, 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.
The following disclosure modifies the discussion of certain risks and uncertainties previously disclosed in our Annual Report on Form 10-K for the year ended March 31, 2020. These risks and uncertainties, along with those previously disclosed, could materially adversely affect our business and financial results. The risks described in this Quarterly Report, our 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 could materially adversely affect our business, financial condition, results of operations or cash flows.
As a result of the TRUaire acquisition, we have become subject to risks relating to the business conducted by TRUaire.
Following the consummation of the TRUaire acquisition, we have become subject to a variety of risks relating to the business conducted by TRUaire, many of which we have already faced in our business, as described in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020. Some of the specific risks facing TRUaire include risks relating to the residential and commercial HVAC/R end market, including general conditions in the industry, changes in current or new regulations and legislation and potential structural changes in the industry; additional information technology risks, including cyber security and data privacy risks relating to TRUaire’s services; risks relating to intellectual property held or used by TRUaire; the ability of TRUaire’s services to adequately compete with the products and services offered by other companies, including through attracting new customers and retaining or selling additional products and service offerings to existing customers; risks relating to current and future legal proceedings involving TRUaire; risks relating to labor and employment, including employee relations and the potential loss of key personnel; risks relating to manufacturing products and operating in Vietnam, including environmental, health and safety laws, uncertainty of local laws and possible economic or political disruption; risks relating to U.S. trade policies; and risks relating to foreign currency exchange rates.
The occurrence of any of such risks could have a material adverse impact on the financial condition, business or results of operations of TRUaire, which could impair or eliminate our ability to achieve the expected cost savings and synergies from the TRUaire acquisition on a timely basis, if ever, or could impair our ability to achieve such cost savings and synergies without adversely affecting our current revenues or investments in future growth. Additionally, the occurrence of any such risks could impair our ability to integrate the business of TRUaire with our businesses in an efficient and timely manner, if at all.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Note 11 to our condensed consolidated financial statements included in “Item 1. Financial Statements” of this Quarterly Report includes a discussion of our share repurchase programs. The following table represents the number of shares repurchased during the quarter ended December 31, 2020.
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Number of Shares (or Approximate Dollar Value) That May Yet Be Purchased Under the Program (a) |
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October 1 - 31 | | 14,631 | | (b) | $ | 77.67 | | | — | | | $ | 100.0 | |
November 1 - 30 | | — | | | — | | | — | | | 100.0 | |
December 1 - 31 | | — | | | — | | | — | | | 100.0 | |
Total | | 14,631 | | | | | — | | | |
(a) On October 30, 2020, we announced that our Board of Directors authorized a new program to repurchase up to $100.0 million of our common stock, which replaces the previously announced $75.0 million program. Under the newly-authorized program, shares may be repurchased from time to time in the open market or in privately negotiated transactions. Our Board of Directors has established an expiration of December 31, 2022, for completion of the new repurchase program; however, the program may be limited or terminated at any time at our discretion without notice. As of December 31, 2020, no shares of our common stock had been repurchased under the program.
(b) Represents shares tendered by employees to satisfy minimum tax withholding amounts for restricted share vesting.
Item 6. Exhibits
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Exhibit No. | | Description |
2.1 | | Stock Purchase Agreement, dated November 4, 2020, by and among RectorSeal, LLC, T.A. Industries, Inc. d/b/a TRUaire, Yongki Yi as Sellers Representative, the Sellers party thereto, and solely for the purpose of Sections 1.8, 6.5(d) and 13.18, CSW Industrials, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed on November 5, 2020) |
3.1 | | |
3.2 | | |
10.1 | | |
10.2 | | First Amendment (Incremental Amendment) to First Amended and Restated Credit Agreement, dated December 1, 2020, by and among CSW Industrials Holdings, Inc. and Whitmore Manufacturing, LLC, the other Loan Parties party thereto and JPMorgan Chase Bank, N.A., individually and in its capacity as the Administrative Agent, Swingline Lender and Issuing Bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on December 1, 2020) |
31.1* | | |
31.2* | | |
32.1** | | |
32.2** | | |
101.INS | | XBRL Instance Document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation LinkBase Document |
101.DEF | | XBRL Taxonomy Extension Definition LinkBase Document |
101.LAB | | XBRL Taxonomy Extension Label LinkBase Document |
101.PRE | | XBRL Taxonomy Extension Presentation LinkBase Document |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
_________________________
* Filed herewith
** Furnished herewith
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.
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| | CSW INDUSTRIALS, INC. |
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February 5, 2021 | | /s/ Joseph B. Armes |
| | Joseph B. Armes |
| | Chief Executive Officer (Principal Executive Officer) |
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February 5, 2021 | | /s/ James E. Perry |
| | James E. Perry |
| | Chief Financial Officer (Principal Financial Officer) |