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CSW Industrials Reports Fiscal Third Quarter 2017 Results

Highlights

  • Third quarter 2017 net revenue of $75.5 million, up 6.5% compared to $70.9 million in the prior year period.
  • Third quarter 2017 GAAP operating income of $3.4 million; Non-GAAP operating income of $6.6 million.
  • Third quarter 2017 GAAP net earnings of $405 thousand, or $0.03 per diluted share; Non-GAAP net earnings of $4.2 million, or $0.26 per diluted share.
  • Company continues restructuring & realignment initiatives targeting annualized savings of approximately $7.5 million in addition to annualized savings of approximately $2.0 to $2.5 million expected from procurement initiatives.

DALLAS, Feb. 13, 2017 (GLOBE NEWSWIRE) -- CSW Industrials, Inc. (NASDAQ:CSWI), a diversified industrial growth company with well-established, scalable platforms and domain expertise across three segments: Industrial Products; Coatings, Sealants & Adhesives; and Specialty Chemicals, today reported results for the third fiscal quarter ended December 31, 2016.

Net revenue for the fiscal third quarter of 2017 was $75.5 million, compared to the prior year period of $70.9 million. Organic growth was 6.2%, while inorganic growth was 0.3%.  The increase in net revenue was primarily attributable to increases in the construction and HVAC markets, partially offset by decreases in the rail and energy markets.

Net income in the fiscal third quarter of 2017 was $405 thousand, or $0.03 per diluted share, compared to $2.0 million, or $0.13 per diluted share, in the prior year period. Adjusted to exclude one-time expenses and applying a normalized tax rate, adjusted net income in the third quarter of fiscal 2017 was up 9.9% to $4.2 million, or $0.26 per diluted share, compared to $3.8 million, or $0.24 per diluted share, in the prior year period.

Joseph B. Armes, CSW Industrials’ Chief Executive Officer, commented, “We were pleased to see strong growth in our architecturally specified building products resulting from market penetration of smoke curtains and growth in our HVAC and plumbing markets.  While our Specialty Chemicals and Coatings, Sealants and Adhesives segments continue to work through challenging end markets, we remain focused on revenue diversification initiatives to broaden end market penetration.  Additionally, we continue to make good progress optimizing those businesses to increase profitability through our restructuring and realignment initiatives, and when combined with our global procurement initiatives, we expect these efforts to yield significant annualized savings.”

Third Quarter Results of Operations
Industrial Products segment revenue increased 11.3% during the quarter to $31.7 million, compared to the prior year level of $28.5 million. The increase in revenue was the result of higher sales volume from strength in the construction market that increased demand for our products. Higher demand in the HVAC market also contributed to increased sales volumes and were partially offset by decreased demand for rail lubrication applicators. Industrial Products segment operating income was $4.0 million, compared to the prior year level of $3.4 million.  Adjusted to exclude one-time expenses, Industrial Products segment adjusted operating income increased to $4.3 million in the third quarter of fiscal 2017 compared to $3.4 million in the prior year period.

Coatings, Sealants and Adhesives (CS&A) segment revenue decreased 1.9% to $23.8 million, compared to the prior year level of $24.3 million. Lower revenue was mainly attributable to decreased sales volumes in the rail end market, partially offset by increased demand in plumbing sealants. Segment operating income in the third quarter of 2017 was $0.8 million, compared to operating income of $4.2 million in the prior year period.  The decrease was attributable to unfavorable absorption on lower sales, CS&A restructuring costs ($0.5 million), and inefficiencies due to the restructuring process that impacted the third quarter of 2017 and the reversal of the liability for the earn-out related to the Strathmore acquisition ($2.0 million) recorded during December 2015 that did not recur. These factors were partially offset by transaction costs from the Deacon acquisition ($0.3 million) recorded during December 2015 that did not recur.  Adjusted to exclude one-time expenses, CS&A segment adjusted operating income decreased to $1.4 million compared to $2.5 million in the prior year period. 

Specialty Chemicals segment revenue increased 10.0% to $19.9 million, compared to the prior year of $18.1 million. Higher sales were attributable to working down the backlog of Whitmore / Jet Lube orders created by integration challenges in the second quarter of fiscal 2017, as well as acquisition-related revenues. Segment operating income in the third quarter of fiscal 2017 was $541 thousand, compared to the prior year level of $1.7 million, resulting from realignment costs related to the Whitmore / Jet Lube integration ($2.1 million), including duplicate labor and overhead, additional freight, and costs attributable to the disposal of inventory, partially offset by transaction costs from the Leak Freeze acquisition ($0.5 million) recorded during December 2015 that did not recur.  Adjusted to exclude one-time expenses, Specialty Chemicals segment adjusted operating income increased to $2.8 million compared to $2.2 million in the prior year period. 

Consolidated gross profit in the third quarter of fiscal 2017 was $28.9 million, a 10.0% decrease compared to the prior year of $32.1 million.  Gross margin as a percentage of sales decreased to 38.3%, compared to 45.3% in the prior year. The decline was due to an unfavorable sales mix shift and reduced absorption of fixed manufacturing costs in products sold into the rail and energy markets.  Additionally, and as previously disclosed, the decrease was driven by restructuring and realignment costs incurred related to optimizing our manufacturing footprint as part of the Company’s efforts to achieve approximately $7.5 million in annual restructuring savings.

Consolidated operating expenses decreased to $25.5 million, or 33.8% of sales, compared to the prior year level of $26.5 million, or 37.4% of sales. The decrease was attributable to organizational and start-up costs incurred in connection with the Share Distribution ($2.1 million) and transaction costs from the Deacon and Leak Freeze acquisitions ($0.8 million) recorded in the prior year period that did not recur.  These costs were mostly offset by the Strathmore acquisition earn-out liability reversal ($2.0 million) recorded in the prior year period that did not recur and current period restructuring and realignment costs ($0.5 million).

Consolidated operating income was $3.4 million, or 4.5% of sales, compared with $5.6 million, or 7.9% of sales, in the prior year.  The lower operating income was primarily attributable to a $3.3 million decrease in gross profit partially offset by the $1.0 million decrease in operating expenses, as discussed above.

Consolidated net income for the third quarter was $405 thousand, or $0.03 per diluted share, compared with net income of $2.0 million in the prior year period.  Our effective tax rate in the quarter was 87.7%, due to the recognition of discrete items tied to the provision versus actual returns filed for fiscal 2016. Adjusted for one-time items and applying a normalized tax rate, adjusted net income was $4.2 million, or $0.26 per diluted share, compared to adjusted net income of $3.8 million, or $0.24 per diluted share, in the prior year.

Conference Call Information

The company will host a conference call today at 10:00 a.m. ET to discuss the results, followed by a question and answer session for the investment community.  A live webcast of the call can be accessed at ir.cswindustrials.com. To access the call, participants may dial toll-free at 1-877-407-0784 or 1-201-689-8560 (international) and request to join the CSW Industrials earnings call.

To listen to a telephonic replay of the conference call, dial toll-free 1-844-512-2921 or 1-412-317-6671 (international) and enter confirmation code 13654535. The telephonic replay will be available beginning at 1:00 p.m. ET on Monday, February 13, 2017, and will last through 11:59 p.m. ET on Monday, February 27, 2017.  The call will also be available for replay via the webcast link on CSW Industrials’ Investor Relations website.

Safe Harbor Statement
This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Words or phrases such as "may," "should," "expects," "could," "intends," "plans," "anticipates," "estimates," "believes," "forecasts," "predicts" or other similar expressions are intended to identify forward-looking statements, which include, without limitation, earnings forecasts, statements relating to our business strategy and statements of expectations, beliefs, future plans and strategies and anticipated developments concerning our industry, business, operations and financial performance and condition.

The forward-looking statements included in this press release are based on our current expectations, projections, estimates and assumptions. These statements are only predictions, not guarantees. Such forward-looking statements are subject to numerous risks and uncertainties that are difficult to predict. These risks and uncertainties may cause actual results to differ materially from what is forecast in such forward-looking statements, and include, without limitation, the risk factors described from time to time in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K.

All forward-looking statements included in this press release are based on information currently available to us, and we assume no obligation to update any forward-looking statement except as may be required by law.

Non-GAAP Financial Measures
This press release includes an analysis of adjusted earnings per share, adjusted net income, and adjusted operating income, which are non-GAAP financial measures of performance.  For a reconciliation of these measures to the most directly comparable GAAP measures and for a discussion of why we consider these Non-GAAP measures useful, see the “Reconciliation of Non-GAAP Measures” section of this release.

About CSW Industrials
CSWI is a diversified industrial growth company with well-established, scalable platforms and domain expertise across three segments: Industrial Products; Coatings, Sealants & Adhesives; and Specialty Chemicals. CSWI's broad portfolio of leading products provides performance optimizing solutions to its customers. CSWI's products include mechanical products for heating, ventilation and air conditioning ("HVAC") and refrigeration applications, coatings and sealants and high performance specialty lubricants. Markets that CSWI serves include: HVAC, industrial, rail, plumbing, architecturally-specified building products, energy, mining and general industrial markets.

CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
         
    Three Months Ended   Nine Months Ended
    December 31,   December 31,
    2016   2015   2016   2015
                                 
    (in thousands, except per share amounts)
                 
Revenues, net   $ 75,496     $ 70,918     $ 239,735     $ 243,572  
Cost of revenues     (46,598 )     (38,769 )     (136,971 )     (130,135 )
Gross profit     28,898       32,149       102,764       113,437  
Selling, general and administrative expenses     (25,504 )     (26,526 )     (81,109 )     (72,747 )
Impairment expenses     (13 )     -       (3,896 )     -  
Operating income     3,381       5,623       17,759       40,690  
Interest expense, net     (673 )     (793 )     (2,163 )     (2,292 )
Other income (expense), net     583       (7 )     1,875       (185 )
Income before income taxes     3,291       4,823       17,471       38,213  
Provision for income taxes     (2,886 )     (2,825 )     (9,128 )     (14,602 )
Net income   $ 405     $ 1,998     $ 8,343     $ 23,611  
                 
Net earnings per common share:                
Basic   $ 0.03     $ 0.13     $ 0.53     $ 1.51  
Diluted     0.03       0.13       0.53       1.51  
                 
                 
    Three Months Ended   Nine Months Ended
    December 31,   December 31,
    2016   2015   2016   2015
                                 
    (in thousands)
                 
Net income   $ 405     $ 1,998     $ 8,343     $ 23,611  
Other comprehensive (loss) income:                
Foreign currency translation adjustments     (1,534 )     (847 )     (3,466 )     (2,064 )
Cash flow hedging activity, net of taxes of                
$(420), $(156), $(383) and $(272), respectively     779       290       712       505  
Pension and other postretirement effects,                
net of taxes of $(1), $(3), $(5) and $(2,614), respectively     2       7       10       4,855  
Other comprehensive (loss) income     (753 )     (550 )     (2,744 )     3,296  
Comprehensive income   $ (348 )   $ 1,448     $ 5,599     $ 26,907  
                 

 

CONSOLIDATED BALANCE SHEETS
(unaudited)
         
    December 31,   March 31,
    2016   2016
                 
    (in thousands, except per share amounts)
ASSETS        
Current assets:        
Cash and cash equivalents   $ 20,414     $ 25,987  
Bank time deposits     1,753       13,278  
Accounts receivable, net of allowance of $1,202 and $1,208, respectively     49,758       52,637  
Inventories, net     53,080       51,634  
Prepaid expenses and other current assets     13,133       11,985  
Total current assets     138,138       155,521  
Property, plant and equipment, net of accumulated depreciation of $61,327        
and $59,035, respectively     62,996       64,357  
Goodwill     67,147       67,757  
Intangible assets, net     80,418       88,727  
Other assets     16,078       15,898  
Total assets   $ 364,777     $ 392,260  
         
LIABILITIES AND EQUITY        
Current liabilities:        
Accounts payable   $ 12,664     $ 9,912  
Accrued and other current liabilities     23,617       21,090  
Current portion of long-term debt     561       561  
Total current liabilities     36,842       31,563  
Long-term debt     46,286       89,121  
Retirement benefits payable     1,300       1,746  
Other long-term liabilities     11,705       11,820  
Total liabilities     96,133       134,250  
Equity:        
Common shares, $0.01 par value     157       156  
Shares authorized – 50,000      
Shares issued – 15,661 and 15,659, respectively      
Preferred shares, $0.01 par value     -       -  
Shares authorized – 10,000        
Shares issued – 0        
Additional paid-in capital     37,603       31,597  
Treasury shares, at cost     (972 )     -  
Retained earnings     242,298       233,955  
Accumulated other comprehensive loss     (10,442 )     (7,698 )
Total equity     268,644       258,010  
Total liabilities and equity   $ 364,777     $ 392,260  
         

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
         
    Nine Months Ended
    December 31,
     2016     2015 
                 
    (in thousands)
Cash flows from operating activities:        
Net income   $   8,343     $   23,611  
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation       6,146         5,042  
Amortization of intangible and other assets       5,879         4,896  
Provision for inventory reserves       1,309         -   
Share-based and other executive compensation       3,837         1,398  
Acquisition-related non-cash gain       (376 )       (1,950 )
Net loss (gain) on sales of property, plant and equipment       30         33  
Pension plan curtailment benefit       -          (8,020 )
Net pension (benefit) expense       (843 )       -   
Impairment of assets       3,896         -   
Net deferred taxes       (2,700 )       4,361  
Changes in operating assets and liabilities:        
Accounts receivable, net       2,842         9,612  
Inventories       (2,941 )       1,484  
Prepaid expenses and other current assets       (1,378 )       (446 )
Other assets       (157 )       (89 )
Accounts payable and other current liabilities       5,693         (411 )
Retirement benefits payable and other liabilities       3,094         (1,039 )
Net cash provided by operating activities       32,674         38,482  
Cash flows from investing activities:        
Capital expenditures       (6,965 )       (6,024 )
Proceeds from sale of assets held for investment       97         -   
Proceeds from sale of assets       193         20  
Net change in bank time deposits       11,442         5,805  
Cash paid for acquisitions       -          (97,732 )
Net cash provided by (used in) investing activities       4,767         (97,931 )
Cash flows from financing activities:        
Borrowings on lines of credit       -          174,040  
Repayments of lines of credit       (42,835 )       (94,421 )
Payments of deferred loan costs       -          (1,073 )
Purchase of treasury shares       (972 )       -   
Cash contribution from Capital Southwest       -          13,000  
Proceeds from stock option activity       2,169         -   
Dividends paid to Capital Southwest       -          (300 )
Net cash (used in) provided by financing activities       (41,638 )       91,246  
Effect of exchange rate changes on cash and equivalents       (1,376 )       (1,193 )
Net change in cash and cash equivalents       (5,573 )       30,604  
Cash and cash equivalents, beginning of period       25,987         20,448  
Cash and cash equivalents, end of period   $   20,414     $   51,052  
         

Reconciliation of Non-GAAP Measures 

Reconciliation of Operating Income to Adjusted Operating Income
 
  (unaudited)
(in thousands)   For the Three Months Ended
December 31,
  For the Nine Months Ended 
December 31,
    2016   2015   2016   2015
                 
GAAP Operating Income   $ 3,381   $ 5,623     $ 17,759   $ 40,690  
                 
Adjusting items:                
Pension gain     -     -       -     (8,020 )
Restructuring & realignment     2,573     -       4,707     -  
Asset Impairment     124     -       3,014     -  
Estimated reserve for excess inventory     -     -       719     -  
Transaction costs     -     (1,122 )     -     1,641  
Spin related costs     -     2,145       -     3,046  
Consulting projects     482     -       1,394     -  
CFO Transition     -     -       2,872     -  
                 
Adjusted Operating Income   $ 6,560   $ 6,646     $ 30,465   $ 37,357  
                             


 
Reconciliation of Net Income to Adjusted Net Income
 
  (unaudited)
(in thousands, except share data)   For the Three Months Ended
December 31,
  For the Nine Months Ended 
December 31,
    2016
  2015
  2016   2015
                 
GAAP Net Income   $ 405     $ 1,998     $ 8,343   $ 23,611  
                               
Adjusting items, net of tax:                              
Pension gain     -       -       -     (5,213 )
Restructuring & realignment     1,665       -       3,139     -  
Asset Impairment     80       -       1,959     -  
Estimated reserve for excess inventory     -       -       467     -  
Transaction costs     -       (726 )     -     1,062  
Spin related costs     -       1,388       -     1,971  
Consulting projects     312       -       906     -  
CFO Transition     -       -       1,867     -  
Discrete Tax Provisions     1,725       1,150       3,073     -  
                               
Adjusted Net Income   $ 4,187     $ 3,810     $ 19,754   $ 21,431  
                 
GAAP Diluted income per common share   $ 0.03     $ 0.13     $ 0.53   $ 1.51  
                 
Adjusting items, per diluted common share:                
Pension gain     -       -       -     (0.33 )
Restructuring & realignment     0.10       -       0.20     -  
Asset Impairment     0.01       -       0.12     -  
Estimated reserve for excess inventory     -       -       0.03     -  
Transaction costs     -       (0.05 )     -     0.07  
Spin related costs     -       0.09       -     0.12  
Consulting projects     0.02       -       0.06     -  
CFO Transition     -       -       0.12     -  
Discrete Tax Provisions     0.10       0.07       0.19     -  
                 
Adjusted earnings per diluted common share   $ 0.26     $ 0.24     $ 1.25   $ 1.37  
                               
Weighted-average shares outstanding (in thousands)                              
Diluted     15,894       15,741       15,812     15,688  
     

 

Reconciliation of Segment Operating Income to Adjusted Segment Operating Income
 
 
  (unaudited)
(in thousands, except percentages)   For the Three Months Ended December 31, 2016   For the Three Months Ended December 31, 2015
    Industrial Products   Coatings,
Sealants &
Adhesives
  Specialty Chemicals   Corporate and Other   Consolidated   Industrial Products   Coatings,
Sealants &
Adhesives
  Specialty Chemicals   Corporate and Other   Consolidated
                                                                                 
Revenue   $ 31,715     $ 23,847     $ 19,890     $ 44     $ 75,496     $ 28,498     $ 24,301     $ 18,075     $ 44     $ 70,918  
                                         
Operating Income   $ 3,978     $ 813     $ 541     $ (1,951 )   $ 3,381     $ 3,422     $ 4,172     $ 1,735     $ (3,706 )   $ 5,623  
                                         
Adjusting items:                                        
Restructuring & realignment     -       427       2,146       -       2,573       -       -       -       -       -  
Asset Impairment     124       -       -       -       124       -       -       -       -       -  
Transaction costs     -       -       -       -       -       -       (1,630 )     508       -       (1,122 )
Spin related costs     -       -       -       -       -       -       -       -       2,145       2,145  
Consulting projects     191       119       119       53       482       -       -       -       -       -  
                                         
Adjusted Operating Income   $ 4,293     $ 1,359     $ 2,806     $ (1,898 )   $ 6,560     $ 3,422     $ 2,542     $ 2,243     $ (1,561 )   $ 6,646  
% of revenue
    13.5 %     5.7 %     14.1 %         8.7 %     12.0 %     10.5 %     12.4 %         9.4 %
                                                     
                                                                                 
    (unaudited)
(in thousands, except percentages)   For the Nine Months Ended December 31, 2016   For the Nine Months Ended December 31, 2015
    Industrial Products   Coatings,
Sealants & Adhesives
  Specialty Chemicals   Corporate and Other   Consolidated   Industrial Products   Coatings,
Sealants & Adhesives
  Specialty Chemicals   Corporate and Other   Consolidated
                                         
Revenue   $ 117,048     $ 70,218     $ 52,380     $ 89     $ 239,735     $ 104,660     $ 80,721     $ 58,009     $ 182     $ 243,572  
                                           
Operating Income   $ 24,482     $ 910     $ 2,829     $ (10,462 )   $ 17,759     $ 24,786     $ 10,974     $ 9,422     $ (4,492 )   $ 40,690  
                                         
Adjusting items:                                        
Pension gain     -       -       -       -       -       (3,179 )     (1,418 )     (3,423 )     -       (8,020 )
Restructuring & realignment     -       1,956       2,751       -       4,707       -       -       -       -       -  
Asset Impairment     214       2,800       -       -       3,014       -       -       -       -       -  
Estimated reserve for excess inventory     17       279       423       -       719       -       -       -       -       -  
Transaction costs     -       -       -       -       -       -       1,133       508       -       1,641  
Spin related costs     -       -       -       -       -       -       -       -       3,046       3,046  
Consulting projects     275       264       201       654       1,394       -       -       -       -       -  
CFO Transition     -       -       -       2,872       2,872       -       -       -       -       -  
                                         
Adjusted Operating Income   $ 24,988     $ 6,209     $ 6,204     $ (6,936 )   $ 30,465     $ 21,607     $ 10,689     $ 6,507     $ (1,446 )   $ 37,357  
% of revenue
    21.3 %     8.8 %     11.8 %         12.7 %     20.6 %     13.2 %     11.2 %         15.3 %
                                         

We use adjusted earnings per share, adjusted net income and adjusted operating income, together with financial measures prepared in accordance with GAAP, such as revenue, income from operations, operating expense, operating income and net income, to asses our historical and prospective operating performance and to enhance our understanding of our core operating performance. We also believe these measures are useful for investors to assess the operating performance of our business without the effect of non-operating items.

Investor contact:
Michael Callahan, ICR
(203) 682-8311
Michael.Callahan@icrinc.com

CSW Industrials