SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| | | | | |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31,
20162023
¨ | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto. Commission file number 001-37454
CSW INDUSTRIALS, INC.
(Exact name of registrant as specified in its charter)
| | |
DelawareCSW INDUSTRIALS, INC. (Exact name of registrant as specified in its charter) |
| | 47-2266942 | | | | | | |
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) |
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 |
Securities registered pursuant to section 12(g) of the Act: None
| | |
| Securities registered pursuant to section 12(g) of the Act: None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x☒ 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 x☒ 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 x☒ No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): | | | | | | | | | | | | | | |
Large accelerated filer☒ | | ¨ | | Accelerated filer☐ | | ¨ |
| | | |
Non-accelerated filer | | x (do☐(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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒ The aggregate market value of the registrant’s common stock held by non-affiliates,
as of September 30, 2015 was approximately $480.8 million, based
uponon the
“when issued” tradinglast sale price
offor the
registrant’s common stock as
of such date. As ofreported by the Nasdaq Global Select Market on September 30,
2015 (the2022, the last business day of our most recently completed second fiscal
quarter), the registrant’s common stock only traded on a “when issued” basis. The registrant’s common stock did not start trading “regular way” on the Nasdaq Global Select Market until October 1, 2015.quarter was approximately $1,827.3 million.
As of
June 2, 2016,May 22, 2023, the latest practicable date,
15,718,18815,508,573 shares of the registrant’s common stock, par value $0.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the definitive proxy statement for the registrant’s 2016 Annual Meeting of Stockholders scheduled to be held on August 8, 2016 is incorporated by reference into Part III hereof.
Unless otherwise specified, or the context otherwise requires, the references in this Annual Report on Form 10-K for the fiscal year ended March 31, 20162023 (“Annual Report”) to “our company,” “the Company,” “we,” “us,” “our” or “CSWI” refer to CSW Industrials, Inc. together with our operating subsidiaries, which includes The RectorSeal Corporation (“RectorSeal”), The Whitmore Manufacturing Company (“Whitmore”), Jet-Lube, Inc. (“Jet-Lube”), Balco, Inc. (“Balco”), Strathmore Holdings, LLC (“Strathmore”), Smoke Guard, Inc. (“Smoke Guard” and all of the Company’s operating subsidiaries collectively, the “Operating Subsidiaries”).wholly-owned subsidiaries.
ITEM 1: BUSINESS
Overview
We were incorporated in the State of Delaware on November 6, 2014 as a wholly owned subsidiary of Capital Southwest Corporation (“Capital Southwest”). We were formed solely for the purpose of effecting the distribution of our outstanding shares of common stock on a pro rata basis to holders of Capital Southwest common stock (the “Share Distribution”) and to become the holding company for a group of manufacturing companies that were owned by Capital Southwest prior to the Share Distribution. The Share Distribution was completed on September 30, 2015, resulted in
General
CSWI
becoming a standalone, publicly-traded company with sole ownership of the Operating Subsidiaries.Our Company
We areis a diversified industrial growth company with well-established, scalable platforms and domain expertise acrossa strategic focus on providing niche, value-added products in the end markets we serve. We operate in three business segments: Industrial Products; Coatings, Sealants & Adhesives;Contractor Solutions, Engineered Building Solutions and Specialty Chemicals. Our broad portfolio of leading products provides performance optimizing solutions to our customers.Specialized Reliability Solutions. Our products include mechanical products for heating, ventilation, and air conditioning (“HVAC”) and refrigeration applications, coatings("HVAC/R"), plumbing products, grilles, registers and sealantsdiffusers ("GRD"), building safety solutions and high performancehigh-performance specialty lubricants. Marketslubricants and sealants. End markets that we serve include HVAC, industrial, rail, plumbing,HVAC/R, architecturally-specified building products, energy, mining and otherplumbing, general industrial, markets.
energy, rail transportation and mining. Our manufacturing operations are concentrated in the United States (“U.S.”), Vietnam and Canada, and we have distribution operations in the 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, primarily including the U.S., Canada, the U.K. and Australia.
Drawing on our innovative and proven technologies, we seek to deliver solutions primarily to our professional customerscontractors that requireplace a premium on superior performance and reliability. We believe our industrial brands such as RectorSeal No. 5® and KOPR-KOTE®, are well knownwell-known in the specific industriesend markets we serve and have a reputation for high quality and reliability. Throughquality. We rely on both organic growth and inorganic growth through acquisitions we believe we are well positioned to offer our customersprovide an increasingly broad portfolio of performance optimizing solutions.solutions that meet our customers’ ever-changing needs. We have a successful record of making accretiveattractive and synergistic acquisitions – in the last five fiscal years,that support expansion of our broad portfolio of solutions, and we completed 13 acquisitions for an aggregate purchase price of $187.3 million. We believe there are further attractiveremain focused on identifying additional acquisition opportunities available within the markets in whichour core end markets.
Through our operating companies, we
operate.We have a long historywell-established legacy of providing high quality specialty chemicals, coatings, sealants and other products accompanied by dependable service and attention to customer satisfaction. Our specialty lubricants were used on the excavation equipment for the Panama Canal in the late 1800s. We also have a long history of innovation. We believe thatinnovation, through which we werehave developed a robust line of products to solve our customers' specific challenges. These products are distributed through an extensive wholesale distribution network serving the firstHVAC/R, architecturally-specified buildings products, plumbing, general industrial, energy, rail transportation and mining end markets. Our desire to develop solutions for our contractors, combined with the differentiated nature of our niche product offerings, drives loyalty to our brands.
CSWI is a methodDelaware corporation and was incorporated in 2014 in anticipation of CSWI's separation from Capital Southwest Corporation ("Capital Southwest"). Our well-established operating companies provide a collective history that spans more than a century. The separation was executed on September 30, 2015 through a pro-rata share distribution of all the then outstanding shares of common stock of CSWI to the holders of common stock of Capital Southwest (the "Share Distribution"). Since the separation, CSWI has been an independent, publicly-traded company, listed on the Nasdaq Global Select Market.
Business Segments
Our business is organized into three reportable segments: Contractor Solutions, Engineered Building Solutions and Specialized Reliability Solutions.
The table below provides an overview of these business segments. For financial information regarding our segments, see Note 20 to our consolidated financial statements included in Item 8 Financial Statements and Supplementary Data ("Item 8") of this Annual Report.
| | | | | | | |
| Business Segment | | Key End Use Markets | |
| Contractor Solutions | | •HVAC/R •Plumbing •General Industrial •Architecturally-Specified Building Products | |
| Engineered Building Solutions | | • Architecturally-Specified Building Products | |
| Specialized Reliability Solutions | | •Energy •General Industrial •Mining •Rail Transportation | |
Contractor Solutions
Our Contractor Solutions segment manufactures efficiency and performance enhancing products predominantly for removingresidential and commercial HVAC/R and plumbing applications, which are designed primarily for the professional trades. It provides an innovative line of installation and service products designed to create efficiency and expediency for the professional trades. Our Contractor Solutions segment is strategically positioned to grow in each market served by leveraging our sales channels and distribution networks. HVAC/R contractors ask for our products by name, and professional plumbers have been using our industry-leading solutions for generations. We manufacture the majority of our mechanical and chemical products internally, we strategically engage third-party manufacturers for outsourced products and we act as a master distributor for certain products. We ensure the quality of internally- and externally-manufactured products through our stringent quality control review procedures backed by our "RectorSeal to the Rescue" commitment around quality, warranty and differentiated support.
Our key product types and brand names are shown below in alphabetical order:
| | | | | |
| Product Types | Brand Names |
| • condensate pads, pans and pumps | • AquaGuard® |
| • condensate switches and traps | • Aspen® Pumps |
| • drain waste and vent systems mechanical products | • Clean Check® |
| • ductless mini-split systems installation support tools and accessories | • Cover GuardTM |
| • electrical protection for HVAC | • DesolvTM |
| • grilles, registers, diffusers and vents | • EZ Trap® |
| • installation supplies for HVAC | • Falcon Stainless® |
| • line set covers | • Fortress® |
| • maintenance chemicals for HVAC | • Goliath® |
| • refrigerant caps | • G-O-N® |
| • solvents, cements, traps, vents, and thread sealants | • HubsettTM |
| • wire pulling head tools | • Kickstart® |
| • Leak Freeze® |
| • No. 5® |
| • Novent® |
| • PRO-FitTM |
| • RectorSeal® |
| • Safe-T-Switch® |
| • Shoemaker Manufacturing® |
| • Slimduct® |
| • SureSeal® |
| • TRU-BLUTM |
| • TRUaire® |
New Product Development – Customer experience is a core competency in our Contractor Solutions segment. We gather "voice of the customer" market research through organized focus groups and online surveys, as well as through less formal channels. Ideas for new products or enhancements to existing products are also generated by our relationships with end-users, independent sales representatives, distributors and our internal acidsales and marketing team. We also actively monitor the competitive landscape. We develop new products and modify existing products in our research and development (“R&D”) labs in Houston, Texas and Cle Elum, Washington.
Competition – Our competition in the Contractor Solutions segment is varied. Competitors range from air conditioningsmall entrepreneurial companies with a single product, to large multinational original equipment manufacturers (“OEMs”). In the products serving the HVAC/R end market category, we compete with DiversiTech, DuraVent, Intermatic, Nu-Calgon, Little Giant, Supco and refrigeration systems, pioneeringothers. In the products serving the plumbing end market category, we compete with IPS, J.R. Smith, Mainline, Oatey and others. Most of our products are sold through distribution channels, and we compete in this channel based on breadth of product line, customer service and pricing.
Customers – Our primary customers are wholesalers and distributors in the HVAC/R and plumbing end markets. Some of these are single location distributors, the majority are regional or national with hundreds of locations. These products are generally sold domestically; however, a small portion is sold internationally through similar channels, and a small number of OEMs purchase these products directly.
Seasonality – A significant portion of our products are sold into the HVAC/R market, which is seasonal by nature. While products are sold throughout the year, revenues tend to peak during the spring and summer months.
Engineered Building Solutions
Our Engineered Building Solutions segment provides primarily code-driven, life-safety products that are engineered to provide aesthetically-pleasing solutions for acid neutralizers.the construction, refurbishment and modernization of commercial, institutional and multi-family residential buildings. Our Engineered Building Solutions segment is a market leader in providing architects, contractors and other construction professionals with unique solutions that meet code requirements and support life safety, while adding functionality, performance, and aesthetically-pleasing designs. The safety and sustainability of our engineered building products enables them to be easily incorporated into the Leadership in Energy and Environmental Design (“LEED”) building market.
Our key product types and brand names are shown below in alphabetical order:
| | | | | |
| Product Types | Brand Names |
| • architectural railings and metals | • Balco® Expansion Joint Systems |
| • fire and smoke protection solutions | • BlazeSealTM |
| • fire stopping solutions | • Greco® Architectural Railings & Metals |
| • pre-engineered and custom architectural building components | • IllumiTreadTM |
| • Metacaulk® |
| • MetaflexProTM |
| • Smoke Guard® Elevator Protection |
| • Smoke Guard® Large Curtain Solutions |
| • Smoke Guard® Perimeter Protection |
New Product Development – Strategic investment in new product innovation, technical advancement, and customer driven product development enhances demand for our products and enriches relationships with end-users. Development teams are located in Boise, Idaho; Hudson, Florida; Wichita, Kansas and Windsor Ontario, Canada.
Competition – Our products generally demand premium valuation. We partnercompete primarily on the basis of competitive lead times, superior custom specification standards and customer-centric service, which we believe are the key drivers of our customers' buying decisions. In the fire and smoke protection product category, we compete with McKeon, US Smoke & Fire, Won Door and others, typically based on product quality, knowledge of building codes and customer service. In the architecturally-specified building component, we compete primarily with Construction Specialties, Emseal and InPro on the basis of product quality, price and driving architectural specifications.
Customers – Fire and smoke protection products are sold through internal sales and installation teams, as well as local building products distributors that also perform installations and service. Architecturally-specified building components are primarily sold through independent sales representatives and building product distributors to general contractors or sub-contractors. Engineered Building Solutions' end use customers include multi-family residential buildings, educational facilities or institutions, warehouses, construction companies, plant maintenance customers, building contractors and repair service companies, among others.
Specialized Reliability Solutions
Our Specialized Reliability Solutions segment provides products for increasing the reliability, efficiency, performance and lifespan of industrial assets. Through our
commercial team and supply chain partners, our Specialized Reliability Solutions segment delivers products that protect assets in the most demanding environments and extreme conditions and solve equipment maintenance challenges. Our customers
to solve specific challenges,depend on their mission-critical equipment, and thus they depend on our trusted specialty lubricants, compounds, sealants, desiccant breather filtration products, and lubrication management systems. Our Specialized Reliability Solutions segment manufactures and supplies highly specialized consumables that impart or enhance properties such as
environment-friendly lubricants, which were specifically developed to providelubricity, anti-seize qualities, friction, sealing and heat control. These high performance
products are typically used in
harsh operating conditions, including extreme heat and pressure and chemical exposure, where commodity products would fail. These products help minimize maintenance down-time, protect and extend the working life of large capital equipment such as cranes, rail
applications combined with biodegradabilitytransportation systems, mining equipment, oil rigs and
no eco-toxicityrotating and grinding equipment found in various industrial segments such as steel mills, canning and bottling, mining and cement. These products enhance, repair or condition the internal working systems of industrial systems and are critical to
satisfy strict environmental requirements.Prior to the Share Distribution, our Operating Subsidiaries operated as separate businesses, whichensuring safe, efficient and effective long-term operational integrity.
Our key product types and brand names are
discussed below:shown below in alphabetical order:
| | | | | |
| Product Types | Brand Names |
| • anti-seize products | • AccuTrack® |
| • compounds, lubricants and sealants | • Air Sentry® |
| • contamination control | RectorSeal. RectorSeal formulates specialty chemical• BioRail®
|
• desiccant breather filtration products including pipe thread | • Deacon® |
| • industrial maintenance and repairs | • Envirolube® XE Extreme |
| • lubricant management systems | • Extreme® |
| • operations solutions | • Gearmate® 1000 ICT |
| • rail friction modifiers | • Jet-Lube® |
• sealants firestop sealants, plastic solvent cements and other formulations for plumbing, HVAC, electrical and industrial | • Kopr-Kote® |
| • Matrix® |
| • NCS-30® ECFTM |
| • OilSafe® |
| • RailArmor® |
| • Run-N-Seal® ECFTM |
| • TOR Armor® |
| • Whitmore® |
| applications, electrical control and mechanical devices, and accessories for ductless mini-split HVAC systems. RectorSeal also makes innovative products for tradesmen and innovative systems for containing flames and smoke from building fires. These products are distributed both domestically and internationally through an extensive distribution network serving the plumbing, industrial, HVAC, refrigeration, construction, electrical and hardware markets.
|
RectorSeal was established
New Product Development – We develop relationships with end-users and channel partners to understand a multitude of operating conditions where technical innovation or enhancement is needed. For example, these relationships have generated innovation in 1937 and acquired by Capital Southwestthe areas of modifying existing lubrication products to operate in 1969. It has facilitiesarctic conditions or modifying an existing product for use in Houston, Texas; Fall River, Massachusetts; and Brisbane, Australia. Portions of RectorSeal’s operating results are included in each of our three business segments. | • | | Whitmore. Whitmore manufactures high performance, specialty lubricants for heavy equipment used in surface mining, railroad and other industries. Whitmore also manufactures lubrication equipment, specifically for rail applications, and reliability solutions for a wide variety of industries, including manufacturing, steel, sugar and power. In addition, Whitmore produces water-based coatings for the automotive and primary metals industries. |
Whitmore products and services are sold in over 100 countries around the world through a service intensive distribution network committed to technical support and customer satisfaction. Whitmore’s primary customer basean application where saltwater may be present. The development team is located in Australia, Brazil, Canada, China, Colombia, the Netherlands, Russia, South Africa, Sweden, the United Kingdom (“U.K.”) and the United States (“U.S.”).
Whitmore was established in 1893 and acquired by Capital Southwest in 1979. It has facilities in Rockwall, Texas and actively targets additional end markets for product use and penetration.
Competition – In general, our products demand premium valuation, as compared to commodity products, and competitors tend to be varied and include global, regional and local companies that may be large or small. We compete primarily on the basis of product differentiation, superior performance and quality and customer-centric service. When compared to many commodity consumables, the product sales cycle is often long, typically resulting in quantified, verified and repeat product performance being the U.K. Portionskey driver of Whitmore’s operating results are includedbuying decisions, rather than price. As these products protect and enhance the operation of large capital equipment, qualification is based on the proof of value in each of our three business segments. | • | | Jet-Lube. Jet-Lube is a leading manufacturer of anti-seize compounds, thread sealants and specialty lubrication products and greases. Jet-Lube serves customers worldwide in a wide variety of industries, including energy, water well, mining, manufacturing, electric utility, food processing and agriculture, construction, transportation, valve maintenance, forestry, military, HVAC and plumbing. |
Jet-Lubeapplication, resulting in a high changeover risk barrier. Typical competitors include Exxon-Mobil, Fuchs, Kleuber, Shell and South Coast Products.
Customers – Specialized Reliability Solutions products are available worldwideprimarily sold through an extensivevalue-added distribution networkpartners, as well as maintenance and repair operations or catalog channels. Our Specialized Reliability Solutions' organization provides both market-specific and product line specific training to both the distribution partners and potential end-users. Our specialists often visit end-users with a combination of factory representativesdistribution partners to advise on critical application issues, which enhances our ability to both “pull” demand from the end-user and warehouses in key locations. Portions of Jet-Lube’s operating results are included in our Coatings, Sealants & Adhesives“push” demand to distributor partners. Specialized Reliability Solutions' customers include petrochemical facilities, industrial manufacturers, construction companies, utilities, plant maintenance customers, building contractors and Specialty Chemicals business segments.Jet-Lube was established in 1949rail and acquired by Capital Southwest in 1973. It has operations in the U.S., Canada and the U.K.
| • | | Strathmore. Strathmore manufactures custom designed coatings for customers in various industries, including the rail, mining and industrial sectors. Strathmore markets and sells its products worldwide through a direct sales force. |
Strathmore was founded in 1942 in Syracuse, New York and acquired by Capital Southwest in April 2015. In addition to its facility in New York, Strathmore has facilities in Longview, Texas; Acworth, Georgia; and Houston, Texas. Strathmore’s operating results are included in our Coatings, Sealants & Adhesives segment.
| • | | Smoke Guard. Smoke Guard manufactures certified custom safety products for the commercial construction market and other markets requiring smoke and fire protection. Smoke Guard’s proprietary technologies control the movement of smoke and are sold through exclusive distributors primarily in the U.S. Smoke Guard’s operating results are included in our Industrial Products segment. |
Smoke Guard was founded in 1991 and operates in Boise, Idaho and Concord, California. It was acquired by Capital Southwest in 2004.
| • | | Balco. Balco is engaged in the fabrication of aluminum and plastic extrusions and products related to safety, slip resistance and emergency egress used by the commercial building industry worldwide. |
Balco was founded in Wichita, Kansas in 1958 and was acquired by Capital Southwest in 1989. It also has a facility in Oklahoma City, Oklahoma. Balco’s operating results are included in our Industrial Products segment.
mining operators, among others.
Our Competitive Strengths
We
As discussed in this section, we believe we have
the followinga variety of competitive
strengths:strengths.
Broad Portfolio of Industry Leading Products and Solutions
We
In our targeted end markets, we have aleading industry positions among our broad portfolio of products with leading industry positions in the specific end markets in which we operate.products. We believe our products and solutions are differentiated from those of our competitors by superior performance, quality and total value delivered to customers. For example, our RectorSealRectorSeal's No. 5®product pipe thread sealant is widely regarded as an industry standard for thread sealants for HVAC,HVAC/R, plumbing and electrical configurations.applications. Additionally, we believe our KOPR-KOTEWhitmore's Kopr-Kote® product anti-seize lubricant is recognized as the anti-seize compound of choice for use in oil and gas drilling operations, where it is asked forrequested by name.Sustainable
Organic Revenue Growth
Platform and
OperatingOptimizing Performance
We focus on
developing our presence in end markets with strong growth trends,
such as HVAC, rail and construction. We also have a loyal customer base that recognizes the performance and quality of our products and solutions, including continuously evaluating the potential uses of existing products to broaden
ourend market penetration.
We historically have a loyal customer base that recognizes the performance results and quality of our products and solutions. Further, our customer base is
diverse – fordiverse. For the
fiscal year ended March 31,
2016,2023, no single customer represented
10% or more
than 10% of our net revenues.
These factors have enabled us to generate strong margin performance. We continue to improve ourorganic revenue growth performance, while remaining focused on strong profitability through targetedoptimizing our manufacturing processes. This effort is supported by a culture of continuous improvement, which looks to refine processes in all of our manufacturing facilities to reduce manufacturing costs, increase production capacity and improve product quality. Additionally, we often evaluate strategic investments to further optimizedrive transformational changes in our manufacturing processes. For example, in the Specialty Chemicals segment, we are in the process of consolidating the manufacturing of someall of our lubricant and grease products intoreportable segments, we have taken actions to consolidate our Rockwall, Texas facilitymanufacturing footprint in order to optimize capacity, improve efficiency and leverage technologies while enhancing product qualityquality.
Diverse Sales and internal environmental, health and safety standards. Further, we continue to refine our manufacturing processes in allDistribution Channels
Many of our
manufacturing facilitiesproducts are sold through full-service distribution networks where product knowledge and customer satisfaction are key success factors. We primarily market through an international network of both internal and third-party sales representatives that call on our wholesale distributors, contractors and direct customers. The strong, long-term relationships we have developed with our wholesale distribution partners and exclusive dealers position us to
lower manufacturing costs, increase production capacitysuccessfully introduce organically developed products and
improve product quality.Stable Platformacquired products. In addition, our extensive distribution network allows us to reach and serve niche end markets that provide organic growth opportunities and a source of opportunities for Acquisitionsour acquisition strategy.
Inorganic Growth Investment with Proven Track Record
We believe our experience in identifying, completing and integrating acquisitions is one of our core competitive strengths, as evidenced by our portfolio of more than 10 acquisitions completed since the 34 acquisitionsinception of the Company. Historically, we have successfully completed since 1991. Since April 1, 2011, wepursued product-line acquisitions with relatively low integration risk that have invested $187.3 million in acquisitions that either (1) added new products designed to service our existing end markets or (2) provided an entry into new, complementary end markets where we can drive revenue growth and improved profitability. Historically, our acquisitions have been relatively small, lower-risk acquisitions of a product that we have identified as having the potential to benefit from our extensive distribution network and manufacturing efficiencies. We have also consummated larger acquisitionsMore recently, we began targeting commercially-proven products and
solutions that
complementare attractive in our
business model.We completed three acquisitions duringexisting end markets where we can drive revenue growth, improved profitability and increased cash flow.
In the third quarter of fiscal year ended March 31, 2023, we acquired Falcon Stainless, Inc ("Falcon"), based in Temecula, California, which offers products that enhance water flow delivery. In the second quarter of fiscal year ended March 31, 2023, we acquired the assets of Cover Guard, Inc. (“CG”) and AC Guard, Inc. ("ACG"), based in Orlando, Florida, which offer lineset covers and HVAC/R condenser protection cages. In the third quarter of the fiscal year ended March 31,
2016. Effective April 1, 2015,2022, we acquired
substantially allShoemaker Manufacturing ("Shoemaker"), based in Cle Elum, Washington, which offers high-quality customizable GRD for commercial and residential markets, and expands CSWI’s HVAC/R product offering and regional exposure in the northwest U.S. In the third quarter of the
assets of Strathmore, a leading participant in the coatings market. Strathmore also has a history of successfully integrating acquisitions, having completed five acquisitions since 1993. Effective October 1, 2015,fiscal year ended March 31, 2021, we acquired
substantially all of the assets of DeaconT.A. Industries, Inc.
(“TRUaire”), a leading manufacturer of
high temperature sealantsGRD for the residential and
injectable packings. Effective December 15, 2015, we acquired substantially all ofcommercial HVAC/R end market, based in Santa Fe Springs, California. We invested more than $490 million for the
assets of AC Leak Freeze, a leading manufacturer of original equipment manufacturer-safe air conditioningmultiple acquisitions made in fiscal 2021, 2022 and
refrigerant leak repair solutions.2023.
Culture of Product Enhancement and
Customer CentricCustomer-Centric Solutions
We have a long history of serving our customers with high quality products
Our highly-trained and
solutions. Wespecialized personnel work closely with our customers, industry experts and research partners to continuously improve our existing products to meet evolving customer and
end market requirements.
Our highly trained and specialized personnel work directly with our current and prospective customers to enhance our product offerings by expanding the use and markets for our existing products. We focus on product enhancements and product line extensions that are designed to meet the specific application needs of
the professional trades. Customer-centric solutions underpin our
customers. We believe this focus has helped us build strong industrial brands and
develop a reputation for high quality
products, in turn leading us to realize improved customer retention and loyalty. Further, our ability to meet the needs of high-value, niche end markets with customized solutions that leverage our existing products has enabled us to differentiate ourselves from
our larger competitors that may not
have the flexibilitybe as willing or
interest in respondingable to respond quickly to evolving customer
demands in these smaller, niche markets.Diverse Sales and Distribution Channels
Many of our products are sold through service-intensive distribution networks committed to technical support and customer satisfaction. We primarily market through an international network of independent manufacturer representatives and agents calling on our wholesale distributors, contractors and direct customers. The strong, long-term relationshipsdemands.
Amid the COVID-19 pandemic, we
have developedworked closely with our
wholesale distribution partners allow uscustomers to
introduce newprovide them with the products
including both newly developed and
acquired products. In addition,services that they need to continue conducting their operations. This included ensuring that our
extensive distribution network allows ussupply chains were secure, that we maintained an adequate level of inventory to
reachmeet our customers' needs and
serve niche end markets that
provide organic growth opportunities and form a key component ofwe remained able to operate our
acquisition strategy.With certain of our products, we also market through a direct sales force focused on specificfacilities at the levels required to meet customer needs. For example, we sell products in our Coatings, Sealants & Adhesive segment directly to rail car and locomotive manufacturers.
Experienced Management Team
Our management team is highly regarded in each of our business segments. Collectively, our management team, including our executive officers, has an average of 25 years of experience in the industrial manufacturing and specialty chemicals industries. They have a successful track record of recognizing and capitalizing upon attractive opportunities in the key markets we serve, and our executive management team has a strong record of effectively managing capital and delivering operating efficiencies over time. In addition, our management team has demonstrated strong capabilities in sourcing and executing strategic and accretive acquisitions.
demand.
We are focused on creating
significantlong-term stockholder value
over the long term by increasing our revenue, profitability and
free cash
flow by (1)flow. Identifying strategic end markets yielding sustainable growth, expanding
the marketsmarket share through our new product development and
uses for our existing products and (2) growing the portfolio of products we manufacture, market and sell through targeted
acquisitions. We believe the key driversacquisitions are all components of our
growth include:Benefits Resulting from the Share Distribution
Historically, we operated as separate independent companies with discrete strategies and capital structures. The Share Distribution has allowed us, as an independent, standalone company, to pursue a strategy focused on rationalizing our organizational structure and management around our three business segments. strategy.
We
expect this strategy to enable us to realize cost and operational synergies, implement best practices across our operations, cross-sell product offerings and, as a result, grow our market share and increase our profitability.Additionally, we believe our standalone company structure will allow us to more effectively allocate capital across our three business segments, enabling more efficient financing of operations and planned growth.
LeveragingLeverage Existing Customer Relationships and Products and Solutions
We expect to
continue to increasedrive revenue
growth by leveraging our reputation for providing high quality products to our
long-standingbroad customer base. Our team of sales representatives, engineers and other technical personnel continues to proactively collaborate with our distributors and
end userscontractors to enhance and adapt existing products and solutions to meet evolving customer needs. In addition, we
expectseek to leverage our existing customer base to cross-sell our products and solutions across our three business segments, thereby
growing organically.driving organic growth.
We Innovate New Products to Accelerate Organic Growth
The collaborative relationships and open feedback channels we have with our distributors and end-user allow us to add value not only through enhancing and adapting existing products and solutions, but also through efficiently developing new products and solutions to meet existing and future customer needs. Our team of R&D, sales and marketing personnel work together to identify product opportunities and methodically pursue development of innovative new products. Through developing new products and solutions to both address new markets and complement our product portfolio in markets we currently serve, we create increased opportunities to drive organic growth.
We Invest in Focused Acquisitions that Leverage our Distribution Channels
While we are focused on
new product development, improving our existing products and penetrating new markets with these products, we expect to continue to identify and execute acquisitions that will broaden our portfolio of products and offer attractive risk-adjusted returns. We primarily focus on commercially proven products and solutions that
currently have limited distribution, but would benefit from a broader distribution network and
beare attractive to
our customers in
targetour targeted end markets. Once acquired,
our intent iswe strive to utilize our extensive distribution networks to increase revenue by selling those products
and solutions to our diversified customer base.
Operational Excellence
We focus on operational excellence in all aspects
Table of our business, with the end goals of improved efficiencies and increased profitability. We will continue to expand improvement initiatives and information sharing across our entire platform, promoting best practices. For example, to accelerate the process of leveraging best practices across our business segments, we recently organized an operations summit among the manufacturing and procurement leaders of our three business segments, which is expected to generate approximately $2 million in annual procurement savings across the business once it is fully implemented. Manufacturing footprint optimization, including the integration of Jet-Lube and Whitmore that is expected to be completed during the fiscal year ended March 31, 2017, is expected to generate approximately $5 million in annual savings in our Specialty Chemicals segment. The majority of these savings will begin to be realized during the fiscal year ending March 31, 2017 with full run-rate savings expected by the end of the fiscal year ending March 31, 2017. We expect to benefit from exploiting new synergy opportunities by applying our best practices when integrating acquisitions. See Note 2 to our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” (“Item 8”) of this Annual Report for financial and other information regarding our operations.Contents
Raw Materials and Suppliers
Our products are manufactured using various
We rely on suppliers and commodity markets to secure components and raw materials
includingsuch as base oils, copper
flake,flakes, steel, aluminum, polyvinyl chloride and tetra-hydrofuran.
TheseWe acquire raw materials
are availableand components from numerous sources, and we
do not anticipate significant shortages of such materials in the future. We generally purchase these raw materials and components as needed. We do not depend on a single source of supply for any significant
amount of raw
materials.materials and components. As we have managed through supply chain challenges caused by the COVID-19 pandemic over the last several years, we continue to take proactive steps to limit the impact of current and anticipated supply chain challenges. We also work closely with our suppliers to ensure availability of products and implement other cost saving initiatives, and we invest in our operations and supply chain to mitigate risk with a focus on the diversification of critical components.
We own
and maintain a
numbersubstantial portfolio of trademarks and patents relating to the names and designs of our products. We consider our trademarks and patents to be valuable
assets of our business.assets. In addition, our pool of proprietary information, consisting of know-how and trade secrets related to the design, manufacture and operation of our products, is considered particularly valuable. Accordingly, we take proactive measures to protect
such proprietary information.
We generallyIn aggregate, we own the rights to the products that we manufacture and sell and are not materially encumbered by licensing or franchise agreements. Our trademarks can typically be renewed indefinitely as long as they remain in use, whereas our
existing patents generally expire 10 to 20 years from the dates they were
filed, which has occurred at various times in the past. Wefiled. Our patents expire from time to time, but we do not believe that the expiration of any individual patent will have a material adverse impact on our business, financial condition or results of operations.
We are subject to export control regulations in countries from which we export products and services. These controls may apply by virtue of the country in which the products are located or by virtue of the origin of the content contained in the products.
If the controls of a particular country apply, theThe level of control generally depends on the nature of the goods and services in question. Where controls apply,
the export of our products generally requireswe typically need an export license or authorization (either on a per-product or
per transactionper-transaction basis) or
that the transaction
must qualify for a license exception or the
equivalent, and may also be subject toequivalent. In certain cases corresponding reporting
requirements.requirements may apply. See Note
1620 to our consolidated financial statements included in Item 8 of this Annual Report for financial and other information regarding our
operations.operations on a geographical basis.
Human Capital Management
We believe that our employees are our most valuable assets and that our skilled, engaged workforce provides us with a competitive advantage. As part of our commitment to our employees, we provide a safe work environment, ongoing training and professional development, competitive compensation and a generous health and retirement benefits package that includes an employee stock ownership plan ("ESOP"), a defined contribution plan ("401(k)"), paid time off, health and wellness care and college tuition reimbursement.
As of March 31, 2023, we employed approximately 2,400 individuals globally. Regionally, approximately 1,100 of our employees are in North America, approximately 1,300 are in Asia Pacific, and approximately 10 are in Europe, the Middle East and Africa. Our workforce is made up of approximately 400 salaried employees and 2,000 hourly employees. Of these employees, approximately 1.8% of our U.S. workforce is represented by unions. We also have an employee organization in Vietnam. We believe that relations with our employees throughout our operations are generally positive, including those employees represented by unions or employee organizations. No unionized facility accounted for more than 10% of our consolidated revenues for the fiscal year ended March 31, 2023.
We assess employee engagement through targeted surveys, which provide feedback on a variety of subjects including safety, communications, diversity and inclusion, performance management, development opportunities, respect and recognition and management support. The survey results are reviewed by our senior leadership team and shared with our managers and employees who collaborate to act on identified areas of improvement to implement measures of success. About 79% of our employees participated in our fiscal 2023 survey, which was conducted through Great Place To Work®. Employee feedback from the survey indicated our overall employee engagement score remains high and in January 2023, we received the Great Place To Work® Certification™. While we continuously work to build on our Company's strong culture, these scores indicate that we are continuing to raise the bar to increase pride, optimism and engagement across the Company and strive to create the best employee experience.
As a result of maintaining a consistent focus on our employee-centric culture, the retention rate (excluding retirements) for our high performance talent in the fiscal year ended March 31, 2023 was 91%. Our company-wide (all employees) voluntary retention rate (excluding retirements) was 83%, representing a 4% improvement from the prior fiscal year.
Workplace Health and Safety
We are committed to creating and maintaining a safe, healthy working environment, and we have developed a health and safety program that focuses on implementing policies and training programs to ensure that all employees understand this commitment. We maintain a global Environmental, Health & Safety policy that is applicable to all our employees, operations and activities. Our health and safety strategies are consistently reviewed and updated as changes occur in our business, and employees are empowered to identify and report safety concerns and take corrective actions. Safety awareness and employee engagement programs have been implemented at the Company’s facilities and have generated meaningful reductions in workplace safety incidents. In particular, we have continued to focus on the health and safety practices at our Vietnam facility since the acquisition in December 2020 through training and equipment upgrades. For the calendar year ended December 31, 2022, our total recordable incident rate ("TRIR") for employees was 1.9, which was a slight increase over the prior calendar year and included the TRIR performance of recently-acquired companies.For the first three months of calendar 2023, our TRIR was 1.0.
The COVID-19 pandemic underscored the importance of keeping our employees safe and healthy and our focus on employee health and safety was evident in how we responded to it. Our actions included adding work from home flexibility, encouraging those who are sick or have symptoms to stay home, increasing cleaning protocols across all locations, providing regular communications regarding health and safety protocols and procedures, establishing physical distancing and personal protective equipment procedures for employees, providing masks and cleaning supplies, implementing protocols to address actual and suspected COVID-19 cases and potential exposure and limiting non-essential domestic and international travel for all employees.
Training, Development and Ethics
Consistent with our belief that our employees are our most valuable assets, developing our people is a critical aspect of our culture. Successful execution of the Company's strategy depends on attracting and retaining highly qualified individuals. We provide developmental opportunities to help our employees build the skills necessary to reach their career goals, including on-the-job training, online learning, professional memberships, and leadership and management training. To help our employees see how their efforts contribute to our Company’s overall success, we utilize a robust performance management process and provide regular feedback to increase engagement and maximize talent development efforts. We have also established various talent development programs for current and future leaders during the critical stages of their careers.
Our core values of accountability, citizenship, teamwork, respect, integrity, stewardship, and excellence form the foundation for our decentralized, entrepreneurial culture, and our Code of Business Conduct (our "Code") represents our shared commitment to living out these core values with the highest level of ethical conduct. All our employees across the globe, including our executive officers, are required to abide by our Code to ensure that our business is conducted in a consistently legal and ethical manner. Our Code covers many topics, including conflicts of interest, anticorruption, financial reporting, confidentiality, insider trading, antitrust and competition law, cybersecurity and information security, appropriate use of social media, and respect in the workplace. Every year, through online and in-person training, our employees receive training on all topics addressed in our Code, and they are required to certify that they will comply with our Code.
Compensation and Benefits
We strive to support both the short-term and long-term well-being of our employees. This commitment extends to the communities in which our employees live, where we are positive, active corporate citizens. A key element of employee well-being is providing compensation and benefits for our employees that are competitive and equitable based on local markets. Our compensation program includes market-aligned salary grades, an annual incentive compensation program for majority of our employees, referral and rewards incentive programs available to employees based on job function, premium pay for employees working extended hours and a long-term incentive plan ("LTIP") for select employees. We analyze our compensation and benefits program annually, and make changes as necessary, to ensure that we remain competitive. We believe maintaining competitive pay and benefits for our employees is important to promote professional excellence and career progression.
As part of our comprehensive total rewards program, our employees are eligible to participate in Company-subsidized medical, dental, vision, life, short-term and long-term disability insurance plans. We provide employees with a paid supplemental life and accident insurance plan and we offer employees the opportunity to contribute to a Flexible Spending Account and a Health Savings Account. Our wellness plan offers a range of programs focused on improving health awareness and well-being. Helping our employees stay healthy and safe is a priority, and our monthly wellness challenges engage employees and often incorporate community-outreach efforts and special events. In calendar year 2022, Cigna recognized our wellness program with a Gold-level Healthy Workforce Designation marking the third consecutive year that we have received Cigna’s highest honor.
Our retirement savings program includes a 401(k) plan and an Employee Stock Ownership Plan ("ESOP"). Our 401(k) plan has a 96% participation rate, which is significantly higher than the recognized industry benchmark of approximately 65% according to the ASPPA (American Society of Pension Professionals & Actuaries). Current and former domestic employees who have participated in our ESOP collectively own approximately 3% of the company. We believe this ESOP strongly aligns the interests of our employees with those of our stockholders.
We maintain a culture that engages and rewards performance of key leaders that is supported through LTIP, an equity compensation plan through which employees receive equity awards in the form of restricted common stock and performance shares. Approximately 90 employees received one or both of these forms of equity awards in fiscal 2023. Our equity compensation plans are designed to promote long-term performance, as well as to create long-term employee retention, continuity of leadership and an ownership culture whereby management and employees think and act as shareholders of the Company.
We believe that the compensation and benefits, and other components of our total rewards program provided to our employees, give us a competitive edge and differentiate us in a challenging labor market. We seek to recruit and retain high performing talent and provide safe, secure and dignified retirements for our employees.
Diversity and Inclusion
We are committed to promoting equal employment opportunities in all our operations, which begins with the employee recruiting process and continues through our employees' relationship with the Company. We also believe that a truly innovative workforce needs to be diverse and must leverage the skills and perspectives of a broad range of backgrounds and experiences. It is our policy, specifically noted in our Code, that we do not tolerate discrimination for any reason, including without limitation race, color, religion, marital status, gender, gender identity, veteran status, sexual orientation, disability or perceived disability, whether or not such discrimination violates law. It is also our policy to fully comply with all laws prohibiting discrimination and promoting opportunity and advancement in employment. This policy extends to all aspects of employment including recruitment, hiring, compensation, benefits, promotion, transfer, layoff, recall, reduction in force, termination, retirement, placement, training and all other privileges, terms and conditions of employment. It is our goal to create a positive and dynamic workplace where all employees can flourish. Our Board of Directors, senior leadership and human resources team are fully aligned in their commitment to promoting the above policies to ensure we remain an employer of choice.
Our operations are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, labor and health and safety matters. Management believes that our business is operated in material compliance with all such regulations. To date, the cost of such compliance has not had a material impact on our capital expenditures, earnings or competitive position or that of our operating subsidiaries. However,While we have implemented policies, practices and procedures to prevent and mitigate risks, violations may occur in the future as a result of human error, equipment failure or other causes. Further, we cannot predict the nature, scope or effect of future environmental legislation or regulatory requirements that could be imposed, or how existing or future laws or regulations will be administered or interpreted. Compliance
Available Information
We file annual, quarterly and current reports, proxy statements and other information with
more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies, could require substantial expenditures by usthe U.S. Securities and
could have a material impact on our business, financial condition and results of operations.Employees
As of March 31, 2016, we employed approximately 725 individuals. Of these employees, 14 are represented by unions. We believe relations with our employees throughout our operations are generally satisfactory, including those employees represented by unions. No unionized facility accounted for more than 10% of our consolidated revenues for the year ended March 31, 2016.
Available Information
We maintain an Internet web site atwww.cswindustrials.comExchange Commission (“SEC”). Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendmentsSEC filings are available to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) are madepublic at the SEC’s website (www.sec.gov). We also make these filings available free of charge through the “Investors” section ofon our Internet web sitewebsite (www.cswindustrials.com) as soon as reasonably practicable after we electronically file those documents with the reports with, or furnish the reports to, the U.S. Securities and Exchange Commission (“SEC”).
We also makeSEC.
Also available
free of charge on our website
are our Corporate Governance Guidelines and Code of Business Conduct,
and Ethics, as well as the charters
for the Audit, Compensation & Talent Development, and Nominating & Corporate Governance Committees of our
Audit Committee,Board of Directors and other important governance documents. All of the foregoing may be obtained through our
Compensationwebsite noted above and
Talent Development Committee andare available in print without charge to stockholders who request them. The information on or accessible through our
Nominating and Corporate Governance Committee. You may access these documents in the “Corporate Governance” section on the “Investors” page of our website.Business Segments
We operate in three business segments: Industrial Products; Coatings, Sealants & Adhesives; and Specialty Chemicals. The table below provides an overview of these business segments. For financial information regarding our segments, see Note 16 to our consolidated financial statements included in Item 8website is not incorporated by reference into, or otherwise made part of, this Annual Report.
| | | | | | |
Business
Segment | | Principal Product
Categories
| | Key End Use Markets | | Representative Industrial Brands |
Industrial Products | | • Specialty mechanical products
• Fire and smoke protection products
• Architecturally- specified building products
• Storage, filtration and application equipment for use with our specialty chemicals and other products
| | • Plumbing
• HVAC
• Refrigeration
• Electrical
• Commercial construction
• Rail car and locomotive
• General industrial
| | 
|
| | | |
Coatings, Sealants & Adhesives | | • Coatings and penetrants
• Pipe thread sealants
• Firestopping sealants and caulks
• Adhesives/solvent cements
| | • Rail car and locomotive
• Oil and gas
• Commercial construction
• Plumbing
• HVAC
• Refrigeration
• Electrical
• General industrial
| |  |
| | | |
Specialty Chemicals | | • Lubricants and greases
• Drilling compounds
• Anti-seize compounds
• Chemical formulations
• Degreasers and cleaners
| | • Energy
• Drilling and boring
• Water well drilling
• Mining
• Rail car and locomotive
• Steel
• Power generation
• Cement
• Aviation
• Plumbing
• HVAC
• Electrical
• General industrial
| |  |
Industrial Products
Our Industrial Products business consists of: specialty mechanical products; fire and smoke protection products; architecturally-specified building products; and storage, filtration and application equipment for useReport or any other document we file with our specialty chemicals and other products for general industrial applications. These industrial products are primarily manufactured internally, although we strategically engage third-party manufacturers for certain
products. We ensure the quality of internally- and externally-manufactured products through our stringent quality control review procedures. Our building products are eco-friendly, enabling them to be easily incorporated into the “Green Building” market.
| | |
Products Types
| | Brand Names
|
Specialty Mechanical Products
• condensate switches, traps and pans
• line set covers
• condensate removal pumps and equipment mounting brackets
• air diffusers for use by professional air conditioning contractors
• tamper resistant locking refrigerant caps;
• ductless mini-split systems installation support tools
• drain waste and vent systems mechanical products
• decorative roof drain downspout nozzles
• wire pulling head tools.
| | • Airtec®
• Clean Check®
• EZ Trap®
• Fortress®
• Goliath® Pans
• G-O-N®
• Hubsett™
• Magic Vent®
• Mighty Bracket™
• Novent®
• Safe-T-Switch®
• Slim Duct™
• SureSeal®
• Titan™ Pans
• Wire Grabber™
|
| |
Fire and Smoke Protection Products | | |
• fire-rated and smoke-rated opening protective systems
| | • Smoke Guard®
|
| |
Architecturally-Specified Building Products | | |
• expansion joint covers
| | • Balco®
|
• fire barriers
| | • DuraFlex™
|
• specialty silicone seals
| | • llumiTread™
|
• stair nosings
| | • MetaBlock™
|
• partition closure systems
| | • MetaFlex™
|
• entrance mats and grids
| | • MetaGrate™
|
• photoluminescent egress markings and signage
| | • MetaMat™
|
• trench and access covers
| | • Michael Rizza™
|
• architectural grating
| | • UltraGrid™
|
| |
Storage, Filtration and Application Equipment | | |
• lubrication application and management systems
| | • Air Sentry®
|
• storage and filtration devices
| | • Guardian®
|
| | • Oil Safe®
|
| | • Whitmore Rail™
|
New Product Development – Customer intimacy is a core competency in our Industrial Products segment. We gather the voice of the customer market research through organized focus groups and online surveys, as well as through less formal channels. Ideas for new products or enhancements to existing products are also generated by our relationships with end users, independent sales representatives, distributors and our internal sales and marketing team. We also actively monitor our competitors’ products through websites, tradeshows and patent applications. We develop new products and modify existing products in our research and development (“R&D”) labs in Houston, Texas; Rockwall, Texas; Boise, Idaho; and Wichita, Kansas.
Competition – Our competition in the Industrial Products segment is varied. Competitors range from small entrepreneurial companies with a single product, to large multinational original equipment manufacturers (“OEMs”). In the specialty mechanical products category, we compete with Diversitech, Supco, Little Giant, Mitsubishi, Cherne, Mainline and JR Smith. Most of these products are sold through distribution channels, and we compete based on breadth of product line, customer service and pricing. In the fire and smoke protection
category we compete with Won Door, Stoebich, McKeon and others, typically on the basis of product innovation, knowledge of building codes and customer service. In the architecturally-specified building products category, we compete primarily with Emseal, Inpro, and MM Systems on the basis of product innovation, price and driving architectural specifications. In the lubricant storage, filtration and transfer space, we compete with Des-Case, Hy-Pro, IFH and others on the basis of superior performance, brand strength and breadth of product line.
Customers – Our primary customers for specialty mechanical products are plumbing, HVAC and electrical wholesalers and distributors. Some of these are local single location distributors, but many are regional or national in scope with hundreds of locations. The majority of this business is sold domestically; however, a small portion is sold internationally through similar channels, and a small number of OEMs purchase these products directly. Fire and smoke protection products are sold through local building products distributors who also perform installations and service. Architecturally-specified building products are sold through a network of distributors. Storage, filtration and application products are marketed and sold worldwide through a service-intensive distribution network.
Seasonality – A significant portion of our products are sold into the HVAC market, which is seasonal by nature. While products are sold throughout the year, sales tend to peak during summer months.
Coatings, Sealants & Adhesives
Our Coatings, Sealants & Adhesives segment is comprised of coatings and penetrants, pipe thread sealants, firestopping sealants and caulks and adhesives/solvent cements, which are primarily manufactured internally. We are dedicated to adding value to our customers through focused industry application expertise, diverse industrial coatings technologies, manufacturing excellence and quick response services.
| | |
Products Types
| | Brand Names
|
• High performance coatings designed to increase the reliability, performance and lifespan of industrial equipment
• Engineered specialty thread sealants designed to seal and secure metal
• Specialty sealants for high temperature applications
• Solvent cements and fire stop caulks
| | • Bio Fireshield™
• Deacon®
• KATS® Coatings
• Metacaulk®
• Railplex®
• RectorSeal No. 5®
• Stratholiner™
• T plus 2®
• Tru-Blu™
|
New Product Development – We generate new ideas for products or enhancements to existing products through our strong customer and industry knowledge and focus on delivering value to our customers. We develop new and modified products and services that improve the performance of our products, the application of our products, or make it easier for our customers to operate more efficiently. We also actively monitor our competitors’ products through websites, tradeshows and patent applications. New products are developed and existing products are modified in our R&D labs in Syracuse, New York; Houston, Texas; and Rockwall, Texas.
Competition – The competitive environment for products in our Coatings, Sealants & Adhesives segment is varied. For coatings, competitors include the industrial paint divisions of Sherwin Williams, PPG Industries, Valspar Corporation and Akzo Nobel, as well as other coatings companies such as Carboline, Hempel, Jotun and smaller regional coatings producers. Competitors of our sealants and adhesives products include Dow Corning Corporation, Henkel, 3M Company, Specified Technologies Inc and Hilti. We compete primarily on the basis of product differentiation, superior performance, quality and customer centric service.
Customers – For coatings, we primarily serve OEMs and end users in rail, energy, general industrial, power generation and marine markets through our direct sales force and internationally through a distribution network.
Customers include rail car and locomotive manufacturers, petrochemical facilities, industrial manufacturers, construction, utilities and plant maintenance customers. We serve sealants and adhesives customers primarily through our distribution network.
Specialty Chemicals
Our Specialty Chemicals segment manufactures and supplies highly specialized consumables that impart or enhance properties such as lubricity, anti-seize qualities, friction and heat control. These materials are typically used in harsh operating conditions, including extreme heat and pressure and chemical exposure, where commodity lubrication products would fail. These products protect and extend the working life of large capital equipment such as cranes, rail systems, mining equipment, oil rigs and rotating and grinding equipment found in various industrial segments such as steel mills, canning and bottling, milling and cement. Additionally, our Specialty Chemicals segment manufactures and supplies specialty products used in the HVAC and refrigeration market. These products enhance, repair or condition the internal working systems of both industrial and residential systems and are critical to ensuring safe, efficient and effective long-term operational integrity. The Specialty Chemicals segment also supplies products and services into the water well treatment space, which includes testing services and diagnosis of current conditions, coupled with consumable solutions to resolve any problems that have been defined.
| | |
Products Types
| | Brand Names
|
• Railroad track lubricants, conditioners and positive friction consumables
• Oil field anti-seize products for drilling and conveyance piping
• Open gear specialty lubricants for heavy equipment
• Specialty lubricants for various industrial applications
• Water well treatment products and services
• Chemical sealants to stop air-conditioning refrigerant leaks
| | • AC Leak Freeze®
• Biorail®
• Decathlon™
• Envirolube®
• Gearmate®
• KOPR-KOTE®
• Medallion™
• Paragon™
• Rail Armor®
• Run-N-Seal®
• Sterilene™
• Surtac®
• TOR Armor®
• Unicid™
• Well-Guard®
• Whitcam®
|
New Product Development – We develop relationships with end users and channel partners to understand existing and new operating conditions where technical innovation or enhancement is needed. For example, these relationships have generated innovation in the areas of modifying existing lubrication products to operate in arctic conditions or modifying an existing product for use in an application where salt water may be present. The development teams located in Rockwall, Texas and Houston, Texas are also actively defining new end markets for product use and penetration.
Competition – As our products are specialty, rather than commodity, competitors tend to be varied and include global, regional and local companies that may be large or small. The product sales cycle is long when compared to many consumables, resulting in verifiable and repeatable product performance being the key driver of choice, rather than price. As these products protect and enhance the operation of large capital equipment, qualification is based on the proof of value in application, resulting in a high changeover risk barrier. Typical competitors include Shell, Castrol, Fuchs and Exxon-Mobil.
Customers – Specialty Chemicals products are primarily sold through value-added distribution partners, as well as maintenance and repair operations or catalog channels. Specialty Chemicals provides both market-specific and product line-specific training to both the distribution partners and potential end users. Our specialists often visit end users with our distribution partners to advise on critical application issues, which enhances our ability to both “pull” demand from the end user and “push” demandfurnish to the distributor partner.
SEC.
Consider carefully the following risk factors, which we believe are the principal risks that we face and of which we are currently aware, and the other information in this Annual Report, including our consolidated financial statements and related notes to those financial statements.
If any of the risks described below occur, our business, financial results, financial condition and stock price could be materially adversely affected. While we believe the risks disclosed below are the principal risks we face and of which we are currently aware,It is possible that additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations.
Market, Economic and Geopolitical Risks Relating
Adverse changes in global economic conditions, particularly in the U.S. and including changes resulting from the effects of the COVID-19 pandemic, could materially adversely affect our financial position, results of operations and cash flows.
Our served industries and key end markets are affected by changes in economic conditions outside our control, which can affect our business in many ways. Any adverse occurrence, including among others, industry slowdown, recession, public health crises (including the COVID-19 pandemic), political instability, costly or constraining government policies, laws and regulations, armed hostilities (including any impacts from Russia’s invasion of the Ukraine and economic or trade sanctions enacted to
Our Businesscondemn or counteract Russian aggression), terrorism, excessive inflation (including the current high inflationary environment), interest rates, tax rates, unemployment rates, high labor costs, labor disturbances, prolonged disruptions in one or more of our customers' production schedules, supply chain disruptions (including those caused by industry capacity constraints, labor shortages, raw material availability and
Industrytransportation and logistics delays and constraints), business disruptions due to cybersecurity incidents and other economic factors have in the past and could in the future materially adversely affect our business, financial condition, and operating results and that of our customers and third-party suppliers. In particular, the COVID-19 pandemic and subsequent supply chain disruptions and uncertainties have had a significant negative impact on the global economy since 2020, including negatively impacting the global supply chain and increasing the cost of materials and operations.
Additionally, adverse changes in economic conditions in the United States and worldwide may reduce the demand for some of our products, adversely impact our ability to predict and meet any future changes in the demand for our products and impair the ability of those with whom we do business to satisfy their obligations to us. Reduced demand may cause us and our competitors to compete on the basis of price, which would have a negative impact on our revenues and profitability. In turn, this could cause us to not be able to satisfy the financial and other covenants to which we are subject under our existing indebtedness
Reduced demand may also hinder our growth plans and otherwise delay or impede execution of our long-term strategic plan and capital allocation strategy. If there is deterioration in the general economy or in the industries we serve, our business, results of operations and financial condition could be materially adversely affected.
The industries in which we operate are highly competitive, and many of our products are in highly competitive
markets, particularly certain specialty chemicals products.markets. We may lose market share to producers of other products that
directly compete with or that can be substituted for our products.
The industries in which we operate are highly competitive, and we face significant competition from both large
domestic and international
producerscompetitors and from smaller regional competitors. Our competitors may improve their competitive position in our
coreserved markets by successfully introducing new
or substitute products, improving their manufacturing processes or expanding their capacity or manufacturing facilities. Further, some of our competitors benefit from advantageous cost positions that could make it increasingly difficult for us to compete in markets for less-differentiated applications. If we are unable to keep pace with our competitors’
productproducts and manufacturing process innovations or cost position, our financial condition and results of operations could be materially adversely affected.
In addition, competition among producers of certain specialty chemicals products is intense. Increased competition from existing or newly developed chemical products may reduce demand for our products in the future, and our customers may decide on alternate sources to meet their requirements. If we are unable to successfully compete with other producers or if other products can be successfully substituted for our products, our sales may decline.
Difficult and volatile conditions in the overall economy, particularly in the U.S. but also globally, and in the capital, credit and commodities markets could materially adversely affect our financial position, results of operations and cash flows.
Our financial position, results of operations and cash flows could be materially adversely affected by difficult global economic conditions and significant volatility in the capital, credit and commodities markets and in the overall economy. Difficult and volatile conditions in the U.S. and globally could affect our business in a number of ways. For example:
weak economic conditions, especially in our key
Certain end markets including the energy industry, could reduce demand for our products, impacting our revenues and margins;
as a result of volatility in commodity prices, we may encounter difficulty in achieving sustained market acceptance of past or future price increases, which could have a material adverse effect on our financial position, results of operations and cash flows;
under difficult market conditions, there can be no assurance that access to credit or the capital markets would be available or sufficient, and in such a case, we may not be able to successfully obtain additional financing on reasonable terms, or at all; and
market conditions could result in our key customers experiencing financial difficulties and/or electing to limit spending, which in turn could result in decreased sales and earnings for us.
Our attempts to address evolving customer needs requires that we continually enhance our products. Our efforts to enhance our products may not be commercially viable and failure to develop commercially successful products or keep pace with our competitors could harm our business and results of operations.
The enhancement and extension of our existing products to broaden the market and uses of our existing products is a key driver of our growth, particularly in our Coatings, Sealants & Adhesives segment. However, developing those product enhancements and extensions can be a costly, lengthy and uncertain process, and it is difficult to estimate the commercial success of those products.
A failure to develop commercially successful products or to identify additional uses for existing products could materially and adversely affect our financial results. If our attempts to develop or enhance products is unsuccessful, we may be unable to recover our development costs,serve are cyclical, which could have an adverse effect on our business and results of operations. In addition, our inability to enhance or develop products that are able to meet the evolving needs of our customers, including a failure to do so that results in our products lagging those of new or existing competitors, could reduce demand for our products and may have a material adverse effect on our business and results of operations.
The cyclical nature of certain industries in which our business operates can cause significant fluctuations in our results of operations and cash flows.
The cyclical nature of the supply and demand balance of
thecertain end markets that we serve, including HVAC/R, general industrial, construction, energy,
rail transportation and mining,
industries poses risks to us that are beyond our control and can affect our operating results. These markets are highly competitive; are driven to a large extent by end-use markets;
are affected by distributor stocking behaviors; and may experience overcapacity, all of which may affect demand for and pricing of our products and result in volatile operating results and cash flows over our business cycle.
Future growthOur operations and earnings may also be significantly affected by changes in
productoil, gas and petrochemical prices and drilling activities, which depend on local, regional and global events or conditions that affect supply and demand for the relevant commodity. Product demand may not be sufficient to utilize current or future capacity. Excess industry capacity may continue to depress our volumes and margins on some products. Our operating results, accordingly, may be volatile as a result of excess industry capacity, as well as from rising energy and raw materials costs.
Weakness in the energy industry may adversely affect certain segments of our end market customers and reduce our sales and results of operations.
Some of our customers are impacted by current weakness in the energy industry. This means our operations and earnings may be significantly affected by changes in oil, gas and petrochemical prices and drilling activities. Oil, gas, petrochemical and product prices and margins in turn depend on local, regional and global events or conditions that affect supply and demand for the relevant commodity.
We rely on independent distributors. Termination of one or more of our relationships with any of those parties or an increase in their sales of our competitors’ products could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We depend on the services of independent distributors to sell our products and, in many cases, provide service and aftermarket support to end users of our products. Rather than serving as passive conduits for delivery of products, our distributors play a significant role in determining which of our products are available for purchase by contractors to service our customers. Almost all of the distributors with whom we transact business also offer competitors’ products and services to our customers. The loss of a substantial number of our distributors, or an increase in the distributors’ sales of our competitors’ products to our customers, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Growth of our business will depend in part on market awareness of our industrial brands, and any failure to develop, maintain, protect or enhance our industrial brands would hurt our ability to retain or attract customers.
We believe that building and maintaining market awareness, brand recognition and goodwill is critical to our success. This will depend largely on our ability to continue to provide high-quality products, and we may not be able to do so effectively. Our efforts in developing our industrial brands may be affected by the marketing
efforts of our competitors and our reliance on our independent dealers, distributors and strategic partners to promote our industrial brands effectively. If we are unable to cost-effectively maintain and increase positive awareness of our industrial brands, our businesses, results of operations and financial condition could be harmed.
We
Climate change could have an adverse effect on our business.
While we seek to mitigate our business risks associated with climate change, we recognize that there are dependentinherent climate-related risks wherever business is conducted, and climate change could create physical and financial risk to our business. Physical risks from climate change could, among other things, include an increase in extreme weather events (such as floods, droughts, tornados or hurricanes), limitations on contractavailability of water and reliable energy, and the health and well-being of individuals in communities where we conduct business. Such events have the potential to disrupt our business, our third-party suppliers or the businesses of our customers, which in turn could have an adverse effect on our financial condition and results of operations.
Climate change regulations may impact our ability to operate at a profit and harm our operating margins.
Increased global focus on climate change may result in the imposition of new or additional regulations or requirements applicable to, and increased financial and transition risks for, our business and the industries in which we operate. A number of government authorities and agencies have introduced, or are contemplating, regulatory changes to address climate change, including the regulation and disclosure of greenhouse gas emissions. The outcome of new legislation or regulation in the U.S. and other jurisdictions in which we operate may result in fees or restrictions on certain activities or materials and new or additional requirements, including to fund energy efficiency activities or renewable energy use and to disclose information regarding our greenhouse gas emissions performance, renewable energy usage and efficiency, waste generation and recycling
rates, climate-related risks, opportunities and oversight and related strategies and initiatives across our global operations. The cost of compliance with stringent climate change regulations could adversely affect our ability to compete with companies in locations that are not subject to stringent climate change regulations. Existing and future climate change-driven environmental and social regulations may negatively impact our business, our customers, or our suppliers, in terms of availability and cost of natural resources and raw materials, product demand, or manufacturing. Despite our efforts to timely comply with climate change initiatives, implement measures to improve our operations and execute on our related strategies and initiatives, any actual or perceived failure to comply with new or additional requirements or meet stakeholder expectations with respect to the impacts of our operations on the environment and related strategies and initiatives may result in adverse publicity, increased litigation risk and adversely affect our business and reputation, which could adversely impact our business, financial condition, results of operation and cash flow.
Business, Operations and Human Capital Risks
Our attempts to address evolving customer needs require that we continually enhance our products. Our efforts to enhance our products may not be commercially viable and failure to develop commercially successful products or keep pace with our competitors could harm our business and results of operations.
A failure to develop commercially successful products or product enhancements or to identify product extensions could materially adversely affect our financial results. If our attempts to develop or enhance products are unsuccessful, we may be unable to recover our development costs, which could have an adverse effect on our business and results of operations. In addition, our inability to enhance or develop products that can meet the evolving needs of our customers, including a failure to do so that results in our products lagging those of new or existing competitors, could reduce demand for our products and may have a material adverse effect on our business and results of operations.
Our international sales and manufacturing operations, including our use of third-party manufacturers for
manufacturing of certain products that we
sell.sell, involve inherent risks that could result in harm to our business.
We have worldwide sales and manufacturing operations, including in North America, Europe, the Middle East, Australia and Asia, including Vietnam. We also use third parties to manufacture certain of our products, most of which are located in jurisdictions outside the United States, including China. Foreign sales and manufacturing are subject to a number of risks, including political and economic uncertainty, social unrest, sudden changes in laws and regulations (including those enacted in response to pandemics and those that may be related to climate change or otherwise), ability to enforce existing or future contracts, labor shortages and work stoppages, natural disasters, currency exchange rate fluctuations, transportation delays or loss or damage to products in transit, expropriation, nationalization, business disruptions due to cybersecurity incidents, compliance with foreign laws and changes in domestic and foreign governmental policies, including the imposition of new or increased tariffs and duties on exported and imported products.
To the extent that we rely on
independent third parties to perform
thesesales and manufacturing functions, we
willdo not
be able to directly control
their activity, including product delivery schedules and quality
assurance. This lack of controlassurance, which may result in product shortages or quality assurance problems that could delay shipments of products,
or increase manufacturing, assembly, testing or other
costs.costs, or diminish our brand recognition or relationships with our customers. If a
contractorthird party sales representative or manufacturer experiences capacity constraints or financial difficulties, suffers damage to its facilities, experiences power outages, natural disasters, labor shortages or labor strikes, or any other disruption,
of assembly or testing capacity, we may not be able to obtain alternative
manufacturingresources in a timely manner or on commercially acceptable terms.
We may not be able Any of these factors could negatively affect our business, results of operations and financial condition.
Loss of key suppliers, the inability to consolidatesecure raw materials on a timely basis, the potential impacts of global inflation, or our inability to pass commodity price increases on to customers could have an adverse effect on our business.
Materials used in our manufacturing
facilities without incurring unanticipated costs andoperations are generally available on the open market from multiple sources. However, some of the raw materials we use are only available from a limited number of sources. Accordingly, any disruptions to
a critical suppliers' operations or the availability of key product inputs could have a material adverse effect on our
business.As partbusiness and results of our effortsoperations. Macroeconomic conditions and the COVID-19 pandemic have caused supply chains for many companies to streamlinebe interrupted, slowed or temporarily rendered inoperable. In addition, supply chain shortages have negatively impacted, and rationalize our manufacturing processes, we are consolidating certain manufacturing facilities. For example, we are in the process of consolidating the production of all lubricant and grease products currently manufactured in one of our Houston, Texas facilitiescould continue to our Rockwall, Texas facility in order to optimize capacity and efficiency. Because of unanticipated events, including the actions of governments, suppliers, employees or customers, we may not realize the synergies, cost reductions and other benefits of any consolidation to the extent we currently expect.
We may not be able to consummate acquisitions at our historical rate and at appropriate prices, which could negatively impact, our growth ratemanufacturing costs and stock price.
As partlogistics costs and, in turn, our gross margins. We may also be required to pay higher prices for raw materials due to inflationary trends regardless of supply.
In addition, inflation can also result in higher interest rates. In response to increasing inflation, the U.S. Federal Reserve began to raise interest rates in March 2022 has done so multiple times since then, and has kept open the possibility of further
increases. We expect inflationary pressures to impact customer behavior during calendar year 2023. With inflation, the cost of capital has increased, and the purchasing power of our and our end-users’ cash resources has declined. Current or future efforts by the government to manage inflationary pressures or stimulate the economy may result in unintended economic consequences, which could have a direct and indirect adverse impact on our business strategy,and results of operations.
While we acquire businessesbelieve many challenges are temporary and can be managed in the ordinary course, somenear-term, our business and results of which mayoperations could be material; please see “Item 1. Business”materially adversely affected by prolonged or increasing supply chain disruptions. Availability and “Item 7. Management’s Discussion and Analysiscost of Financial Condition and Results of Operations” included in this Annual Report for additional information. Our ability to grow revenues, earnings and cash flow at or above our historic rates depends in part upon our ability to identify and successfully acquire and integrate businesses at accretive valuations and realize anticipated synergies. Our inability to do soraw materials could adversely impact our growth rate and our stock price. Our ability to implement our inorganic growth strategy will be limitedaffected by our ability to identify appropriate acquisition candidates, which are difficult to identify for a number of reasons,factors, including high valuationsthe cost of reliable energy; commodity prices; inflation; tariffs and competition among prospective buyers. Covenantsduties on imported materials; foreign currency exchange rates; and phases of the general business cycle and global demand. We may be unable to pass along price increases to our customers, which could have a material adverse effect on our business and results of operations.
We rely on independent distributors as a channel to market for many of our products. Termination of a substantial number of our distributor relationships or an increase in a distributor's sales of our credit agreementcompetitors’ products could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We depend on the services of domestic and international independent distributors to sell our products and, in many cases, provide service and aftermarket support to end-users of our products. Rather than serving as passive conduits for delivery of products, our distributors play a significant role in determining which of our products are available for purchase either by end-users or by contractors to service end-users. While the use of distributors expands the reach and customer base for our products, the maintenance and administration of distributor relationships is costly and time-consuming. The loss of a substantial number of our distributors, for any reason could have a material adverse effect on our business, financial resources, including availablecondition, results of operations or cash and borrowing capacity, will alsoflows. In certain international jurisdictions, distributors are conferred certain legal rights that could limit our ability to consummate acquisitions, which may require additional debt financing, resulting in higher leveragemodify or terminate distribution relationships.
Many of the distributors with whom we transact business also offer competitors’ products and anservices to our customers. An increase in interest expense. Changesthe distributors’ sales of our competitors’ products to our customers, or a decrease in accountingthe number of our products the distributor makes available for purchase, could have a material adverse effect on our business, financial condition, results of operations or regulatory requirementscash flows.
Our insurance policies may not cover, or fully cover, us against natural disasters, global conflicts or environmental risk.
We currently have insurance policies for certain business risks, which include property damage, business interruption, operational and product liability, transit, directors’ and officers’ liability, cybersecurity, industrial accidents and other risks customary in the industries in which we operate. However, we may become subject to liability (including in relation to pollution, occupational illnesses, injury resulting from tampering, product contamination or degeneration or other hazards) against which we have not insured or cannot fully insure.
For example, hurricanes may affect our facilities or the failure of our information systems as a result of breakdown, malicious attacks, unauthorized access, viruses or other factors could alsoseverely impair several aspects of operations, including, but not limited to, logistics, revenues, customer service and administration. In addition, in the event that a product liability or third-party liability claim is brought against us, we may be required to recall our products in certain jurisdictions if they fail to meet relevant quality or safety standards, and we cannot guarantee that we will be successful in making an insurance claim under our policies or that the claimed proceeds will be sufficient to compensate the actual damages suffered.
Should we suffer a major uninsured loss, a product liability judgment against us or a product recall, future earnings could be materially adversely affected. We could be required to increase our debt or divert resources from other investments in our business to discharge product related claims. In addition, adverse publicity in relation to our products could have a significant effect on future revenues, and insurance may not continue to be available at economically acceptable premiums. As a result, our insurance coverage may not cover the full scope and extent of claims against us or losses that we incur.
Cybersecurity breaches and other disruptions to our information technology systems could compromise our information, disrupt our operations, and expose us to liability, which may adversely impact our operations.
In the ordinary course of our business, we store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees in our information technology systems, including in our data centers and on our networks. The secure processing, maintenance and transmission of this data is critical to our operations. Some of these systems are maintained or operated by third-party contractors, including cloud-based systems. Despite our efforts to secure our information systems from cyber-security attacks or breaches, our
information technology systems may be vulnerable to attacks by hackers or breached or disrupted due to employee error, malfeasance or other disruptions. If these technologies, systems, products or services are damaged, cease to function properly, are compromised due to employee or third-party contractor error, user error, malfeasance, system errors, or other vulnerabilities, or are subject to cybersecurity attacks, such as those involving denial of service attacks, unauthorized access, malicious software, or other intrusions, including by criminals, nation states or insiders, our business may be adversely impacted. The impacts of any such circumstances could include production downtimes, operational delays, and other impacts on our operations and ability to consummate acquisitions.Our acquisitionprovide products and integrationservices to our customers; compromise of businesses could negatively impactconfidential, proprietary or otherwise protected information, including personal information and customer confidential data; destruction, corruption, or theft of data or intellectual property; manipulation, disruption, or improper use of these technologies, systems, products or services; financial losses from fraudulent transactions, remedial actions, loss of business or potential liability; adverse media coverage; and legal claims or legal proceedings, including regulatory investigations, actions and fines; and damage to our financial statements.
Acquiring businesses involvesreputation. There has been a rise in the number of financial, accounting, managerial, operational, legal, compliancecyberattacks targeting confidential business information generally and in the manufacturing industry specifically. Moreover, there has been a rise in the number of cyberattacks that depend on human error or manipulation, including phishing attacks or schemes that use social engineering to gain access to systems or perpetuate wire transfer or other risksfrauds.
These trends increase the likelihood of such events occurring as well as the costs associated with protecting against such attacks. Although such attempts have been made to attack our information technology systems, no material harm has resulted. Any such attack, breach or disruption could compromise our information technology systems and
challenges, including the
following,information stored in them could be accessed, publicly disclosed, lost or stolen and our business operations could be disrupted. Additionally, any
significant disruption or slowdown of
our systems could cause customers to cancel orders or cause standard business processes to become inefficient or ineffective, which could adversely affect our financial
statements:any acquiredposition, results of operations or cash flows. Any such access, disclosure or other loss of information or business technology, servicedisruption could result in legal claims or product could under-perform relativeproceedings, liability under laws that protect the privacy of personal information, and damage to our expectations and the price that we paid for it, or not achieve cost savings or other synergies in accordance with our anticipated timetable;
we may incur or assume significant debt in connection with our acquisitions,reputation, which would increase our leverage and interest expense, thereby reducing funds available to us for purposes such as working capital, capital expenditures, research and development and other general corporate purposes;
pre-closing and post-closing earnings charges could adversely impact operating results in any given period,our operations.
The domestic and international regulatory environment related to information security, collection and privacy is increasingly rigorous and complex, with new and rapidly changing requirements applicable to our business, which often require changes to our business practices. Compliance with these new requirements, including the impact may be substantially different from period to period;
European Union’s General Data Protection Regulation, the process of integrating acquired operations may create operating difficulties and may require significant financial and managerial resources that would otherwise be available for existing operations;
we could experience difficulty in integrating financialCalifornia Privacy Rights Act, and other controlsinternational and systems;
we may lose key employees or customers of the acquired company;
we may assume unknown liabilities, or known or contingent liabilities may be greater than anticipated, and
conforming the acquired company’s standards, process, proceduresdomestic regulations, are costly and controls, including accounting systems and controls, withwill result in additional costs in our operations could cause internal control deficiencies relatedefforts to our internal control over financial reporting or exposurecontinue to regulatory sanctions resulting from the acquired company’s activities; andcomply.
The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities.
Certain of the acquisition agreements by which we have acquired companies require the former owners to indemnify us against certain liabilities related to the operation of the company before we acquired it. In most of these agreements, however, the liability of the former owners is limited and certain former owners may be unable to meet their indemnification responsibilities. We cannot assure you that these indemnification provisions will protect us fully or at all, and, as a result, we may face unexpected liabilities that adversely affect our financial statements.
Our relationships with our employees could deteriorate, which could adversely affect our operations.
As a manufacturing company, we rely on
our employees and good relationsa positive relationship with our employees to produce our products and maintain our production processes and productivity. As of March 31,
2016,2023, we had approximately
7252,400 full-time employees, of which
1415 were subject to collective bargaining
agreements.agreements in the United States, and approximately 1,300 of which are located in Vietnam. If our workers were to engage in a strike, work stoppage or other slowdown, our operations could be disrupted, or we could experience higher labor costs. In addition, if significant portions of our employees were to become unionized, we could experience significant operating disruptions and higher ongoing labor costs, which could adversely affect our business, financial condition and results of operations.
Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.
Our success in the highly competitive end markets in which we operate will continue to depend to a significant extent on our key employees,the experience and we are dependent on the expertise of our executive officers and other key employees. Loss of the servicessenior leaders. The loss of any of our key leaders or failure to fill new positions created by expansion, turnover or retirement could adversely affect our ability to implement our business strategy. The competition for talent has become increasingly intense, and we may experience increased employee turnover due to a tightening labor market, resulting in skilled labor shortages. The challenge to attract and retain qualified talent in the current competitive labor market could lead to increased wage inflation or impede our ability to execute certain key strategic initiatives as we respond to labor shortages. Failure to successfully attract and retain an appropriately qualified workforce could materially adversely affect our business, financial condition, and results of operations.
Strategic Transactions and Investments Risks
Our acquisition and integration of businesses could negatively impact our financial results.
Inorganic growth is an important part of our strategic growth plan, and we also seek to acquire businesses, some of which may be material, in pursuit of our plans. Acquiring businesses involves a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely affect our financial statements:
•we may experience difficulty in identifying appropriate acquisition candidates;
•any acquired business, technology, service or product could under-perform relative to our expectations and the price that we paid for it, not achieve cost savings or other synergies in accordance with our anticipated timetable or require us to take an impairment related to the acquired business;
•we may decide to divest businesses, technologies, services or products for financial, strategic or other reasons, which may require significant financial and managerial resources and may result in unfavorable accounting treatment;
•we may incur or assume significant debt in connection with our acquisitions, which would increase our leverage and interest expense, thereby reducing funds available to us for purposes such as working capital, capital expenditures, research and development and other general corporate purposes;
•pre-closing and post-closing earnings and charges could adversely impact operating results in any given period, and the impact may be substantially different from period to period;
•the process of integrating acquired operations may create operating difficulties and may require significant financial and managerial resources that would otherwise be available for existing operations;
•we could experience difficulty in integrating financial and other controls and systems;
•we may lose key employees or customers of the acquired company;
•we may assume liabilities that are unknown or for which our indemnification rights are insufficient, or known or contingent liabilities may be greater than anticipated; and
•conforming the acquired company's standards, process, procedures and controls, including accounting systems and controls, with our operations could cause deficiencies related to our internal control over financial reporting or exposure to regulatory sanctions resulting from the acquired company's activities.
We may be unable to successfully execute and realize the expected financial benefits from strategic initiatives.
From time to time, our business has engaged in strategic initiatives, and such activities may occur in the future. These efforts have included consolidating manufacturing facilities, rationalizing our manufacturing processes, and establishing a joint venture within our Specialized Reliability Solutions segment.
While we expect meaningful financial benefits from our strategic initiatives, we may not realize the full benefits expected within the anticipated time frame. Adverse effects from strategy-driven organizational change could interfere with our realization of anticipated synergies, customer service improvements and cost savings from these individualsstrategic initiatives. Additionally, our ability to fully realize the benefits and implement strategic initiatives may be limited by certain contractual commitments. Moreover, we may incur substantial expenses in connection with the execution of strategic plans in excess of what is forecasted. Further, strategic initiatives can be a complex and time-consuming process that can place substantial demands on management, which could divert attention from other business priorities or disrupt our daily operations. Any of these failures could materially adversely affect our business, financial condition, results of operations and cash flows, which could constrain our liquidity.
Changes in future business or other market conditions could cause business investments and/or recorded goodwill or other long-term assets to become impaired, resulting in substantial losses and write-downs that would materially adversely affect our results of operations and financial condition.
From time to time, we acquire businesses, following careful analysis and due diligence procedures designed to achieve a desired return or strategic objective. These procedures often involve certain assumptions and judgments in determining acquisition price. After acquisition, such assumptions and judgments may prove to be inaccurate due to a variety of circumstances, which could adversely affect the anticipated returns or which are otherwise not recoverable as an adjustment to the purchase price. Additionally, actual operating results for an acquisition may vary significantly from initial estimates. As of March 31, 2023, we had goodwill of $242.7 million recorded in our consolidated balance sheet. We evaluate the recoverability of recorded goodwill annually, as well as when we changed reporting units and when events or circumstances indicate the possibility of impairment. Because of the significance of our goodwill and other intangible assets, a future impairment of these assets could have a material adverse effect on our results of operations and financial condition. For additional information on
our accounting policies related to goodwill, see our discussion under Note 1 to our consolidated financial statements in Item 8 of this Annual Report.
Financial Risks
Our outstanding indebtedness and the restrictive covenants in the agreements governing our indebtedness limit our operating and financial flexibility.
We are required to make scheduled repayments and, under certain events of default, accelerated repayments on our outstanding indebtedness, which may require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness. Such repayment requirements could reduce the availability of our cash flows to fund working capital acquisitions, capital expenditures, R&D efforts and other general corporate purposes, and could generally limit our flexibility in planning for, or reacting to, changes in our business and industry.
In addition, the agreements governing our indebtedness impose certain operating and financial restrictions on us and somewhat limit management’s discretion in operating our businesses. These agreements limit or restrict our ability, among other things, to: incur additional debt; pay dividends and make other distributions; make investments and other restricted payments; create liens; sell assets; and enter into transactions with affiliates.
We are also required to comply with leverage and interest coverage financial covenants and deliver to our lenders audited annual and unaudited quarterly financial statements. Our ability to comply with these covenants may be affected by events beyond our control. Failure to comply with these covenants could result in an event of default that, if not cured or waived, may have a material adverse effect on our business, financial condition, results of operations and cash flows. In the event we incur additional indebtedness, or if interest rates on our indebtedness increase, the risks described above could increase.
The phase-out of LIBOR and transition to SOFR as a benchmark interest rate will have uncertain and possibly adverse effects.
London Inter-bank Offered Rate ("LIBOR") has been the subject of national, international, and other regulatory guidance and proposals for reform. On March 5, 2021, the United Kingdom’s Financial Conduct Authority published the dates that the use of LIBOR as an index for commercial loans will be phased out. Foreign currency indices, including the British pound, the Euro, and Swiss franc, along with the U.S. dollar 1-week and 2-month settings ceased after December 31, 2021, while the remaining U.S. dollar settings will cease after June 30, 2023. In December 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848,” which extended the sunset date from December 31, 2022 to December 31, 2024.
On December 15, 2022, we entered into an amendment to our Second Amended and Restated Credit Agreement, dated as of May 18, 2021, and as part of that amendment we transitioned from the use of LIBOR to the Secured Overnight Funding Rate (“SOFR”) in such agreement. We have no other material financing agreements that use LIBOR as an interest index. There is no guarantee that the transition from LIBOR to SOFR will not result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could affect our interest expense and earnings and may have an adverse effect on our business. Further,business, results of operations, financial condition, and stock price. Whether or not SOFR attains market acceptance as a LIBOR replacement tool remains in question. As such, the future of SOFR at this time remains uncertain.
Fluctuations in currency exchange rates may significantly impact our results of operations and may significantly affect the comparability of our results between financial periods.
Our operations are conducted in many countries. The results of the operations and the financial position of these subsidiaries are reported in the relevant foreign currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements. The main currencies to which we are exposed, besides the U.S. dollar, are primarily the Australian dollar, the British pound, the Canadian dollar and the Vietnamese dong. The exchange rates between these currencies and the U.S. dollar in recent years have fluctuated significantly and may notcontinue to do so in the future for a variety of reasons, including general economic conditions and event-driven circumstances. A depreciation of these currencies against the U.S. dollar will decrease the U.S. dollar equivalent of the amounts derived from these operations reported in our consolidated financial statements, and an appreciation of these currencies will result in a corresponding increase in such amounts.
Because many of our raw material costs are determined with respect to the U.S. dollar rather than these currencies, depreciation of these currencies may have an adverse effect on our profit margins or our reported results of operations. Conversely, to the extent that we are required to pay for goods or services in foreign currencies, the appreciation of such currencies against the U.S. dollar will tend to negatively impact our results of operations. In addition, currency fluctuations may affect the comparability of our results of operations between financial periods.
We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. Given the volatility of exchange rates, there can be no assurance that we will be able to
retaineffectively manage our currency transaction risks, that our hedging activities will be effective or
recruit qualified individuals to join our company. The loss of executive officers or other key employees could resultthat any volatility in
high transition costs and could disrupt our operations.Chemical processing is inherently hazardous, which could result in accidents that disrupt our operations or expose us to significant losses or liabilities.
Hazards associated with chemical processing and the related storage and transportation of raw materials, products and wastes exist in our operations and the operations of other occupants with whom we share manufacturing sites. These hazards could lead to an interruption or suspension of operations and have an adverse
effect on the productivity and profitability of a particular manufacturing facility or on us as a whole. These potential risks include, but arecurrency exchange rates will not necessarily limited to chemical spills and other discharges or releases of toxic or hazardous substances or gases, pipeline and storage tank leaks and ruptures, explosions and fires and mechanical failure. These hazards may result in personal injury and loss of life, damage to property and contamination of the environment, which may result in a suspension of operations and the imposition of civil or criminal penalties, including governmental fines, expenses for remediation and claims brought by governmental entities or third parties. The loss or shutdown of operations over an extended period at any of our major operating facilities could have a material adverse effect on our financial condition or results of operations.
Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.
We are subject to tax laws and regulations in the United States and multiple foreign jurisdictions. Our future effective tax rates could be adversely affected by changes in tax laws, regulations, accounting principles or interpretations thereof, as well as changes in related interpretations and other tax guidance. For example, the Organization for Economic Co-operation and Development, an international association of 38 countries including the United States, has proposed changes to numerous long-standing tax principles. These proposals, if finalized and adopted by the associated countries, will likely increase tax uncertainty and may adversely affect our provision for income taxes.The effect of such tax law changes or regulations and interpretations, as well as any additional tax reform legislation in the U.S., U.K, Canada, Australia, Vietnam or elsewhere, could have a material adverse effect on our business, financial condition and results of operations. Our property,In addition, we are also subject to periodic examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. As of March 31, 2023, we had a reserve of $16.5 million relating to uncertain tax positions, and taxing authorities may disagree with the positions we have taken regarding the tax treatment or characterization of our transactions. Although we believe that our tax filing positions are appropriate, the final determination of tax audits or tax disputes may be different from what is reflected in our historical income tax provisions and accruals. If future audits find that additional taxes are due, we may be subject to incremental tax liabilities, possibly including interest and penalties, which could have a material adverse effect on our business, interruptionfinancial condition and casualty insuranceresults of operations.
We may acquire various structured financial instruments for purposes of hedging or reducing our risks, which may be costly and ineffective.
We may seek to hedge against commodity price fluctuations and credit risk by using structured financial instruments such as futures, options, swaps and forward contracts. Use of structured financial instruments for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging transaction can result in losses in the hedging transaction. Hedging activities also involve the risk of an imperfect correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the instrument being hedged. Use of hedging activities may not fully insureprevent significant losses and could increase our losses.
We may inadvertently fail to maintain effective disclosure controls and procedures and internal controls over financial reporting.
Effective internal controls are necessary for us
against all potential hazards incidental to
provide reliable financial reports, effectively prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports or effectively prevent fraud, our
business.Regulation ofreputation and operating results could be harmed. If we are unable to maintain effective disclosure controls and procedures and internal controls over financial reporting, we may not be able to provide reliable financial reports, which in turn could affect our employees’ exposureoperating results or cause us to certain chemicals or other hazardous productsfail to meet our reporting obligations. Ineffective internal controls could require material expenditures or changesalso cause investors to lose confidence in reported financial information, which could negatively affect our operations.
Certain chemicals that we usestock price, limit our ability to access capital markets in the manufacturefuture, and require additional costs to improve internal control systems and procedures.
Legal and
Health Administration limits the permissible employee exposure to some of those chemicals. Future studies on the health effects of certain chemicals may result in additional regulations or new regulations in foreign countries that further restrict or prohibit the use of, and exposure to, certain chemicals. Additional regulation of certain chemicals could require us to change our operations, and these changes could affect the quality of our products and materially increase our costs.Regulatory Risks
Regulatory and statutory changes applicable to us or our customers could adversely affect our financial condition and results of operations.
We and many of our customers are subject to various national,
state and local laws, rules and regulations. Changes in any of these areas could result in additional compliance costs, seizures, confiscations,
recallrecalls or monetary fines, any of which could prevent or inhibit the development, distribution and sale of our products.
In addition, we benefit from certain regulations, including building code regulations,
thatwhich require the use of products that we and other manufacturers sell. For example, certain environmental regulations may encourage the use of more environmentally friendly products, such as some of the lubricants and greases that we manufacture. If these regulations were to change,
demand for our products could be reduced and our results of operations could be adversely affected.
Compliance with extensive environmental, health and safety laws could require material expenditures, changes in our operations or site remediation.
Our operations and properties are subject to regulation under environmental laws, which can impose substantial sanctions for violations. We must conform our operations to applicable regulatory requirements and adapt to changes in such requirements in all jurisdictions in which we operate. Certain materials we use in the manufacture of our products can represent potentially significant health and safety concerns. We use
large quantities of hazardous substances and generate hazardous wastes in
certain of our manufacturing operations. Consequently, our operations are subject to extensive environmental, health and safety laws and regulations at the international, national, state and local level in multiple jurisdictions. These laws and regulations govern, among other things, air emissions, wastewater discharges, solid and hazardous waste management, site remediation programs and chemical use and management. Many of these laws and regulations have become more stringent over time, and the costs of compliance with these requirements may increase, including costs associated with any necessary capital investments. In addition, our production facilities require operating permits that are subject to renewal and, in some circumstances, revocation. The necessary permits may not be issued or continue in effect, and renewals of any issued permits may contain significant new requirements or restrictions.
The nature of the chemical industry exposes us to risks of liability due to the use, production, management, storage, transportation and sale of materials that may be hazardous and can cause contamination or personal injury or damage if released into the environment.
Compliance with environmental laws and regulations generally increases the costs of transportation and storage of raw materials and finished products, as well as the costs of storage and disposal of wastes. We may incur substantial costs, including fines, damages, criminal or civil sanctions and remediation costs, or experience interruptions in our operations for violations arising under environmental laws, regulations or permit requirements.
We are subject to the U.S. Foreign Corrupt Practices Act and other anti-corruption laws, as well as other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, financial condition and results of operations.
Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”), and other anti-corruption laws that apply in countries where we do business. The FCPA and these other laws generally prohibit us and our employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We conduct business in a number of jurisdictions that pose a high risk of potential FCPA violations, and we participate in relationships with third parties whose actions could potentially subject us to liability under the FCPA or other anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
We are also subject to other laws and regulations governing our international operations, including regulations administered by the U.S. Department of Commerce’s Bureau of Industry and Security, the U.S. Department of Treasury’s Office of Foreign Asset Control and various non-U.S. government entities, including applicable export control regulations, economic sanctions on countries and persons, customs requirements, currency exchange regulations and transfer pricing regulations (collectively, “Trade Control Laws”).
We have and maintain a compliance program with policies, procedures and employee training to help ensure compliance with applicable anti-corruption laws and the Trade Control Laws. However, despite our compliance programs, there is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the FCPA or other legal requirements, or Trade Control Laws. If we are not in compliance with the FCPA and other anti-corruption laws or Trade Control Laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and
remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity.
Likewise, any investigation of any potential violations of the FCPA, other anti-corruption laws or Trade Control Laws by the U.S. or foreign authorities could also have an adverse impact on our reputation, business, financial condition and results of operations.
Our permits, licenses, registrations or authorizations and those of our customers or distributors may be modified, suspended, terminated or revoked before their expiration or we and/or they may be unable to renew them upon their expiration. We may bear liability for failure to obtain, maintain or comply with required authorizations.
We are required to obtain and maintain, and may be required to obtain and maintain in the future, various permits, licenses, registrations and authorizations for the ownership or operation of our business, including the manufacturing, distribution, sale and marketing of our products and importing of raw materials. These permits, licenses, registrations and authorizations could be modified, suspended, terminated or revoked or we may be unable to renew them upon their expiration for various reasons, including for non-compliance. These permits, licenses, registrations and authorizations can be difficult, costly and time consuming to obtain and could contain conditions that limit our operations. Our failure to obtain, maintain and comply with necessary permits, licenses, registrations or authorizations for the conduct of our business could result in fines or penalties, which may be significant. Additionally, any such failure could restrict or otherwise prohibit certain aspects of our operations, which could have a material adverse effect on our business, financial condition and results of operations.
Many of our customers and distributors require similar permits, licenses, registrations and authorizations to operate. If a significant customer, distributor or group thereof were to
havelose an important permit, license, registration or authorization,
revoked or such permit, license, registration or authorization was not renewed, forcing them to cease or reduce their business, our
salesrevenues could decrease, which would have a material adverse effect on our business, financial condition and results of operations.
Failure
Industrial manufacturing is inherently hazardous, which could result in accidents that disrupt our operations or expose us to design, implementsignificant losses or liabilities.
Hazards associated with our manufacturing processes and
maintain effective internal controlsthe related storage and transportation of raw materials, products and wastes exist in our operations and the operations of other occupants with whom we share manufacturing sites. These hazards could lead to an interruption or suspension of operations and have an adverse effect on the productivity and profitability of a particular manufacturing facility or on us as a whole. These potential risks include, but are not necessarily limited to, spills and other discharges or releases of toxic or hazardous substances or gases, pipeline and storage tank leaks and ruptures, explosions and fires and mechanical failure. These hazards may result in personal injury and loss of life, damage to property and contamination of the environment, which may result in a suspension of operations and the imposition of civil or criminal penalties, including governmental fines, expenses for remediation and claims brought by governmental entities or third parties. The loss or shutdown of operations over an extended period at any of our major operating facilities could have a material adverse effect on our
financial condition and results of operations. Our property, business
interruption and
stock price.As a public company, we have significant requirements for enhanced financial reporting and internal controls. The processcasualty insurance may not fully insure us against all potential hazards incidental to our business.
Regulation of designing and implementing effective internal controls is a continuous effort that requires usour employees’ exposure to anticipate and react tocertain chemicals or other hazardous products could require material expenditures or changes in our businessoperations.
Certain chemicals and other raw materials that we use in the economicmanufacture of our products may have adverse health effects. The Occupational Safety and regulatory environmentsHealth Administration limits the permissible employee exposure to some of those materials. Future studies on the health effects of certain chemicals and materials may result in additional or new regulations that further restrict or prohibit the use of, and exposure to, expend significant resourcescertain chemicals and materials. Additional regulation of certain chemicals and materials could require us to maintain a systemchange our operations, and these changes could affect the quality of internal controls that is adequate to satisfy our reporting obligations as a public company. If we areproducts and materially increase our costs.
We may be unable to
maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meetprotect our
reporting obligations on a timely basis, result in material misstatements in our financial statements and harm our operating results. In addition, we will be required to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting.This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our auditors have issued an attestation report on effectiveness of our internal controls. Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting or our independent registered public accounting firm may not issue a favorable assessment. If we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report, investors could lose confidence in our reported financial information, which could have a material adverse effect on the trading price of our stock.
Our insurance policies may not cover, or fully cover, us against natural disasters, global conflicts or environmental risk.
We currently have insurance policies for certain operating risks, which include certain property damage, including certain aspects of business interruption for certain sites, operational and product liability, transit, directors’ and officers’ liability, industrial accident insurance and other risks customary in the industries in which we operate. However, we may become subject to liability (including in relation to pollution, occupational illnesses, injury resulting from tampering, product contamination or degeneration or other hazards) against which we have not insured or cannot fully insure.
For example, hurricanes may affect our facilities or the failure of our information systems as a result of breakdown, malicious attacks, unauthorized access, viruses or other factors could severely impair several aspects of operations, including, but not limited to, logistics, sales, customer service and administration. In addition, in the event that a product liability or third-party liability claim is brought against us, we may be required to recall our products in certain jurisdictions if they fail to meet relevant quality or safety standards, and we cannot guarantee that we will be successful in making an insurance claim under our policies or that the claimed proceeds will be sufficient to compensate the actual damages suffered.
Should we suffer a major uninsured loss, a product liability judgment against us or a product recall, future earnings could be materially adversely affected. We could be required to increase our debt or divert resources from other investments in our business to discharge product related claims. In addition, adverse publicity in relation to our products could have a significant effect on future sales, and insurance may not continue to be available at economically acceptable premiums. As a result, our insurance coverage may not cover the full scope and extent of claims against us or losses that we incur, including, but not limited to, claims for environmental or industrial accidents, occupational illnesses, pollution and product liability and business interruption.
Our business relies heavily on trademarks, trade secrets, other intellectual property and proprietary information, and our failure to protect our rightswhich could harm our competitive advantages with respect to the manufacturing of some of our products.
position.
Our ability to protect and preserve our trademarks, trade secrets and other intellectual property and proprietary information relating to our business is an important factor to our success. However, we may be unable to prevent third parties from using our intellectual property and other proprietary information without our authorization or from independently developing intellectual property and other proprietary information that is similar to ours, particularly in those countries where the laws do not protect our proprietary rights to the same degree as in the U.S. In addition, because certain of our products are manufactured
by third parties, we have
necessarily shared some of our intellectual property with those third parties. There can be no guarantee that those third parties, some of whom are located in jurisdictions where intellectual property risks may be more pronounced, will
comply with contractual and other legal commitments to preserve
and protect our intellectual property.
The use of our intellectual property and other proprietary information by others could reduce or eliminate any competitive advantage we have developed, potentially causing us to lose sales or otherwise harm our business. If it becomes necessary for us to litigate to protect these rights, any proceedings could be burdensome and costly, and we may not prevail.
Our intellectual property may not provide us with any competitive advantage and may be challenged by third parties. Moreover, our competitors may already hold or in the future may hold intellectual property rights in the U.S. or abroad that, if enforced or issued, could possibly prevail over our rights or otherwise limit our ability to manufacture or sell one or more of our products in the U.S. or internationally.
Despite our efforts, we may be sued for infringing on the intellectual property rights of others. This litigation is costly and, even if we prevail, the costs of such litigation could adversely affect our financial condition.
Adequate remedies may not be available in the event of
an unauthorized use or disclosure of our trade secrets and manufacturing expertise. The loss of employees who have specialized knowledge and expertise could
harm our competitive position and cause our salesrevenues and operating results to decline as a result of increased competition. In addition, others may obtain knowledge of our trade secrets through independent development or other access by legal means.
The failure to protect our intellectual property and other proprietary information,
Adverse developments affecting the financial services industry, including
our processes, apparatuses, technology, trade secrets, trade names and proprietary manufacturing expertise, methods and compounds, could have a material adverse effect on our businesses and results of operations.Security breaches and other disruptions to our information technology systems could compromise our information, disrupt our operations, and expose us to liability, which may adversely impact our operations.
In the ordinary course of our business, we store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees in our information technology systems, including in our data centers and on our networks. The secure processing, maintenance and transmission of this data is critical to our operations. Despite our security measures, our information technology systems may be vulnerable to attacksevents or concerns involving liquidity, defaults or non-performance by hackersfinancial institutions or breached or disrupted due to employee error, malfeasance or other disruptions. Any such attack, breach or disruption could compromise our information technology systems and the information stored in them could be accessed, publicly disclosed, lost or stolen and our business operations could be disrupted. Additionally, any significant disruption or slowdown of our systems could cause customers to cancel orders or cause standard business processes to become inefficient or ineffective, which could adversely affect our financial position, results of operations or cash flows. Any such access, disclosure or other loss of information or business disruption could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and damage to our reputation, which could adversely impact our operations.
We are subject to the U.S. Foreign Corrupt Practices Act and other anti-corruption laws, as well as other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, whichtransactional counterparties, could adversely affect our business, financial condition andor results of operations.
Our operations are subject
Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”),market-wide liquidity problems.Although we assess our banking and customer relationships as we believe necessary or appropriate, our access to funding sources and other anti-corruption lawscredit arrangements in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that applyaffect us, the financial services industry, or the economy in countries where we do business. The FCPA and these other laws generally prohibit us and our employees and intermediaries from bribing, being bribedgeneral.These factors could include, among others, events such as liquidity constraints or making other prohibited paymentsfailures, the ability to government officialsperform obligations under various types of financial, credit or other persons to obtainliquidity agreements or retain businessarrangements, disruptions or gain some other business advantage. We conduct businessinstability in a number of jurisdictions that pose a high risk of potential FCPA violations, and we participatethe financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in relationships with third parties whose actions could potentially subject us to liability under the FCPA or other anti-corruption laws. financial services industry.
In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.We are also subject to other laws and regulations governing our international operations, including regulations administered by the U.S. Department of Commerce’s Bureau of Industry and Security, the U.S. Department of Treasury’s Office of Foreign Asset Control and various non-U.S. government entities, including applicable export control regulations, economic sanctions on countries and persons, customs requirements, currency exchange regulations and transfer pricing regulations (collectively, the “Trade Control Laws”).
However, despite our compliance programs, there is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the FCPA or other legal requirements, or Trade Control Laws. If we are not in compliance with the FCPA and other anti-corruption laws or Trade Control Laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity.
Likewise, any investigation of any potential violations of the FCPA, other anti-corruption laws or Trade Control Laws byinvestor concerns regarding the U.S. or foreign authorities could also have an adverse impact on our reputation, business,international financial condition and results of operations.
Our outstanding indebtedness and the restrictive covenants in the agreements governing our indebtedness limit our operating and financial flexibility.
We are required to make scheduled repayments and, under certain events of default, mandatory repayments on our outstanding indebtedness, which may require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures, R&D efforts and other general corporate purposes, and could generally limit our flexibility in planning for, or reacting to, changes in our business and industry.
In addition, the agreements governing our indebtedness impose certain operating and financial restrictions on us and somewhat limit management’s discretion in operating our businesses. These agreements limit or restrict our ability, among other things, to: incur additional debt; pay dividends and make other distributions; make investments and other restricted payments; create liens; sell assets; and enter into transactions with affiliates.
We are also required to comply with leverage and interest coverage financial covenants and deliver to our lenders audited annual and unaudited quarterly financial statements. Our ability to comply with these covenants may be affected by events beyond our control. Failure to comply with these covenantssystems could result in an eventless favorable commercial financing terms, including higher interest rates or costs and more restrictive financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all.
Any decline in available funding or access to our cash and liquidity resources could, among other risks, adversely impact our ability to meet our operating expenses, financial obligations, or fulfill our other obligations.Any of default which, ifthese impacts, or any other impacts resulting from the factors described above or other related or similar factors not cured or waived, maydescribed above, could have a material adverse effectimpacts on our business, financial condition, results of operationsliquidity and cash flows.We may acquire various structured financial instruments for purposes of hedging or reducing our risks, which may be costly and ineffective.
We may seek to hedge against commodity price fluctuations and credit risk by using structured financial instruments such as futures, options, swaps and forward contracts. Use of structured financial instruments for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging transaction can result in losses in the hedging transaction. Hedging activities also involve the risk of an imperfect correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the instrument being hedged. Use of hedging activities may not prevent significant losses and could increase our losses.
Fluctuations in currency exchange rates may significantly impact our results of operations and may significantly affect the comparability of our results between financial periods.
Our operations are conducted in many countries. The results of the operations and the financial position of these subsidiaries are reported in the relevant foreign currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements. The main currencies to which we are exposed, besides the U.S. dollar, are primarily the Canadian dollar, the British pound and the Australian dollar. The exchange rates between these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies against the U.S. dollar will decrease the U.S. dollar equivalent of the amounts derived from these operations reported in our consolidated financial statements and an appreciation of these currencies will result in a corresponding increase in such amounts. Because many of our raw material costs are determined with respect to the U.S. dollar rather than these currencies, depreciation of these currencies may have an adverse effect on our profit margins or our reported results of operations. Conversely, to the extent that we are required to pay for goods or services in foreign currencies, the appreciation of such currencies against the U.S. dollar will tend to negatively impact our results of operations. In addition, currency fluctuations may affect the comparability of our results of operations between financial periods.
We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. Given the volatility of exchange rates, there can be no assurance that we will be able to effectively manage our currency transaction risks, that our hedging activities will be effective or that any volatility in currency exchange rates will not have a material adverse effect on ourbusiness, financial condition, or results of operations.
Risks Relating to our Recent Separation from Capital Southwest
The historical combined financial information included in this Annual Report is not necessarily representative of the results we would have achieved as a standalone, publicly traded company and may not be a reliable indicator of our future results.
The Company began operating as a standalone, publicly traded Company on October 1, 2015. The historical combined financial information included in this Annual Report, as well as our Information Statement on Form 10 filed with the SEC, for periods prior to October 1, 2015 reflects historical financial information of our Operating Subsidiaries and does not necessarily reflect the financial condition, results of operations or cash flows we would have achieved as a standalone, publicly traded company during the periods presented or that we may achieve in the future. For example, historical combined financial information reflects allocations of expenses for services historically provided by Capital Southwest, and those allocations may be different than the comparable expenses we would have incurred as a standalone company. Additionally, the historical combined financial information does not reflect the changes that have and will occur in our cost structure, management, financing arrangements and business operations related to being an independent, publicly traded company, as well as other changes as we transition to an integrated industrial manufacturing company.
We may not be able to successfully integrate our operations in a timely manner or at all.
Prior to the Share Distribution, we operated as independent companies. Our management is in process of integrating the separate businesses, technologies, organizations, procedures, policies and operations of our subsidiaries into an integrated industrial manufacturing company, which is necessary to fully realize the expected results of the Share Distribution. The integration process may prove to be more complex and time-consuming and require substantially more resources and effort than currently anticipated, which could have a material adverse effect on us and our operations, relationships with market participants, employees, regulators and others.
The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company with listed equity securities, we are required to comply with laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC, including compliance with the reporting requirements of the Exchange Act and the requirements of the NASDAQ Marketplace Rules not applicable to private companies. Complying with these statutes, regulations and requirements is expected to occupy a significant amount of time of our Board and management and is expected to significantly increase our administrative costs and expenses, which could adversely affect our profitability.
We may be unable to achieve some or all of the benefits that we expect to achieve as an independent, publicly traded company.
As a standalone, publicly traded company, we believe that our business will benefit from, among other things, more focused management and an enhanced ability to pursue our business strategy, which we expect as a result of the Share Distribution. However, we may be more susceptible to market fluctuations and other adverse events than we would have been were we still a part of Capital Southwest. In addition, we may not be able to achieve some or all of the benefits that we expect to achieve as a standalone company in the time we expect, if at all.
Potential indemnification obligations pursuant to agreements related to the Share Distribution could materially adversely affect us.
Agreements between Capital Southwest and us provide for, among other things, the principal corporate transactions required to effect the separation, the conditions to the Share Distribution and provisions governing the relationship between Capital Southwest and us with respect to and resulting from the Share Distribution.
Among other things, we have indemnification obligations designed to make us financially responsible for liabilities that may exist relating to or arising out of our business activities, whether incurred prior to or after the Share Distribution. In addition, after the Share Distribution, there are several significant areas where the liabilities of Capital Southwest became our obligations, including Capital Southwest defined benefit obligations. If we are required to indemnify Capital Southwest under the circumstances set forth in such agreements, we may be subject to substantial liabilities that could adversely affect our financial condition.
If the Share Distribution were to fail to qualify as a tax-free transaction for U.S. federal income tax purposes, then we and our stockholders could incur significant U.S. federal income tax liabilities.
In connection with the Share Distribution, Capital Southwest received an opinion from a nationally recognized accounting firm substantially to the effect that the Share Distribution should qualify as tax free under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code (“the Code”), except with respect to any cash received in lieu of fractional shares of CSWI common stock. An opinion of an accounting firm is not binding on the Internal Revenue Service (“IRS”). Accordingly, the IRS may reach conclusions with respect to the Share Distribution that are different from the conclusions reached in the opinion. The opinion relied on certain facts, assumptions, representations and undertakings from Capital Southwest and us regarding the past and future conduct of the companies’ respective businesses and other matters, which, if incomplete, incorrect or not satisfied, could alter that accounting firm’s conclusions.
If the Share Distribution ultimately is determined to be taxable, it could expose Capital Southwest and its shareholders to significant U.S. federal income tax liabilities. We have agreed not to enter into any transaction that could cause any portion of the Share Distribution to be taxable to Capital Southwest, including under Section 355 of the Code. Pursuant to the Tax Matters Agreement, we have also agreed to indemnify Capital Southwest for any tax liabilities resulting from such transactions, and Capital Southwest has agreed to indemnify us for any tax liabilities resulting from such transactions entered into by them. These obligations may discourage, delay or prevent a change of control of our Company
Our ability to engage in certain corporate transactions is limited.
Our ability to engage in significant equity transactions is restricted in order to preserve the tax-free status of the Share Distribution to Capital Southwest for U.S. federal income purposes. Even if the Share Distribution otherwise qualifies for tax-free treatment to Capital Southwest’s shareholders under the Code, it may be taxable to Capital Southwest if 50% or more, by vote or value, of the shares of our common stock or Capital Southwest’s common stock are acquired or issued as part of a plan or series of related transactions that includes the Share Distribution. For this purpose, any acquisitions or issuances of Capital Southwest’s common stock within two years before the Share Distribution, and any acquisitions or issuances of our common stock or Capital Southwest’s common stock within two years after the Share Distribution, generally are presumed to be part of such a plan, although we or Capital Southwest may be able to rebut that presumption. If an acquisition or issuance of shares of our common stock or Capital Southwest’s common stock triggers the application of the Code, Capital Southwest would recognize a taxable gain as a result of the Share Distribution to the extent the fair market value of our common stock exceeds Capital Southwest’s tax basis in our common stock at the time of the Share Distribution.
Under a Tax Matters Agreement that was entered into by Capital Southwest and us, there are restrictions on our ability to take actions that could cause the Share Distribution to fail to qualify for favorable treatment under
the Code, and we will be required to indemnify Capital Southwest against any tax liabilities arising as a result of the Share Distribution that are attributable to any actions taken by us or with respect to us or any of our affiliates. As a result, we may be limited or restricted from entering into strategic, capital raising or other transactions which might be advantageous to us or our stockholders.
In connection with our separation from Capital Southwest, Capital Southwest will indemnify us for certain liabilities. However, there can be no assurance that these indemnities will be sufficient to insure us against the full amount of such liabilities or that Capital Southwest’s ability to satisfy its indemnification obligation will not be impaired in the future.
Following the Share Distribution, Capital Southwest has agreed to indemnify us for certain liabilities, including certain tax liabilities. However, third parties could seek to hold us responsible for any of the liabilities that Capital Southwest will agree to retain, and there can be no assurance that Capital Southwest will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Capital Southwest any amounts for which we are held liable, we may be temporarily required to bear these losses while seeking recovery from Capital Southwest.
Potential liabilities may arise due to fraudulent transfer considerations, which would adversely affect our financial condition and our results of operations.
In connection with the Share Distribution, Capital Southwest undertook several corporate restructuring transactions which, along with the Spin-off, may be subject to federal and state fraudulent conveyance and transfer laws. If, under these laws, a court were to determine that, at the time of the Share Distribution, any entity involved in these restructuring transactions or the Share Distribution: (1) was insolvent; (2) was rendered insolvent by reason of the Share Distribution; (3) had remaining assets constituting unreasonably small capital; or (4) intended to incur, or believed it would incur, debts beyond its ability to pay these debts as they matured, then the court could void the Share Distribution, in whole or in part, as a fraudulent conveyance or transfer. The court could then require our stockholders to return to Capital Southwest some or all of the shares of our common stock issued in the Share Distribution, or require Capital Southwest or us, as the case may be, to fund liabilities of the other company for the benefit of creditors.
Forward-Looking Statements
This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect the current views of our senior management with respect to future events and our financial performance. These statements include forward-looking statements with respect to our business and industry in general. Statements that include the words “may,” “expects,” “plans,” “anticipates,” “estimates,” “believes,” “potential,” “projects,” “forecasts,” “intends,” or the negative thereof or other comparable terminology and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.
Forward-looking statements 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;
•changes in local political, economic, social and labor conditions;
•potential disruptions from wars and military conflicts, including Russia's invasion of Ukraine;
•future levels of revenues, operating margins, income from operations, net income or earnings per share;
•the ability to respond to anticipated inflationary pressure, including reductions on consumer discretionary income and our ability to pass along rising costs through increased selling prices;
•anticipated levels of demand for our products and services;
•the actual impact to supply, production levels and costs from global supply chain logistics and transportation challenges
•short and long-term effects of the COVID-19 pandemic;
•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 expected impact of accounting pronouncements; and
the expected benefits of being a standalone publicly-traded company; and
•the other factors listed above under “Risk Factors.”
Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements. The foregoing factors should not be construed as exhaustive. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Any forward-looking statements you read in this Annual Report reflect our views as of the date of this Annual Report with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. You should not place undue reliance on these forward-looking statements and you should carefully consider all of the factors identified in this Annual Report that could cause actual results to differ. We assume no obligation to update or revise these forward lookingforward-looking statements, except as required by law.
ITEM 1B: UNRESOLVED STAFF COMMENTS
Not applicable.
Our principal executive offices are located at 5420 Lyndon B. Johnson Freeway, Suite 500, Dallas, Texas 75240. Our headquarters is a leased
facility, which we began to occupy on March 7, 2016.facility. The
current lease term expires August 31,
2026.2026, but may be renewed.
We consider the many
offices, manufacturing and
research and developmentR&D facilities,
distribution centers, warehouses,
offices and other properties that we own or lease to be in good condition and generally suitable for the purposes for which they are used. The following table presents our principal
manufacturingphysical locations by
segment.segment and excludes facilities classified as discontinued operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Location | | Use | | Segment | | Square
Footage | | | Owned/Leased |
Boise, Idaho | | Manufacturing, Office and R&D | | Industrial ProductsEngineered Building Solutions | | 42,000 | 40,800 | | | Leased |
Fall River, Massachusetts
Cle Elum, Washington | | Manufacturing | | All | | | 140,200 | | | Leased |
Houston, Texas
| | Manufacturing, office, R&D | | Coatings, Sealants & Adhesives | | | 36,000 | | | Leased |
Houston, Texas
| | Manufacturing and Office | | All | | | 253,900 | | | Owned |
Houston, Texas
| | Manufacturing | | Coatings, Sealants & Adhesives and Specialty Chemicals | | | 146,000 | | | Leased |
Longview, Texas
| | Manufacturing | | Coatings, Sealants & Adhesives | | | 53,200 | | | Owned |
Oklahoma City, Oklahoma
| | Manufacturing | | Industrial Products | | | 30,600 | | | Owned |
Rockwall, Texas
| | Distribution Center, Manufacturing, Office, R&D and Warehouse | | AllContractor Solutions | | 180,000 | 227,600 | | | OwnedLeased |
Syracuse, New York
Dong Nai, Vietnam | | Manufacturing and Office | | Coatings, Sealants & AdhesivesContractor Solutions | | 634,000 | 20,900 | | | Owned |
Fall River, Massachusetts | | Manufacturing and Office | | Contractor Solutions | | 140,200 | | | Leased |
| Greenwood, Indiana | | Distribution Center & Office | | Contractor Solutions | | 54,000 | | | Leased |
| Houston, Texas | | Manufacturing, Office, R&D and Warehouse | | Contractor Solutions | | 253,900 | | | Owned |
| Houston, Texas | | Distribution Center & Office | | Contractor Solutions | | 150,000 | | | Leased |
| Hudson, Florida | | Manufacturing, Office and R&D | | Engineered Building Solutions | | 40,000 | | | Leased |
| Jacksonville, Florida | | Distribution Center & Office | | Contractor Solutions | | 217,000 | | | Leased |
| North East, Maryland | | Distribution Center & Office | | Contractor Solutions | | 150,000 | | | Leased |
| Rockwall, Texas | | Manufacturing, Office, R&D and Warehouse | | Specialized Reliability Solutions | | 227,600 | | | Owned |
| Terrell, Texas | | Manufacturing | | Specialized Reliability Solutions | | 101,000 | | | Leased |
| Santa Fe Springs, California | | Distribution Center & Office | | Contractor Solutions | | 240,000 | | | Leased |
| Wichita, Kansas | | Manufacturing and Office | | Industrial ProductsEngineered Building Solutions | | 42,800 | 42,800 | | Owned |
| Windsor, Ontario, Canada | Owned | Manufacturing, Office and R&D | | Engineered Building Solutions | | 42,000 | | | Leased |
We believe that our facilities are adequate for our current operations. We may endeavor to selectively reduce or expand our existing lease commitments as circumstances warrant. See Note 79 to our consolidated financial statements included in Item 8 of this Annual Report for additional information regarding our operating lease obligations.
ITEM 3: LEGAL PROCEEDINGS
We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfoliooperating companies. We are not currently a party to any legal proceedings that, individually or in the aggregate, are expected to have a material effect on our business, financial condition, results of operations or financial statements, taken as a whole.
ITEM 4: MINE SAFETY DISCLOSURES
PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common shares
began “when issued” tradingare listed on the Nasdaq Global Select Market
on September 16, 2015. “Regular way” trading onunder the
Nasdaq Global Select Market began on October 1, 2015. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock, as reported by Nasdaq: | | | | | | | | |
| | | High | | | Low | |
Second Quarter of FY 2016 (September 16, 2015 – September 30, 2015) | | $ | 38.00 | | | $ | 23.20 | |
Third Quarter of FY 2016 (October 1, 2015 – December 31, 2015) | | $ | 39.96 | | | $ | 30.25 | |
Fourth Quarter of FY 2016 (January 1, 2016 – March 31, 2016) | | $ | 37.75 | | | $ | 27.84 | |
On June 2, 2016, the closing price of our common stock on the Nasdaq Global Select Market was $33.84 per share.
symbol "CSWI."
As of
June 2, 2016,May 22, 2023, there were
approximately 548326 holders of record of our common stock. The number of holders of record is based upon the actual numbers of holders registered at such date and does not include holders of shares in “street name” or persons, partnerships, associates, corporations or other entities in security position listings maintained by depositories.
Dividend Policy
Any payment
Issuer Purchases of dividends will be at the discretionEquity Securities
Note 12 to our consolidated financial statements included in Item 8 of this Annual Report includes a discussion of our Boardshare repurchase program. The following table represents the number of Directors and will depend upon various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, any contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law, general business conditions and other factorsshares repurchased during the quarter ended March 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program (a) | | Maximum Number of Shares (or Approximate Dollar Value) That May Yet Be Purchased Under the Program |
| | | | | | | | (in millions) |
| January 1 - 31 | | 67 | | (b) | $ | 119.49 | | | — | | | $ | 100.0 | |
| February 1 - 28 | | — | | | — | | | — | | | 100.0 | |
| March 1 - 31 | | — | | | — | | | — | | | 100.0 | |
| | 67 | | | | | — | | | |
(a) On December 15, 2022, we announced that our Board of Directors
may deem relevant. We do not currently expectauthorized a new program to
pay dividends onrepurchase up to $100.0 million of our common stock,
which replaced a previously announced $100.0 million program. Under the current 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 date of December 31, 2024, for
completion of the
foreseeable future.Issuer Purchasesnew repurchase program; however, the program may be limited or terminated at any time at our discretion without notice. As of Equity Securities
None.
March 31, 2023, 336,347 shares of our common stock had been repurchased for an aggregate amount of $35.7 million under the prior $100.0 million program and no shares had been repurchased under the current $100.0 million program.
(b) Represents shares tendered by employees to satisfy minimum tax withholding amounts related to the vesting of equity awards.
The following graph compares the cumulative total shareholder return on our common stock from
OctoberApril 1,
20152018 through March 31,
20162023 compared with the
Standard & Poor’s (“S&P”) Small Cap 600 indexRussell 2000 Index, of which CSWI is a component, and a composite custom peer group,
which was selected on an industry
basis.basis and is periodically reviewed and updated (if necessary) to ensure it provides reasonable comparability based on products offered and end markets served by CSWI. The graph assumes that $100 was invested at the market close on
OctoberApril 1,
20152018 and that all dividends were reinvested. The stock price performance of the following graph is not necessarily indicative of future stock price performance. The custom peer group consists of the following:
| | | | | | | | | | | |
Astec Industries
Aaon, Inc | | Futurefuel Corp. | | Landec Corp | | Omnova Solutions |
Chase Corp.
| | Gorman-Rupp Company | | Littelfuse, Inc. | | Orbotech Ltd. |
Columbus McKinnon Corp | | Innospec Inc. | | LSB Industries, Inc | | Quaker ChemicalStandex International |
Armstrong Industries, Inc | CTS Corp.Corporation | | Koppers Holdings | | Methode Electronics, Inc. | | Tredegar Corp. |
FlotekAstec Industries, Inc.
| Futurefuel Corp. | Kraton Performance PolymersMueller Water Products | |
| Barnes Group | NN,Gorman-Rupp Co. | PGT Innovations | |
| Chase Corporation | Innospec Inc. | Quaker Houghton | WD-40 Company |
This graph is furnished and not filed with the SEC. Notwithstanding anything to the contrary set forth in any of our
perviousprevious filings made under the Securities Act of 1933 or the Exchange Act that incorporate future filings made by us under those statutes, the
above stock performance graph
below is not to be incorporated by reference in any prior filings, nor shall it be incorporated by reference into any future filings made by us under those statutes.
ITEM 6:
SELECTED FINANCIAL DATA | | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands, except per share data) | | Fiscal Years ended March 31, | |
| | 2016 (a) | | | 2015 (a) | | | 2014 (a) | | | 2013 (a) | | | 2012 (a) | |
RESULTS OF OPERATIONS | | | | | | | | | | | | | | | | | | | | |
Revenues, net | | $ | 319,831 | | | $ | 261,834 | | | $ | 231,713 | | | $ | 199,094 | | | $ | 171,035 | |
Gross profit | | | 147,864 | | | | 126,425 | | | | 112,086 | | | | 94,582 | | | | 78,389 | |
Operating expenses | | | (100,378 | ) | | | (82,391 | ) | | | (74,173 | ) | | | (62,335 | ) | | | (53,743 | ) |
Operating income | | | 47,486 | | | | 44,034 | | | | 37,913 | | | | 32,247 | | | | 24,646 | |
Interest (expense) income, net | | | (3,035 | ) | | | (611 | ) | | | (131 | ) | | | 74 | | | | 523 | |
Provision for income taxes | | | (18,754 | ) | | | (15,223 | ) | | | (12,794 | ) | | | (10,707 | ) | | | (7,755 | ) |
Net income from continuing operations | | | 25,471 | | | | 29,705 | | | | 24,732 | | | | 22,513 | | | | 16,829 | |
Net income per diluted share | | | 1.62 | | | | 1.90 | | | | 1.58 | | | | 1.44 | | | | 1.08 | |
| | | | | |
FINANCIAL CONDITION | | | | | | | | | | | | | | | | | | | | |
Working capital | | | 123,958 | | | | 93,774 | | | | 90,884 | | | | 77,196 | | | | 85,688 | |
Total assets | | | 392,260 | | | | 286,521 | | | | 277,820 | | | | 236,521 | | | | 195,957 | |
Total debt | | | 89,682 | | | | 26,704 | | | | 45,097 | | | | 23,348 | | | | 6,100 | |
Retirement obligations and other liabilities | | | 13,566 | | | | 30,255 | | | | 12,233 | | | | 12,070 | | | | 12,531 | |
Total equity | | | 258,010 | | | | 204,601 | | | | 196,186 | | | | 176,522 | | | | 160,029 | |
(a) | We began operations on September 30, 2015 as a result of the Share Distribution discussed in Note 1 to our consolidated financial statements included in Item 8 of this Annual Report. The financial position, results of operations and cash flows for periods prior to September 30, 2015 represent the combined financial information of the Operating Subsidiaries contributed to us as a result of the Share Distribution. The financial statements for periods prior to the Share Distribution may not include all of the expenses that would have been incurred had the Operating Subsidiaries been operating as separate publicly-traded (“standalone”) companies during those periods and may not reflect the consolidated results of operations, financial position, and cash flows as a standalone company during all periods presented. |
[Reserved]
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the accompanying consolidated financial statements and notes. See “Item 1A. Risk Factors” and the “Forward-Looking Statements” included in this Annual Report
on Form 10-K for the year ended March 31, 2016 (“Annual Report”) for a discussion of the risks, uncertainties and assumptions associated with these statements. Unless otherwise noted, all amounts discussed herein are consolidated.
EXECUTIVE OVERVIEW
The Share Distribution
On December 2, 2014, Capital Southwest announced its plan to spin-off certain of its industrial products, coatings, sealants and adhesives and specialty chemicals businesses by means of a distribution of the outstanding shares of common stock of CSWI on a pro rata basis to holders of Capital Southwest common stock. The Share Distribution occurred on September 30, 2015, and CSWI became an independent, publicly traded company. Prior to the Share Distribution, Capital Southwest contributed to CSWI all of the outstanding capital stock of the entities described below:
| • | | RectorSeal formulates and manufactures specialty chemical products including pipe thread sealants, firestop sealants, plastic solvent cements and other formulations. RectorSeal also makes specialty tools for tradesmen and innovative systems for containing flames and smoke from building fires. RectorSeal’s operating results are divided amongst each of our three business segments. |
| • | | Whitmore manufactures high performance, specialty lubricants for heavy equipment used in surface mining, railroad and other industries. Whitmore also manufactures lubrication equipment, specifically for rail applications, and lubrication-centric reliability solutions for a wide variety of industries, and produces water-based coatings for the automotive and primary metals industries. Whitmore’s operating results are divided amongst each of our three business segments. |
| • | | Jet-Lube is a world leader in anti-seize compounds, thread sealants and specialty lubrication products and greases for the energy industry. Jet-Lube’s operating results are divided amongst our Coatings, Sealants & Adhesives and Specialty Chemicals segments. |
| • | | Strathmore is engaged in the manufacturing of paint for sale to industrial clients and is a leading manufacturer of specialized industrial coating products including urethanes, epoxies, acrylics and alkyds. Strathmore’s operating results are included in the Coatings, Sealants & Adhesives segment. |
| • | | Balco is engaged in the fabrication of aluminum and plastic extrusions and other materials related to safety, slip resistance and emergency egress. Balco’s operating results are included in the Industrials Products segment. |
| • | | Smoke Guard manufactures certified custom safety products for the commercial construction market and other markets requiring smoke and fire protection. Smoke Guard’s operating results are included in the Industrials Products segment. |
Additionally, prior to the Share Distribution, Capital Southwest contributed to CSWI $13.0 million in cash and pension assets of $10.4 million (CSWI assumed both the pension plan assets and obligations associated with the defined benefit pension plan).
We are a diversified industrial growth company with
well-established, scalable platformsa strategic focus on providing niche, value-added products in the end markets we serve. We operate in three business segments: Contractor Solutions, Engineered Building Solutions and
domain expertise across three segments: Industrial Products; Coatings, Sealants & Adhesives; and Specialty Chemicals. Our broad portfolio of leading products provides performance optimizing solutions to our customers.Specialized Reliability Solutions. Our products include mechanical products for heating, ventilation,
and air conditioning
(“HVAC”) and refrigeration
applications, coatings("HVAC/R"), plumbing products, grilles, registers and
sealantsdiffusers ("GRD"), building safety solutions and
high performancehigh-performance specialty
lubricants. Marketslubricants and sealants. End markets that we serve include
HVAC, industrial, rail, plumbing,HVAC/R, architecturally-specified building products,
plumbing, general industrial, energy,
mining,rail transportation and
other generalindustrial markets.mining. Our manufacturing operations are concentrated in the United States (“U.S.”), butVietnam and Canada, and we also have distribution operations in the U.S., Australia, Canada and the United Kingdom and our(“U.K.”). Our products are sold directly to end-users or through designated channels in over 100 countries around the world, primarily including the U.S., Canada, the U.K. and Australia.
Drawing on our innovative and proven technologies, we seek to deliver solutions primarily to contractors that place a premium on superior performance and reliability. We believe our brands are well-known in the specific end markets we serve and have a reputation for high quality. We rely on both
domesticallyorganic growth and
internationally.inorganic growth through acquisitions to provide an increasingly broad portfolio of performance optimizing solutions that meet our customers’ ever-changing needs. We have a successful record of making attractive, synergistic acquisitions in support of this objective, and we remain focused on identifying additional acquisition opportunities in our core end markets.
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. TheWe have a source of recurring revenue from the maintenance, repair and overhaul and consumable nature of many of our products is a source of recurring revenue for us.products. We also provide some custom and semi-customengineered products whichthat strengthen and enhance our customer relationships. Our diverseThe reputation of our product portfolio includesis built on more than 100 highly respected industrial brands including RectorSealwell-respected brand names, such as AC GuardTM,Air Sentry®,Cover GuardTM,Deacon®, Falcon Stainless®, Greco®, Jet-Lube®, Kopr-Kote®, Leak Freeze®, Metacaulk®, No. 5 ™ thread sealants, KOPR KOTE™ anti-seize lubricants, Safe-T-Switch® condensate overflow shutoff devices, KATS® coatings,5®, OilSafe®, Safe-T-Switch®, Shoemaker Manufacturing®, Smoke Guard®, TRUaire® and Air Sentry® breathers. Our products are well knownWhitmore®.
The COVID-19 pandemic and its resulting impacts had an overall negative impact on our financial results in the
specific industries we serveprior fiscal years ended March 31, 2022 and
have a reputation for high quality and reliability. We use contract manufacturers to manufacture certain products, but the majority of these products are either privately-labeled or manufactured exclusively for us. Third party-manufactured products accounted for approximately 53%, 21% and 4% of the net revenues of the Industrial Products, Coatings, Sealants & Adhesives and Specialty Chemicals segments, respectively, for theMarch 31, 2021. During our current fiscal year ended March 31,
2016. The use of third party manufacturers resulted in an increase of approximately 11% in operating margins when compared to2023, the
operating margins of internally-manufactured products for the fiscal year ended March 31, 2016.Prior to the Share Distribution, we operated as separate entities. The consolidated financial statements included in this Annual Report include all revenues, costs, assets,direct and liabilities directly attributable to the businesses discussed above. However, the consolidated financial statements for periods prior to the Share Distribution may not include allindirect impacts of the expenses that would have been incurred hadCOVID-19 pandemic on our consolidated operating results were immaterial as economic activities recovered and the businesses been standalone companies during those periods and may not reflecteffects of the consolidatedpandemic lessened. While the Federal COVID-19 Public Health Emergency Declaration expired on May 11, 2023, the extent to which the COVID-19 pandemic impacts our business, results of operations, and financial position,condition will depend on future developments, which are highly uncertain and cash flows as standalone companies during all periods presented. Based on our initial projections and current activity level,cannot be predicted. As such, we expect recurring corporate overhead to becannot reasonably estimate the future impact of the COVID-19 pandemic at least $1.5 million per quarter. this time.
We
expect to incur capital costs in the next few years to integrate our operations, including the consolidation of some of our manufacturing facilities. As a result of these efforts, we expect to operate more efficiently and effectively. We also expect to incur additional costs as a result of being a public company, such as additional employee-related costs, costs to start up certain standalone corporate functions, information systems costs and other organizational-related costs. We expect the synergies that may be achieved through our integration efforts to offset the additional costs in the longer term.We believe that our broad portfolio of products and markets served and our brand recognition will continue to provide opportunities; however,monitor the Russian invasion of Ukraine and its global impact. We have no operations, employees or assets in Russia, Belarus or Ukraine, nor do we face ongoing challenges affecting many companies, such as environmental and other regulatory compliance and overall global economic uncertainty. Duringsource goods or services of any material amount from those countries, whether directly or indirectly. Shortly after the year ended March 31, 2016,Russian invasion of Ukraine began in February 2022, we experienced spending declines at many of our customersindefinitely suspended all
commercial activities in the energy and mining end markets as they addressed market issues related to lower market prices for crude oil, gas and other natural resources. To a lesser extent, these spending declines also indirectly impacted other end markets that we serve including rail and industrial. We expect that certain challenges relating to the current energy environment will persist throughout 2016.Russia. During the fiscal year ended March 31, 2016,2023, we saw stronghad no sales growthinto Belarus or Ukraine. While the conflict continues to evolve and the outcome remains highly uncertain, we do not currently believe the Russia-Ukraine conflict will have a material impact on our business and results of operations. However, if the Russia-Ukraine conflict continues or worsens, leading to greater global economic or political disruptions and uncertainty, our business and results of operations could be materially impacted as a result.
Business Developments
On October 4, 2022, we acquired 100% of the outstanding equity of Falcon Stainless, Inc ("Falcon"), based in other key end markets such as HVAC, whereTemecula, California, for an aggregate purchase price of $37.1 million (including $1.0 million cash acquired), comprising cash consideration of $34.6 million and an additional payment of $2.5 million due one-year from the acquisition date assuming certain business conditions are met. The cash consideration was funded with cash on hand and borrowings under our innovative mechanicalexisting Revolving Credit Facility (as defined in Note 8). Falcon's products are well-known among the professional trades for supplying enhanced water flow delivery and chemicals have increased market penetration,customer satisfaction and architecturally specified building products, which is currently benefitting fromsupplement our Contractor Solutions segment's existing product portfolio. Falcon activity has been included in our Contractor Solutions segment since the acquisition date.
On July 8, 2022, we acquired the assets of Cover Guard, Inc. (“CG”) and AC Guard, Inc. ("ACG"), based in Orlando, Florida, for an aggregate purchase price of $18.4 million, comprised of cash consideration of $18.0 million and additional contingent considerations initially measured at $0.4 million based on CG and ACG meeting defined financial targets over a
robust commercial construction cycle.Our Markets
The following discussion should be read inperiod of 5 years. In conjunction with the “Outlookacquisition, we agreed to pay an additional $3.7 million, comprised of cash consideration of $1.5 million and 5-year annuity payments (value of $2.2 million) to a third party to secure the related intellectual property. CG and ACG product lines further expand Contractor Solutions’ offering of leading HVAC/R accessories, including lineset covers and HVAC/R condenser protection cages. Through these differentiated products, our Contractor Solutions segment expects to achieve incremental ductless and ducted HVAC/R market penetration. CG and ACG activity has been included in our Contractor Solutions segment since the acquisition date.
On December 15, 2021, we acquired 100% of the outstanding equity of Shoemaker Manufacturing, LLC (“Shoemaker”), based in Cle Elum, Washington, for
Fiscal Year 2017” sectionan aggregate purchase price of $43.6 million, including working capital and closing cash adjustments and expected contingent consideration. Shoemaker offers high-quality customizable GRD for commercial and residential markets, and expands CSWI’s HVAC/R product offering and regional exposure in the northwest U.S. The aggregate purchase price was comprised of cash consideration of $38.6 million, 25,483 shares of the Company's common stock valued at $3.0 million at transaction close and additional contingent consideration of up to $2.0 million based on Shoemaker meeting a defined financial target during the quarter ended March 31, 2022, which was achieved. Shoemaker activity has been included
below.HVAC
in our Contractor Solutions segment since the acquisition date.
On April 1, 2021, Whitmore Manufacturing, LLC (“Whitmore”), a wholly-owned subsidiary of CSWI, completed the formation of a joint venture with Pennzoil-Quaker State Company dba SOPUS products (“Shell”), a wholly-owned subsidiary of Shell Oil Company that comprises Shell’s U.S. lubricants business. The formation was consummated through a transaction in which Whitmore sold to Shell a 50% interest in a wholly-owned subsidiary (containing certain existing operating assets) in exchange for consideration of $13.4 million from Shell in the form of cash ($5.3 million) and intangible assets ($8.1 million). The Whitmore JV has been consolidated into the operations of the Company and its activity has been included in our Specialized Reliability Solutions segment since the formation date.
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 ("GRD") 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 extended the Company’s product offerings to the HVAC market and provided strategic distribution facilities. The consideration paid for TRUaire included cash of $288.0 million and 849,852 shares of the Company’s common stock valued at $97.7 million at transaction close. 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 Contractor Solutions segment since the acquisition date.
Our Markets
HVAC/R
The HVAC/R market is our largest market served and it represented approximately
22%55% and
24%53% of our net
salesrevenues in the
fiscal years ended March 31,
20162023 and
2015,2022, respectively. We provide an extensive array of products
for installation, repair and maintenance of HVACHVAC/R systems that includes our largest product family, condensate switches, as well as condensate pans air diffusers, condensateand pumps, GRD, refrigerant caps, line set covers and other chemical and mechanical products. The industry is driven by new construction projects, as well as replacement and repair of existing HVAC systems.HVAC/R systems, as well as new construction projects. New HVACHVAC/R systems are heavily influenced by macro trends, in building construction. HVACwhile replacement and repair of existing HVAC/R systems are dependent on weather and age of unit. The HVAC/R market tends to be seasonal with the peak sales season beginning in March and continuing through August. Construction and repair is typically performed by contractors, and we utilize our global distribution network to drive sales of our brands to such contractors. For the fiscal year ending March 31, 2017, we anticipate growth in the HVAC market to be stronger than the gross domestic product, but lower than recent historical growth due to the slowdown in the installation of new HVAC units in the U.S.
Industrial
The industrial end market
Architecturally-Specified Building Products
Architecturally-specified building products represented approximately
19%18% and
18%19% of our net
salesrevenues in the
fiscal years ended March 31,
20162023 and
2015,2022, respectively.
We manufacture and sell products such as engineered railings, smoke and fire protection systems, expansion joints and stair edge nosings for end use customers including multi-family residential buildings, educational facilities or institutions, warehouses, construction companies, plant maintenance customers, building contractors and repair service companies. Sales of these products are driven by architectural specifications and safety codes. The
industrial endsales process is typically long as these can be multi-year construction projects. The construction market,
includes customers who manufacture chemicals, steel equipmentboth commercial and
multi-family, is a
wide variety of materials. We includekey driver for sales of
industrial coatings, lubricants and breathers, as well as various other industrial products in the industrial end market. We serve this market primarily through a network of industrial distributors. We expect our sales into this market in the next fiscal year to grow slightly higher than the gross domestic product due to our innovative technologies and recent acquisitions.Rail
The rail market represented approximately 16% and 5% of our net sales in the fiscal years ended March 31, 2016 and 2015, respectively. We provide an array of products into the rail industry, including lubricants and lubricating devices for rail lines, which increase efficiency and reduce noise for and extend the life of rail cars, and coating of tank cars and locomotives. We leverage our technical expertise to build relationships with key decision-makers to ensure that our products meet required specifications. The rail industry is driven by the transportation of natural resources, including coal and petrochemical products, and has experienced slowdowns as a result of declines in the mining and energy markets, which in turn, has resulted in a reduction in rail miles traveled and reduced production of new tank cars. For the fiscal year ending March 31, 2017, we anticipate ongoing challenges in the rail coatings industry as it continues to be impacted by the mining and energy markets and due to the increased use of natural gas, which is transported by pipeline, for domestic power generation.
architecturally-specified building products.
The plumbing market represented approximately
15%7% and
16%9% of our net
salesrevenues in the
fiscal years ended March 31,
20162023 and
2015,2022, respectively. We provide many products to the plumbing industry including thread sealants, solvent cements, fire-stopping products, condensate switches and
traps,trap guards, as well as other mechanical
products.products, such as drain traps. Installation is typically performed by contractors, and we utilize our global distribution network to drive sales of our
brandsproducts to contractors.
We are not anticipating any significant changes in the overall plumbing industry in the fiscal year ending March 31, 2017.Architecturally-Specified Building Products
Architecturally-specified building products represented approximately 14% and 15% of our net sales in the fiscal years ended March 31, 2016 and 2015, respectively. We manufacture and sell products such as expansion joints, stair nosings and smoke and fire protection systems for large commercial buildings and parking garages. Sales of these products are driven by architectural specifications and safety codes, and the sales process is typically long as these are multi-year construction projects. International expansion is driving revenues in this end market as larger buildings are being designed and built. The construction market is a key driver for sales of architecturally-specified building products and our outlook for growth in new construction is stronger than the gross domestic product in the fiscal year ending March 31, 2017.
The energy market represented approximately 7% and 13%6% of our net salesrevenues in the fiscal years ended March 31, 20162023 and 2015,2022, respectively. We provide market-leading lubricants and anti-seize compounds, as well as greases, for use in oilfield drilling activity and maintenance of oilfield drilling and valve related equipment. We also provide coatings tosell our products primarily through distributors that are strategically situated near the energy industry for storage tanks, drum containersmajor oil and general refinery maintenance.gas producing areas across the globe. The outlook for the energy industry is heavily dependent on the global demand growthexpectations from both mature marketsdeveloped and developing geographies. We believe increased crudeemerging economies, as well as oil supply resultedprice and local government policies relative to oil exploration, drilling, storage and transportation.
General Industrial
The general industrial end market represented approximately 6% and 7% of our net revenues in the
significant decline in the price of oil beginning in the fourth quarter of 2014, and we believe the lower oil prices will continue to negatively impact energy upstream investment most acutely and impact mid-stream and downstream investment to a lesser extent. We expect this will negatively impact the demand for our products used in oil and gas drilling applications in the fiscal year endingyears ended March 31,
2017.2023 and 2022, respectively. We provide products focused on asset protection and reliability, including lubricants, desiccant breathers and fluid management products. The general industrial market includes the manufacture of chemicals, steel, cement, food and beverage, pulp and paper and a wide variety of other processed materials. We serve this market primarily through a network of distributors.
The mining market represented approximately 4% and 7%3% of our net salesrevenues in the fiscal years ended March 31, 20162023 and 2015,2022, respectively. WeAcross the globe, we provide market-leading lubricants to open gear boxesgears used in large mining excavation equipment, primarily through our distribution network.direct sales agents, as well as a network of strategic distributors. The North American mining industry is heavily weighted toward coal production and has experienced headwinds recently due to reducedcontinued decline in domestic coal prices,demand, partially mitigated by the seaborne coal export market. Globally, coal demand has been robust, and focused efforts in coal markets outside of the U.S., coupled with enhanced focus on markets such as iron, gold, diamonds and uranium in Southeast Asia, South America, and Africa have delivered growth that has generally offset the weakness in North American coal demand. Outside of coal, the mining market tends to move with global industrial output as basic industrial metals such as copper, tin, aluminum, and zinc, which is caused by lower oilare critical inputs to many industrial products.
Rail Transportation
The rail transportation market represented approximately 3% and gas prices. We are not anticipating any significant improvement3% of our net revenues in the miningyears ended March 31, 2023 and 2022, respectively. We provide an array of products into the rail transportation industry, including lubricants and lubricating devices for rail transportation lines, which increase efficiency, reduce noise and extend the life of rail transportation equipment such as rails and wheels. We leverage our technical expertise to build relationships with key decision-makers to ensure our products meet required specifications. We sell our products primarily through a direct sales force, as well as through distribution partners. End markets for rail transportation include Class 1 Rail as the primary end market in North America and Transit Rail as the primary end market in all other geographies. Cyclical product classes such as farm products and petrochemical products can impact volumes in Class 1 Rail. While coal transport is diminishing demand for Class 1 Rail in North America, global investment in Transit Rail systems is expected to more than offset this decline.
Our Outlook
In fiscal 2024, we anticipate building on our strong fiscal year 2023 performance and using that momentum to continue executing our growth strategies. We expect sales to continue to grow across all three segments, and supported by improved execution and operational efficiency, we also expect to continue to grow profitability at a faster rate than sales. Our diverse product portfolio serves attractive and healthy end markets, which supports our revenue growth goals.
We expect to maintain a strong balance sheet in fiscal year 2024, which provides us with access to capital through our cash on hand, internally-generated cash flow and availability under our Revolving Credit Facility. Our capital allocation strategy continues to guide our investing decisions, with a priority to direct capital to the highest risk adjusted return opportunities, within the categories of organic growth, strategic acquisitions and the return of cash to shareholders through our share repurchase and dividend programs. With the strength of our financial position, we will continue to invest in financially and strategically attractive expanded product offerings, key elements of our long-term strategy of targeting long-term profitable growth. We will continue to invest our capital in maintaining our facilities and in continuous improvement initiatives. We recognize the importance of, and remain committed to, continuing to drive organic growth, as well as investing additional capital in opportunities with attractive risk-adjusted returns, driving increased penetration in the
fiscal year ending March 31, 2017.end markets we serve. We remain disciplined in our approach to acquisitions, particularly as it relates to our assessment of valuation, prospective synergies, diligence, cultural fit and ease of integration, especially in light of economic conditions.
The following discussion provides an analysis of our consolidated results of operations and results for each of our segments.
Currency effects included in the discussion below are calculated by translating current fiscal year results on a monthly basis at prior fiscal year exchange rates for the same periods.The acquisitions listed below impact comparability:
| | | | |
Acquisition
| | Effective Date | | Segment |
Leak Freeze
| | December 16, 2015 | | Specialty Chemicals |
Deacon
| | October 1, 2015 | | Coatings, Sealants & Adhesives |
Strathmore
| | April 1, 2015 | | Coatings, Sealants & Adhesives |
SureSeal
| | January 2, 2015 | | Industrial Products |
Evo-Crete, Polyslab
| | August 15, 2014 | | Industrial Products |
Fluid Defense
| | January 31, 2014 | | Industrial Products |
Resource Conservation Technologies, Inc.
| | January 2, 2014 | | Industrial Products |
The operations of
each acquired businessFalcon have been included in
our consolidated results of operations and in the
applicableoperating results of our Contractor Solutions segment since
October 4, 2022, the effective date of the acquisition. The operations of CG and ACG have been included in our consolidated results of operations and in the operating results of our Contractor Solutions segment since July 8, 2022, the effective date of the acquisition. The operations of Shoemaker have been included in our consolidated results of operations and in the operating results of our Contractor Solutions segment since December 15, 2021, the effective date of the acquisition. The operations of TRUaire have been included in our consolidated results of operations and in the operating results of our Contractor Solutions segment since December 15, 2020, the effective date of the acquisition. All acquisitions are described in Note 2 to our consolidated financial statements included in Item 8 of this Annual Report.
| | | | | | | | | | | | | | | | |
| (Amounts in thousands, except percent and per share data) | | Fiscal Years Ended March 31, | | | Change | |
| | 2016 | | | 2015 | | | Amount | | | Percent | |
Revenues, net | | $ | 319,831 | | | $ | 261,834 | | | $ | 57,997 | | | | 22.2 | % |
Gross profit | | | 147,864 | | | | 126,425 | | | | 21,439 | | | | 17.0 | % |
Gross profit margin | | | 46.2 | % | | | 48.3 | % | | | | | | | | |
Selling, general and administrative expense | | | (100,378 | ) | | | (82,391 | ) | | | 17,987 | | | | 21.8 | % |
Operating income | | | 47,486 | | | | 44,034 | | | | 3,452 | | | | 7.8 | % |
Operating margin | | | 14.8 | % | | | 16.8 | % | | | | | | | | |
Interest expense, net | | | (3,035 | ) | | | (611 | ) | | | 2,424 | | | | 396.7 | % |
Other (expense) income, net | | | (226 | ) | | | 1,505 | | | | (1,731 | ) | | | -115.0 | % |
Provision for income taxes | | | (18,754 | ) | | | (15,223 | ) | | | 3,531 | | | | 23.2 | % |
Effective tax rate | | | 42.4 | % | | | 33.9 | % | | | | | | | | |
Net income | | | 25,471 | | | | 29,705 | | | | (4,234 | ) | | | -14.3 | % |
Earnings per share, diluted | | | 1.62 | | | | 1.90 | | | | (0.28 | ) | | | | |
| | | | | | | | | | | | | | | | |
| (Amounts in thousands, except percent and per share data) | | Fiscal Years Ended March 31, | | | Change | |
| | 2015 | | | 2014 | | | Amount | | | Percent | |
Revenues, net | | $ | 261,834 | | | $ | 231,713 | | | $ | 30,121 | | | | 13.0 | % |
Gross profit | | | 126,425 | | | | 112,086 | | | | 14,339 | | | | 12.8 | % |
Gross profit margin | | | 48.3 | % | | | 48.4 | % | | | | | | | | |
Selling, general and administrative expense | | | (82,391 | ) | | | (74,173 | ) | | | 8,218 | | | | 11.1 | % |
Operating income | | | 44,034 | | | | 37,913 | | | | 6,121 | | | | 16.1 | % |
Operating margin | | | 16.8 | % | | | 16.4 | % | | | | | | | | |
Interest expense, net | | | (611 | ) | | | (131 | ) | | | 480 | | | | 366.4 | % |
Other income (expense), net | | | 1,505 | | | | (256 | ) | | | 1,761 | | | | -687.9 | % |
Provision for income taxes | | | (15,223 | ) | | | (12,794 | ) | | | 2,429 | | | | 19.0 | % |
Effective tax rate | | | 33.9 | % | | | 34.1 | % | | | | | | | | |
Net income | | | 29,705 | | | | 24,732 | | | | 4,973 | | | | 20.1 | % |
Earnings per share, diluted | | | 1.90 | | | | 1.58 | | | | 0.32 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, |
| (amounts in thousands) | | 2023 | | 2022 | | 2021 |
| Revenues, net | | $ | 757,904 | | | $ | 626,435 | | | $ | 419,205 | |
Net revenues for the fiscal year ended March 31, 20162023 increased $58.0$131.5 million, or 22.2%21.0%, as compared with the fiscal year ended March 31, 2015,2022. The increase was partially due to the acquisitions of Shoemaker, CG, ACG and Falcon ($35.9 million or 5.7%). Excluding the impact of the acquisitions, organic sales increased $95.6 million, or 15.3%, from the prior year due to pricing initiatives. Net revenue increased in all end markets including $58.9HVAC/R, architecturally-specified building products, energy, mining, general industrial, rail transportation and plumbing.
Net revenues for the year ended March 31, 2022 increased $207.2 million,
relatedor 49.4%, as compared with the year ended March 31, 2021. The increase was primarily due to
acquisitions.the acquisitions of TRUaire and Shoemaker ($103.2 million or 24.6%). Excluding the impact of acquisitions,
decreasedorganic sales
volumes intoincreased $104.0 million or 24.8% from the
energyprior year due to pricing initiatives and
mining industries were mostly offset by higher sales volumes of both existing productsincreased unit volumes. Pricing initiatives, which began in the three months ended March 31, 2021 to mitigate rising costs, continued and
new products, particularly intoincreased during the
HVAC and architecturally-specified building products markets.Net revenues for the fiscal year ended March 31, 20152022. Net revenue increased $30.1 million, or 13.0%, as compared with the fiscal year ended March 31, 2014,in all end markets including $15.2 million related to acquisitions. The remaining increase was primarily attributable to an increase in sales volumes in the Industrial Products segment due to HVACHVAC/R, energy, plumbing, mining, rail transportation, architecturally-specified building products and to a lesser degree, in the Coatings, Sealants & Adhesives segment due to caulking products, partially offset by a decrease in sales volumes in the Specialty Chemicals segment due largely to a slowdown in global mining activity.
general industrial.
Net revenues into the Americas, Europe, Middle East and Africa
("EMEA") and
the Asia Pacific
represented approximately 89%, 7%, and 4% of net revenues, respectively,regions for the
fiscal year ended March 31,
2016, 84%, 9%,2023, 2022 and
7% of net revenues, respectively, for the fiscal year ended March 31, 2015 and 82%, 11%, and 7% of net revenues, respectively, for the fiscal year ended March 31, 2014. The increase in net revenue into the Americas for the fiscal year ended March 31, 2016 as compared with the prior periods is attributable to the acquisition of Strathmore, whose customers2021 are
generally U.S.-based.presented below. The presentation of net revenues by geographic region is based on the location of the customer. For additional information regarding net revenues by geographic region, see Note
1620 to our consolidated financial statements included in
“Item 8. Financial Statements and Supplementary Data” (“Item
8”)8 of this Annual Report.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | 2022 | | 2021 |
| Americas | | 94% | | 94% | | 93% |
| EMEA | | 4% | | 3% | | 4% |
| Asia Pacific Regions | | 2% | | 3% | | 3% |
Gross Profit and Gross Profit Margin
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, |
| (amounts in thousands, except percentages) | | 2023 | | 2022 | | 2021 |
| Gross profit | | $ | 318,214 | | | $ | 255,962 | | | $ | 184,550 | |
| Gross profit margin | | 42.0 | % | | 40.9 | % | | 44.0 | % |
Gross profit for the
fiscal year ended March 31,
20162023 increased
$21.4$62.3 million, or
17.0%24.3%, as compared with the
fiscal year ended March 31,
2015, including $15.9 million related to acquisitions. Gross profit margin for the fiscal year ended March 31, 2016 of 46.2% decreased from 48.3% for the fiscal year ended March 31, 2015. The decrease was caused primarily by the addition of the lower gross margin associated with Strathmore products, partially offset by a pension plan curtailment benefit ($2.7 million), changes in product mix and lower materials costs for certain products.Gross profit for the fiscal year ended March 31, 2015 increased $14.3 million, or 12.8%, as compared with the fiscal year ended March 31, 2014, including $7.4 million related to acquisitions. Gross profit margin for the fiscal year ended March 31, 2015 of 48.3% was comparable to the fiscal year ended March 31, 2014. The impact
of increased sales in the Industrial Products and Coatings, Sealants & Adhesives segments, which positively impacted absorption of fixed manufacturing costs, was offset by higher raw materials and packaging unit costs for certain products in the Specialty Chemicals segment due to decreased manufacturing volumes.
Selling, General and Administrative Expense
Selling, general and administrative expense for the fiscal year ended March 31, 2016 increased $18.0 million, or 21.8%, as compared with the fiscal year ended March 31, 2015. The increase was attributable to acquired operations ($17.5 million, which includes $3.4 million of transaction costs) and organizational start-up costs incurred in connection with the Share Distribution ($3.7 million), as well as increased sales and distribution expenses consistent with increased sales volumes and increased personnel-related expenses and professional fees. These increases were partially offset by a pension plan curtailment benefit ($5.3 million) and the reversal of the liability for the earn-out related to the Strathmore acquisition ($2.0 million), as well as expenses recorded in the prior year that did not recur, including retention and severance costs associated with the consolidation of selected manufacturing activities ($1.3 million), bad debt related to one non-U.S. customer ($1.2 million), research and development expenses related to a project for the development of certain fire and smoke prevention products and an impairment loss ($0.7 million) recognized on a patent and a trademark.
Selling, general and administrative expense for the fiscal year ended March 31, 2015 increased $8.2 million, or 11.1%, as compared with the fiscal year ended March 31, 2014. The increase was attributable to higher costs in the Specialty Chemicals segment caused by the reserve for a bad debt related to one non-U.S. customer ($1.2 million), retention and severance costs associated with the consolidation of selected manufacturing activities ($1.3 million) and an increase in sales volumes consistent with the growth in net revenues in the Industrial Products segment, and to a lesser degree, in the Coatings, Sealants & Adhesives segment. These increases were slightly offset by a reduction in intangible asset impairment losses recognized in the current year as compared with the prior year.
Operating Income
Operating income for the fiscal year ended March 31, 2016 increased by $3.5 million, or 7.8%, as compared with the fiscal year ended March 31, 2015.2022. The increase was primarily a result of pricing initiatives, the $21.4acquisitions of Shoemaker, CG, ACG and Falcon, along with the $3.9 million TRUaire purchase accounting effect and the $1.7 million TRUaire Vietnam COVID Impact (described below) incurred in the prior year period that did not recur. Gross profit margin for the year ended March 31, 2023 of 42.0% increased from 40.9% for the year ended March 31, 2022. The increase was due to the above-mentioned TRUaire-related expenses incurred in the prior year period that did not recur and pricing initiatives.
Gross profit for the year ended March 31, 2022 increased $71.4 million, or 38.7%, as compared with the year ended March 31, 2021. The increase was primarily due to the acquisitions of TRUaire and Shoemaker, pricing initiatives and increased organic sales. Gross profit margin for the year ended March 31, 2022 of 40.9% decreased from 44.0% for the year ended March 31, 2021, primarily due to inclusions of the TRUaire and Shoemaker acquisitions, material and freight costs increases outpacing implemented pricing initiatives and $1.7 million of under-absorption costs resulting from reduced production levels and incremental compensation expenses incurred at the TRUaire Vietnam facility during the year to maintain TRUaire Vietnam's operations in accordance with COVID-19 restrictions ("TRUaire Vietnam COVID Impact").
Selling, General and Administrative Expense
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, |
| (amounts in thousands, except percentages) | | 2023 | | 2022 | | 2021 |
| Operating expenses | | $ | 179,148 | | | $ | 158,582 | | | $ | 125,330 | |
| Operating expenses as a % of revenues | | 23.6 | % | | 25.3 | % | | 29.9 | % |
Selling, general and administrative expenses for the year ended March 31, 2023 increased $20.6 million, or 13.0%, as compared with the year ended March 31, 2022. The increase was primarily due to added expenses related to the inclusion of Shoemaker in the current year, increases related to employee compensation expenses, third-party sales commissions, marketing and travel expenses to support revenue growth, increased professional fees primarily related to support business growth and recent acquisitions, along with increased depreciation and amortization. The decrease in operating expenses as a percentage of sales was primarily attributable to sales increasing by a greater percentage than the increase in operating expenses.
Selling, general and administrative expenses for the year ended March 31, 2022 increased $33.3 million, or 26.5%, as compared with the year ended March 31, 2021. The increase was primarily due to the added expenses related to the inclusion of TRUaire, Shoemaker and the Whitmore JV in the current period, increased equity compensation expenses and increased spending on sales commissions driven by increased revenues, increased depreciation expenses related to enterprise resource planning systems, increased headcount, increased travel and $0.7 million of transaction expenses related to the Shoemaker acquisition. The increases were partially offset by transactions expenses related to the TRUaire acquisition ($7.8 million) and JV formation ($2.6 million) incurred in the prior year period that did not recur. The increase in operating expenses as a percentage of sales was primarily attributable to sales increasing by a greater percentage than the increase in operating expenses.
Operating Income
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, |
| (amounts in thousands, except percentages) | | 2023 | | 2022 | | 2021 |
| Operating income | | $ | 139,066 | | | $ | 97,380 | | | $ | 59,220 | |
| Operating margin | | 18.3 | % | | 15.5 | % | | 14.1 | % |
Operating income for the year ended March 31, 2023 increased by $41.7 million, or 42.8%, as compared with the year ended March 31, 2022. The increase was a result of the $62.3 million increase in gross profit, partially offset by the
$18.0$20.6 million increase in selling, general and administrative expense as discussed above.
Operating income for the
fiscal year ended March 31,
20152022 increased by
$6.1$38.2 million, or
16.1%64.4%, as compared with the
fiscal year ended March 31,
2014.2021. The increase was
primarily a result of
the $14.3 million increase in gross profit, partially offset by the $8.2$33.3 million increase in selling, general and administrative expense as discussed
above.Interest Expense, net
above, partially offset by the $71.4 million increase in gross profit.
Other income and expense
Interest expense, net for the fiscal year ended March 31, 20162023 increased $2.4$7.7 million to $13.2 million, or 142.2%, as compared with the fiscal year ended March 31, 2015, primarily2022, due to higher interest expense recognized onrates and increased borrowing during the loan related to the acquisition of Strathmore and interest expense recognized onyear under our new Revolving Credit Facility (described in Note 78 to our consolidated financial statements included in Item 8 included inof this Annual Report) entered intoprimarily in December 2015. connection with the acquisitions of Shoemaker, CG, ACG and Falcon.
Interest expense, net for the fiscal year ended March 31, 20152022 increased $3.1 million to $5.4 million, or 128.7%, as compared with the year ended March 31, 2021, primarily due to increased borrowing during the year under our Revolving Credit Facility in connection with the TRUaire acquisition.
Other expense, net decreased by $0.5 million for the year ended March 31, 2023 to income of less than $0.1 million as compared with the year ended March 31, 2022. The decrease was primarily due to foreign currency exchange changes.
Other expense, net decreased by $5.5 million for the year ended March 31, 2022 to expense of $0.5 million as compared with the
fiscal year ended March 31,
2014.Other (Expense) Income, net
Other (expense) income, net decreased by $1.7 million for the fiscal year ended March 31, 2016 to a loss of $0.2 million as compared with the fiscal year ended March 31, 2015.2021. The decline isdecrease was primarily due to a $0.9prior year indemnification expense of $5.0 million gain onarising from the salepartial release of real estate ina tax indemnification asset related to the prior yearTRUaire acquisition that did not recur. Other (expense) income, net increased $1.8 million for the fiscal year ended March 31, 2015 to income of $1.5 million as compared with the fiscal year ended March 31, 2014. The improvement was primarily attributable to a $0.9 million gain on the sale of real estate.
Provision for Income Taxes and Effective Tax Rate
The
provision for income taxes for the fiscal year ended March 31, 2016 was $18.8 million, representing an effective tax
rate of 42.4%, as compared with the provision of $15.2 million, representing an effective tax rate of 33.9%, for the fiscal year ended March 31, 2015 and the provision of $12.8 million, representing an effective tax rate of 34.1%, for the fiscal year ended March 31, 2014. The provision for income taxes was impacted by $3.0 million, relating to a reserve for uncertain tax positions, acquisition-related costs and start-up and organizational costs incurred in connection with the Share Distribution that are not deductible for tax purposes, which increased the effective tax rate by 6.7% for the fiscal year ended March 31, 2016. Other items impacting the effective tax rate include foreign operations activity in countries with lower statutory rates
and domestic operations activity in states with higher statutory rates.We accrue interest and penalties on uncertain tax positions as a component of our provision for income taxes. We have accrued interest and penalties on uncertain tax positions of $0.2 million and $0.2 million, respectively, for the fiscal year ended March 31, 2016. We did not recognize any interest and penalties for uncertain tax positions for the years ended March 31, 2023, 2022 and 2021 were 23.3%, 26.4% and 21.2%, respectively. As compared with the statutory rate for the year ended March 31, 2023, the provision for income taxes was primarily impacted by state tax expense (net of federal benefits), which increased the provision by $2.9 million and effective rate by 2.3%, executive compensation limitation, which increased the provision by $1.6 million and the effective tax rate by 1.2%; impact of GILTI inclusions, which increased the provision by $1.1 million and the effective tax rate by 0.9%; impact of repatriation of foreign earnings, which increased the provision by $0.9 million and the effective rate by 0.7%; and non-deductible expenses, which increased the provision by $0.6 million and the effective tax rate by 0.4%. This was offset by IRC section 250 deductions, which decreased the provision by $1.6 million and the effective tax rate by 1.3%; foreign tax credits, which decreased the provision by $0.6 million and the effective tax rate by 0.5% and tax benefits related to the restricted stock vesting, which decreased the provision by $0.4 million and the effective tax rate by 0.3%.
As compared with the statutory rate for the year ended March 31, 2022, the provision for income taxes was primarily impacted by the state tax expense, which increased the provision by $4.8 million and the effective rate by 5.2%, executive compensation limitation, which increased the provision by $1.0 million and the effective rate by 1.1%, and a net increase in uncertain tax positions, which increased the provision by $0.8 million and the effective rate by 0.8%. This was offset by tax benefits related to the restricted stock vesting, which decreased the provision by $1.9 million and the effective rate by 2.1% and IRC section 250 deductions, which decreased the provision by $1.1 million and the effective tax rate by 1.2%.
During the year ended March 31, 2023, we released a reserve of $1.6 million primarily as a result of the conclusion of TRUaire's Vietnam's audit for the tax periods from January 1, 2019 to March 31, 2022 (refer to Note 15), including accrued interest of $0.4 million and accrued penalties of $0.5 million. We also recorded total tax contingency reserves of $2.8 million, including unrecognized tax benefit of $2.5 million, accrued interest and penalty of $0.1 million and $0.2 million, respectively, through purchase accounting in connection with the Falcon Stainless acquisition. For the year ended March 31, 2023, we recorded an additional net tax contingency reserve of less than $0.1 million, accrued interest of $0.7 million and accrued penalty of $0.6 million.
During the year ended March 31, 2022, we released a reserve of $1.4 million, including accrued interest of $0.6 million and accrued penalties of $0.5 million, related to positions taken on tax returns for which the statute has expired.
Our federal income tax returns for the years ended March 31, 2022, 2021 and 2020 remain subject to examination. Our income tax returns for TRUaire's pre-acquisition periods including calendar years 2018, 2019 and 2020 remain subject to examinations. Our income tax returns in certain state income tax jurisdictions remain subject to examination for various periods for the period ended September 30, 2015
or 2014.and subsequent years.
As of
both March 31,
2016,2023 and 2022, we had
$0.2 million in tax effectedimmaterial net operating loss
carryforwards.carryforwards, which were fully reserved through valuation allowances. Net operating loss carryforwards will expire in periods beyond the next
five5 years.
Net Income and Earnings Per Share
Net income for the fiscal year ended March 31, 2016 decreased by $4.2 million to $25.5 million, or to $1.62 per diluted share, as compared with the fiscal year ended March 31, 2015. The decrease was primarily attributable to the $3.5 million increase in provision for income taxes.
Net income for the fiscal year ended March 31, 2015 increased by $5.0 million to $29.7 million, or to $1.90 per diluted share, as compared with the fiscal year ended March 31, 2014. The increase was attributable to the $6.1 million increase in operating income and the $1.8 million increase in other income (expense), net, partially offset by the $2.4 million increase in tax expense.
We conduct our operations through three business segments based on
the type of product and how we manage the
business.businesses. We evaluate segment performance and allocate resources based on each segment’s operating income. The key operating results for our three business segments are discussed below.
Industrial Products
Contractor Solutions Segment Results
Industrial Products includes specialty mechanical
Our Contractor Solutions segment manufactures efficiency and performance enhancing products
firepredominantly for residential and
smoke protection products, architecturally-specified building productscommercial HVAC/R and
storage, filtration and application equipmentplumbing applications, which are designed primarily for
use with our specialty chemicals and other products for general industrial application. | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended March 31, | | | Change | |
| (Amounts in thousands, except percent data) | | 2016 | | | 2015 | | | Amount | | | Percent | |
Revenues, net | | $ | 138,594 | | | $ | 118,422 | | | $ | 20,172 | | | | 17.0 | % |
Operating income | | | 31,075 | | | | 19,711 | | | | 11,364 | | | | 57.7 | % |
Operating margin | | | 22.4 | % | | | 16.6 | % | | | | | | | | |
| | |
| | | Fiscal Years Ended March 31, | | | Change | |
| (Amounts in thousands, except percent data) | | 2015 | | | 2014 | | | Amount | | | Percent | |
Revenues, net | | $ | 118,422 | | | $ | 93,043 | | | $ | 25,379 | | | | 27.3 | % |
Operating income | | | 19,711 | | | | 12,593 | | | | 7,118 | | | | 56.5 | % |
Operating margin | | | 16.6 | % | | | 13.5 | % | | | | | | | | |
the professional trades.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| (amounts in thousands, except percentages) | | 2023 | | 2022 | | 2021 |
| Revenues, net | | $ | 513,776 | | | $ | 416,487 | | | $ | 245,528 | |
| Operating income | | 126,204 | | | 96,115 | | | 59,007 | |
| Operating margin | | 24.6 | % | | 23.1 | % | | 24.0 | % |
Net revenues for the
fiscal year ended March 31,
20162023 increased
$20.2$97.3 million, or
17.0%23.4%, as compared with the
fiscal year ended March 31,
2015.2022. The increase was
primarily attributablepartially due to
increased sales volumes, as well as a slight improvement in pricingthe acquisitions of Shoemaker, CG, ACG and
$2.9Falcon ($35.9 million
attributable to acquisitions.or 8.6%). Excluding the impact of acquisitions,
increasesorganic sales increased by $61.4 million, or 14.8%, due primarily to pricing initiatives, partially offset by a slight decrease in
sales volumes and prices accounted for approximately 94% and 6%, respectively, of the increase in net revenues, and the increase in sales volumes resulted mainly fromunit volumes. Net revenue increased
sales of existing products ($13.0 million), reflecting greater demand in the
HVAC and theHVAC/R, architecturally-specified building products
and plumbing end markets and
sales of fire and smoke prevention products related to projects that were expected to begindecreased in the
prior fiscal year, but were started or completed in the first quarter because of customer delays ($2.5 million).general industrial end market.
Net revenues for the
fiscal year ended March 31,
20152022 increased
$25.4$171.0 million, or
27.3%69.6%, as compared with the
fiscal year ended March 31,
2014.2021. The increase was primarily
attributabledue to
higherthe TRUaire and Shoemaker acquisitions ($103.2 million or 42.0%). Excluding the impact of acquisitions, organic sales
volumes forincreased by $67.8 million, or 27.6%, due to pricing initiatives and increased unit volumes. Pricing initiatives to mitigate rising costs, which began in the
fiscalthree months ended March 31, 2021, continued and increased during the year ended March 31,
2015. The increase2022. Net revenue increased in
sales volumes resulted from greater demand for HVACHVAC/R, plumbing and architecturally-specified building products
($5.6 million), sales of new products from acquisitions ($15.1 million),end markets and
sales of newly developed fire and smoke prevention products ($0.7 million).decreased in general industrial end market.
Operating income for the
fiscal year ended March 31,
20162023 increased
$11.4$30.1 million, or
57.7%31.3%, as compared with the
fiscal year ended March 31,
2015.2022. The increase was primarily
attributabledue to
the increased net
revenues,revenue and the inclusion of recent acquisitions of Shoemaker, CG, ACG and Falcon, as well as the
decrease in expenses due to a pension plan curtailment benefit ($3.2 million)$3.9 million TRUaire purchase accounting effect and
an impairment loss ($0.7 million) recognized on a patent and trademark$1.7 million TRUaire Vietnam COVID Impact incurred in the prior
year period that did not recur.
These improvements were partially offset by increases in selling, general and administrative expensesOperating margin of 24.6% for the year ended March 31, 2023 increased as compared to 23.1% for the year ended March 31, 2022. This increase was primarily due to
personnel-relatedthe above-mentioned TRUaire-related expenses
and higher freight and commission expenses associatedincurred in the prior year period that did not recur combined with
increased sales volumes.the positive effect of pricing initiatives.
Operating income for the
fiscal year ended March 31,
20152022 increased
$7.1$37.1 million, or
56.5%62.9%, as compared with the
fiscal year ended March 31,
2014, supported by an increase in sales volumes, partially offset by modest increases in selling, general and administrative expenses relative to the increase in net revenues.Coatings, Sealants & Adhesives Segment Results
Coatings, Sealants & Adhesives is comprised of coatings and penetrants, pipe thread sealants, firestopping sealants and caulks and adhesives/solvent cements.
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended March 31, | | | Change | |
| (Amounts in thousands, except percent data) | | 2016 | | | 2015 | | | Amount | | | Percent | |
Revenues, net | | $ | 106,035 | | | $ | 52,119 | | | $ | 53,916 | | | | 103.4 | % |
Operating income | | | 10,911 | | | | 11,420 | | | | (509 | ) | | | -4.5 | % |
Operating margin | | | 10.3 | % | | | 21.9 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended March 31, | | | Change | |
| (Amounts in thousands, except percent data) | | 2015 | | | 2014 | | | Amount | | | Percent | |
Revenues, net | | $ | 52,119 | | | $ | 46,950 | | | $ | 5,169 | | | | 11.0 | % |
Operating income | | | 11,420 | | | | 9,360 | | | | 2,060 | | | | 22.0 | % |
Operating margin | | | 21.9 | % | | | 19.9 | % | | | | | | | | |
Net revenues for the fiscal year ended March 31, 2016 increased $53.9 million, or 103.4%, as compared with the fiscal year ended March 31, 2015. The increase was attributable to $54.6 million from acquisitions. Excluding the impact of acquisitions, sales into the energy industry declined, which were partially offset by increased sales into plumbing and general industrial markets.
Net revenues for the fiscal year ended March 31, 2015 increased $5.2 million, or 11.0%, as compared with the fiscal year ended March 31, 2014.2021. The increase was primarily attributabledue to higher sales volumes, largely driven by salesthe inclusion of caulking productsTRUaire and the transactions expenses ($3.47.8 million), which were supported by recent acquisitions.
Operating income for the fiscal year ended March 31, 2016 decreased $0.5 million, or 4.5%, as compared with the fiscal year ended March 31, 2015. The impact of increased net revenues, as well as the reversal of the liability for the earn-out related to the StrathmoreTRUaire acquisition ($2.0 million) and a decreaseincurred in expenses due to a pension plan curtailment benefit ($1.4 million) were offset by increases in selling, general and administrative expenses ($11.3 million) related to acquired operations, as well as Strathmore integration and transaction costs ($4.2 million) and personnel-related expenses and professional fees.
Operating income for the fiscal year ended March 31, 2015 increased $2.1 million, or 22.0%, as compared with the fiscal year ended March 31, 2014. The increase was due to an increase in sales volumes consistent with the growth in net revenues and modest increases in selling, general and administrative expenses consistent with the increase in net revenues.
Specialty Chemicals Segment Results
Specialty Chemicals includes lubricants and greases, drilling compounds, anti-seize compounds, chemical formulations and degreasers and cleaners.
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended March 31, | | | Change | |
| (Amounts in thousands, except percent data) | | 2016 | | | 2015 | | | Amount | | | Percent | |
Revenues, net | | $ | 74,930 | | | $ | 89,738 | | | $ | (14,808 | ) | | | -16.5 | % |
Operating income | | | 12,490 | | | | 13,016 | | | | (526 | ) | | | -4.0 | % |
Operating margin | | | 16.7 | % | | | 14.5 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended March 31, | | | Change | |
| (Amounts in thousands, except percent data) | | 2015 | | | 2014 | | | Amount | | | Percent | |
Revenues, net | | $ | 89,738 | | | $ | 90,744 | | | $ | (1,006 | ) | | | -1.1 | % |
Operating income | | | 13,016 | | | | 15,877 | | | | (2,861 | ) | | | -18.0 | % |
Operating margin | | | 14.5 | % | | | 17.5 | % | | | | | | | | |
Net revenues for the fiscal year ended March 31, 2016 decreased $14.8 million, or 16.5%, as compared with the fiscal year ended March 31, 2015, which is net of $1.4 million in net revenues provided by acquisitions. The decrease in net revenues was due to decreases in sales volumes related primarily to a slowdown in the energy industry ($14.5 million), which indirectly impacted other end markets, as well as a decrease in sales volumes into the mining and industrial markets ($5.7 million). These decreases were partially offset by an increase in sales volumes associated with both new and existing lubricant products offered to the rail industry ($4.0 million), and to a lesser extent, an increase in prices.
Net revenues for the fiscal year ended March 31, 2015 decreased $1.0 million, or 1.1%, as compared with the fiscal year ended March 31, 2014. The decrease was attributable to a decrease in sales volumes related primarily to a slowdown in global mining activity ($3.5 million). These decreases in sales volumes were partially offset by an increase in sales volumes associated with a new product offered to the rail industry ($1.0 million).
Operating income for the fiscal year ended March 31, 2016 decreased $0.5 million, or 4.0%, as compared with the fiscal year ended March 31, 2015. The improvement was primarily due to a decrease in expenses due to a pension plan curtailment benefit ($3.4 million) and lower freight and commissions expenses resulting from the decrease in sales volumes, as well as expenses recorded in the prior year that did not recur, including retention and severance costs associated with the consolidation of selected manufacturing activities ($1.3 million) and bad debt related to one non-U.S. customer ($1.2 million). These benefits were mostlypartially offset by the impact oftransaction expenses ($0.7 million) in the decrease in net revenues, as well as transactioncurrent year related to the Shoemaker acquisition. The organic sales growth contributed to the increased operating income, which was partially offset by increased material and freight costs, ($0.5 million)the $1.7 million TRUaire Vietnam COVID Impact discussed above and increased system costs, personnel-relatedspending on sales commissions, depreciation and optimization expenses related to enterprise resource planning systems, headcount and professional fees.
travel. Operating incomemargin of 23.1% for the fiscal year ended March 31, 20152022 decreased $2.9as compared to 24.0% for the year ended March 31, 2022. This decrease was primarily due to the inclusion of TRUaire and increased material and freight costs.
Engineered Building Solutions Segment Results
The Engineered Building Solutionssegment provides primarily code-driven products focused on life safety that are engineered to provide aesthetically-pleasing solutions for the construction, refurbishment and modernization of commercial, institutional, and multi-family residential buildings.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| (amounts in thousands, except percentages) | | 2023 | | 2022 | | 2021 |
| Revenues, net | | $ | 103,969 | | | $ | 97,296 | | | $ | 95,672 | |
| Operating income | | 12,889 | | | 11,101 | | | 14,066 | |
| Operating margin | | 12.4 | % | | 11.4 | % | | 14.7 | % |
Net revenues for the year ended March 31, 2023 increased $6.7 million, or 18.0%6.9%, as compared with the fiscal year ended March 31, 2014.2022. The declineincrease was primarily due to sustained commercial activity, retention of market share and pricing initiatives.
Net revenues for the year ended March 31, 2022 increased $1.6 million, or 1.7%, as compared with the year ended March 31, 2021. The increase was primarily due to enhanced marketing efforts and market share gains.
Operating income for the year ended March 31, 2023 increased $1.8 million, or 16.1%, as compared with the year ended March 31, 2022. The increase was due to the increased net revenue and management of operating expenses. Operating margin of 12.4% for the year ended March 31, 2023 increased as compared to 11.4% for the year ended March 31, 2022. This increase was primarily due to effective management of operating expenses, partially offset by the shift in sales to lower margin projects.
Operating income for the year ended March 31, 2022 decreased $3.0 million, or 21.1%, as compared with the year ended March 31, 2021. The decrease was due to a shift in sales to lower margin projects and added salespeople to achieve long-term revenue growth objectives. Operating margin of 11.4% for the year ended March 31, 2022 decreased as compared to 14.7% for the year ended March 31, 2021. This decrease was due to a shift in sales to lower margin projects and added salespeople to achieve long-term revenue growth objectives.
Specialized Reliability Solutions Segment Results
The Specialized Reliability Solutions segment provides long-established products for increasing the reliability, performance and lifespan of industrial assets and solving equipment maintenance challenges.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| (amounts in thousands, except percentages) | | 2023 | | 2022 | | 2021 |
| Revenues, net | | $ | 147,445 | | | $ | 116,042 | | | $ | 78,365 | |
| Operating income | | 20,176 | | | 9,007 | | | 581 | |
| Operating margin | | 13.7 | % | | 7.8 | % | | 0.7 | % |
Net revenues for the year ended March 31, 2023 increased $31.4 million, or 27.1%, as compared with the year ended March 31, 2022. The increase was primarily due to increased unit volumes and pricing initiatives. Net revenue increased in all end markets including energy, mining, general industrial and rail transportation.
Net revenues for the year ended March 31, 2022 increased $37.7 million, or 48.1%, as compared with the year ended March 31, 2021. The increase was primarily due to demand recovery in the energy, mining and rail transportation and general industrial end markets, pricing initiatives to mitigate rising costs that began in the three months ended June 30, 2021 and continued throughout the current year, as well as the inclusion of the newly formed Whitmore JV.
Operating income for the year ended March 31, 2023 increased $11.2 million, or 124.0%, as compared with the year ended March 31, 2022. The increase was primarily due to the increased net revenue, partially offset by increased operating expenses. Operating margin of 13.7% for the year ended March 31, 2023 increased as compared to 7.8% for the year ended March 31, 2022. This increase was primarily due to gross margin improvement as a result of leverage from revenue volume increase, pricing initiatives, as well as reduced growth in operating expense as a percentage of revenue.
Operating income for the
decreases in sales volumes referenced above and increases in cost of revenues, due primarily to higher raw material and packaging costs for certain products, and operating expenses.year ended March 31, 2022 increased $8.4 million, or 1,451.5%, as compared with the year ended March 31, 2021. The increase
in operating expenses resulted from an increase inwas primarily due to increased organic sales and the
reserve for bad debts ($1.2 million), retention and severance costs associated with the consolidationinclusion of
selected manufacturing activities ($1.3 million), incentive plan accruals ($0.4 million) and ERP system implementation costs ($0.3 million), which wereWhitmore JV, partially offset by
lowerincreased material expenses outpacing implemented price increases, increased spending on sales commissions
driven by increased sales and increased travel expense. Operating margin of 7.8% for the year ended March 31, 2022 increased as compared to 0.7% for the year ended March 31, 2021. This increase was primarily due to the
decreaseslightly improved gross margin and reduced growth in
sales volumes and lower travel and marketing costs ($0.8 million).operating expense as a percentage of revenue.
For additional information on segments, see Note
1620 to our consolidated financial statements included in Item 8 of this Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Analysis
| | | | | | | | | | | | |
| | | Fiscal Years Ended March 31, | |
| (amounts in thousands) | | 2016 | | | 2015 | | | 2014 | |
Net cash provided by operating activities | | $ | 41,530 | | | $ | 35,468 | | | $ | 21,629 | |
Net cash used in investing activities | | | (110,221 | ) | | | (2,625 | ) | | | (39,942 | ) |
Net cash provided by (used in) financing activities | | | 74,694 | | | | (26,893 | ) | | | 13,069 | |
General
Existing cash on hand, cash generated by operations and borrowings available under our Revolving Credit Facility ("Revolver Borrowings") are our primary sources of short-term liquidity. Our ability to consistently generate strong cash flow from our operations is one of our most significant financial strengths; it enables us to invest in our people and our brands, make capital investments and strategic acquisitions, provide a cash dividend program, and from time-to-time, repurchase shares of our common stock. The largest use of cash in our operations is for purchasing and carrying inventories. Additionally, we use our Revolver Borrowings to support our working capital requirements, capital expenditures and strategic acquisitions. We monitor the depository institutions that hold our cashseek to maintain adequate liquidity to meet working capital requirements, fund capital expenditures, and cash equivalentsmake scheduled principal and interest payments on a regular basis, anddebt. Absent deterioration of market conditions, we believe that we have placed our deposits with creditworthy financial institutions. Our sources ofcash flows from operating cash generally include the sale of our products and services and the conversion offinancing activities, primarily Revolver Borrowings, will provide adequate resources to satisfy our working capital, particularly accounts receivablescheduled principal and inventories. interest payments on debt, anticipated dividend payments, periodic share repurchases, and anticipated capital expenditure requirements for both our short-term and long-term capital needs.
Cash Flow Analysis
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| (amounts in thousands) | | 2023 | | 2022 | | 2021 |
| Net cash provided by operating activities | | $ | 121,453 | | | $ | 69,089 | | | $ | 66,254 | |
| Net cash used in investing activities | | (72,166) | | | (51,456) | | | (289,889) | |
| Net cash (used in) provided by financing activities | | (46,840) | | | (13,039) | | | 214,049 | |
Our cash balance
(including cash and equivalents, restricted cash and bank time deposits) at March 31,
20162023 was
$39.3$18.5 million, as compared with
$32.1$16.6 million at March 31,
2015.2022.
For the fiscal year ended March 31, 2016,2023, our cash provided by operating activities was $41.5$121.5 million, as compared with $35.5$69.1 million and $21.6$66.3 million for the fiscal years ended March 31, 20152022 and 2014,2021, respectively. Cash flows from working
•Working capital increasedused cash for the fiscal year ended March 31, 2016,2023 due primarily to lowerhigher inventories ($5.111.4 million), lower accounts payable and other current liabilities ($7.0 million), and higher prepaid expenses and other current assets ($1.3 million), partially offset by lower accounts receivable ($2.51.1 million).
•Working capital used cash for the year ended March 31, 2022 due to higher inventories ($49.4 million) and higher accounts receivable ($26.7 million), partially offset by higher accounts payable and other current liabilities ($0.928.0 million), partially offset by higher prepaid expenses and other current assets ($4.9 million). Cash flows from working capital decreased for the fiscal year ended March 31, 2015, due primarily to higher inventories ($6.7 million), mostly offset by lower prepaid expenses and other current assets ($4.43.5 million).
•Working capital used cash for the year ended March 31, 2021 due to higher accounts receivable ($7.2 million), higher prepaid expenses and other assets ($4.2 million) and higher inventory ($3.4 million), partially offset by higher accounts payable and other current liabilities ($1.113.9 million).
Cash flows
from working capital decreased forused in investing activities during the
fiscal year ended March 31,
2014, due primarily to higher accounts receivable ($10.0 million), higher inventories ($6.8 million) and lower accounts payable and other current liabilities ($0.9 million).Cash flows used by investing activities during the fiscal year ended March 31, 20162023 were $110.2$72.2 million as compared with $2.6$51.5 million and $39.9$289.9 million for the fiscal years ended March 31, 20152022 and 2014,2021, respectively.
•Capital expenditures during the fiscal years ended March 31, 2016, 20152023, 2022 and 20142021 were $11.1$14.0 million, $8.7$15.7 million and $15.0$8.8 million, respectively. Our capital expenditures arehave been focused on enterprise resource planning systems, capacity expansion, consolidation of manufacturing facilities, continuous improvement and automation. We areautomation and new product introductions
•During the year ended March 31, 2023, we acquired Falcon for an aggregate purchase price of $37.1 million, comprised of $33.6 million in cash consideration (net of cash received), the assets of CG and ACG and the related intellectual property for $19.7 million in cash consideration and additional $0.3 million annuity payments, and other acquisitions for $2.7 million in cash consideration. Additionally, a contingent payment of $2.0 million was remitted to the Shoemaker sellers due to the performance obligation set forth in the processacquisition agreement being met as part of streamlining some manufacturing operations,the Shoemaker acquisition.
•During the year ended March 31, 2022, we acquired Shoemaker for an aggregate purchase price of $43.6 million, including $37.4 million in cash consideration (net of cash received). Additionally, we received proceeds of $1.4 million as a result of the consolidation of most of our lubricant and grease production into our Rockwall, Texas facility. Our totalfinal working capital expenditure requirementstrue-up adjustment related to this consolidation are currently expected to be approximately $3 million during the fiscalTRUaire acquisition.
•During the year ending ended March 31, 2017,2021, we acquired TRUaire for $286.9 million (after working capital adjustment) in cash consideration and may require additional capital expenditures in later periods. Asstock consideration valued at $97.7 million as discussed in Note 2 to our consolidated financial statements included in Item 8 of this Annual Report we acquired Strathmore for $68.8 million, Deaconfor $12.6 million and Leak Freeze for $16.3 million during the fiscal year ended March 31, 2016. During the fiscal year ended March 31, 2015, we received total proceeds of $9.9 million from the sale of assets, and used $4.5 million to acquire the Evo-Crete and Polyslab product lines. During the fiscal year ended March 31, 2014, we used $18.5 million to acquire Resource Conservation Technologies, Inc. and $5.6 million to acquire Fluid Defense.
.
Cash flows provided by (used in) financing activities during the fiscal year ended March 31, 2016 were $74.7 million as compared with a use of $26.9 million and $13.1 million provided for the fiscal years ended March 31, 20152023, 2022 and 2014,2021 were $(46.8) million, $(13.0) million and $214.0 million, respectively. Cash inflows duringoutflows resulted from:
•Net borrowings from our Revolving Credit Facility and the fiscal year ended March 31, 2016 resulted primarily from borrowings on our new revolving credit agreementWhitmore Term Loan (as discussed in Note 78 to our consolidated financial statements included in Item 8 of this Annual Report), which were used to repay amounts outstanding under the Strathmore Acquisition Term Loan and the RectorSeal Line of Credit and fund the acquisition of Leak Freeze, and a contribution of $13.0$0.2 million, from Capital Southwest. We had net (repayments) borrowings on outstanding lines of credit of $(18.4)$10.4 million and $21.8$231.4 million during the fiscal years ended March 31, 20152023, 2022 and 2014,2021, respectively. We paid dividends
•Payments of $0.7 million of underwriting discounts and fees in connection with amending our Revolving Credit Facility during the year ended March 31, 2023, as discussed in Note 8 to Capital Southwestour consolidated financial statements included in Item 8 of $8.3this Annual Report.
•Proceeds from the redeemable noncontrolling interest shareholder for its investment in the consolidated Whitmore JV of $3.0 million and $8.7$6.3 million during the fiscal years ended March 31, 20152023 and 2014,March 31, 2022, respectively, as discussed in Note 3 to our consolidated financial statements included in Item 8 of this Annual Report.
•Repurchases of shares under our share repurchase programs (as discussed in Note 12 to our consolidated financial statements included in Item 8 of this Annual Report) of $35.7 million, $14.4 million and $7.3 million during the years ended March 31, 2023, 2022 and 2021, respectively.
•Dividend payments of $10.6 million, $9.5 million and $8.1 million were paid during the years ended March 31, 2023, 2022 and 2021, respectively.
We believe that available cash and cash equivalents, cash flows generated through operations and cash available under our Revolving Credit Facility will be sufficient to meet our liquidity needs, including capital expenditures, for at least the next 12 months.
Acquisitions
and Dispositions
We regularly evaluate acquisition opportunities of various sizes. The cost and terms of any financing to be raised in conjunction with any acquisition, including our ability to raise capital, is a critical consideration in any such evaluation.
Note 2 to During the year ended March 31, 2023, we acquired 100% of the outstanding equity of Falcon, based in Temecula, California, for an aggregate purchase price of $37.1 million and the assets of CG and ACG and related intellectual properties, based in Orlando, Florida, for an aggregate purchase price of $22.1 million. During the year ended March 31, 2022, we acquired 100% of the outstanding equity of Shoemaker. The aggregate purchase price for the Shoemaker acquisition was $43.6 million. These acquisitions were funded through a combination of cash on hand, borrowings under our consolidated financial statements included in Item 8 of this Annual Report contains a discussion of our acquisitions.
Financing
Revolving Credit Facilities
Facility and stock consideration. See Note 72 to our consolidated financial statements included in Item 8 of this Annual Report for a discussion of our indebtedness. We compliedacquisitions.
Debt
Our long-term debt obligation consists of the Revolver Borrowings with
all covenants throughmaturity date in fiscal 2027. As of March 31,
2016.2023, we had $253.0 million in outstanding Revolver Borrowings, which resulted in a borrowing capacity of $247.0 million. See Note 8 to our consolidated financial statements included in Item 8 of this Annual Report for a discussion of our indebtedness.
Dividends
Total dividends of $10.6 million were paid during the year ended March 31, 2023. On April 14, 2023, we declared a quarterly dividend and announced an increase of our quarterly dividend rate to $0.19 per share, which was paid on May 12, 2023 to shareholders of record as of April 28, 2023. We have entered into interest rate swapcurrently expect to continue to pay a regular quarterly dividend to shareholders in the future, but such payments are subject to approval of our Board of Directors and are dependent upon our financial conditions, results of operations, capital requirements, and other factors, including those set forth under Item 1A. "Risk Factors" of this Annual Report. See Note 12 to our consolidated financial statements included in Item 8 of this Annual Report for a discussion of dividends.
Share Repurchase Program
On October 30, 2020, our Board of Directors approved a repurchase program authorizing the repurchase of up to $100.0 million of our common stock, which replaced a prior $75.0 million repurchase program. On December 16, 2022, we announced that our Board of Directors authorized a new $100.0 million share repurchase program, which replaced the previously announced $100.0 million program. Through March 31, 2023, no shares had been repurchased under the current $100.0 million repurchase program. Through March 31, 2023, under the prior $100.0 million repurchase program, we repurchased 336,347 shares for an aggregate amount of $35.7 million. A total of 462,462 shares had been repurchased for an aggregate amount of $50.1 million under the prior $100.0 million program. As of March 31, 2023, no shares were repurchased under the current $100.0 million program. Our Board of Directors has established an expiration of December 31, 2024 for the current $100.0 million repurchase program and we currently expect to continue to repurchase shares in the near future, but such repurchases are dependent upon our financial condition, results of operations, capital requirements, and other factors, including those set forth under Item 1A. "Risk Factors" of this Annual Report. See Note 12 to our consolidated financial statements included in Item 8 of this Annual Report for a discussion of our share repurchase program.
Capital Expenditures
During the year ended March 31, 2023, we invested $14.0 million in capital expenditures related to enterprise resource planning systems, capacity expansion, continuous improvement and automation and new product introductions. We plan to continue investing in capital expenditures in the future to improve manufacturing productivity, upgrade information technology infrastructure and security and implement advanced technologies for our existing facilities.
Contractual Obligations
Our contractual obligations as of March 31, 2023 primarily included purchase obligations and operating lease commitments. Purchase obligations include agreements to
hedge our exposurepurchase goods or services that are enforceable, legally binding and specify all significant terms, including: fixed or minimum quantities to
be purchased; fixed, minimum or variable
interest payments relatedprice provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancellable without penalty. We expect to
our indebtedness. These agreements are more fully describedincur $61.1 million in
purchase obligations over the next 12 months. For operating lease commitments, see Note 9 to our consolidated financial statements included in Item 8 of this Annual
Report, and in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” below.Off-Balance Sheet Arrangements
As of March 31, 2016, we did not have any off-balance sheet arrangements that we believe have or are reasonably likely to have a material adverse effect on our financial condition or results of operations.
OUTLOOK FOR FISCAL YEAR 2017
Consolidated revenue for the year ended March 31, 2016 was $319.8 million, an increase of $58.0 million or 22.2%, as compared with the year ended March 31, 2015. This included an increase of $58.9 million due to acquisitions.
Looking ahead, the year ending March 31, 2017 (“Fiscal 2017”) is poised to be an important year as we remain focused on delivering our operational commitments and priorities while advancing our strategic initiatives as a standalone public company. We have a diverse product portfolio that serves an attractive and broad range of growing end markets, primarily in North America, and we have a stable platform for acquisitions with a proven track record of product enhancement and customer centric solutions. We expect to see revenue growth in the majority of our key end use markets during Fiscal 2017, including HVAC, plumbing, rail lubrication, architecturally-specified building products and industrial markets. This expected revenue growth will be driven by our innovative technologies, product differentiation, recent acquisitions and favorable industry trends. Other end markets, however, are anticipated to remain flat or slightly down during Fiscal 2017 due to ongoing effects of energy market weakness, driven by the decline in the price of oil, gas and coal. This includes our sales into energy and mining end markets where we do not expect to see meaningful recovery during Fiscal 2017.
We are focused on operational excellence in all aspects of our business, leading to improved efficiencies and increased profitability. We have established centers of excellence across our company to capture and leverage organizational synergies. Operational excellence is expected to generate approximately $5 million in annual run rate savings in our Specialty Chemicals segment following the completion of the integration of Jet-Lube and Whitmore. The majority of these savings will begin to be realized during Fiscal 2017 with full run-rate savings expected by the end of Fiscal 2017. We also expect to realize approximately $2 million in annual run-rate procurement savings across the business, which should begin to be realized in Fiscal 2017. Our Coatings, Sealants & Adhesives segment results are expected to improve as Strathmore’s integration plan progresses, including ongoing manufacturing footprint optimization efforts, margin remediation initiatives and revenue growth from recapturing lost market share and acceleration of product development for new applications.
In Fiscal 2017, we expect capital expenditures to be between $10 million and $12 million. Capital expenditures will be focused on consolidation of manufacturing facilities, continuous improvement and automation. Additionally, we will continue to evaluate acquisition opportunities of various sizes.
CONTRACTUAL OBLIGATIONS
The following table presents a summary of our contractual obligations at March 31, 2016 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due by Period (1) | |
| | | < 1 Year | | | 1-3 Years | | | 3-5 Years | | | > 5 Years | | | Total | |
Long-term debt obligations, principal (2) | | $ | 561 | | | $ | 1,122 | | | $ | 77,661 | | | $ | 10,338 | | | $ | 89,682 | |
Long-term debt obligations, interest (2) | | | 2,733 | | | | 5,385 | | | | 4,666 | | | | 3,262 | | | | 16,046 | |
Operating lease obligations (3) | | | 2,364 | | | | 3,200 | | | | 2,642 | | | | 4,648 | | | | 12,854 | |
Purchase obligations (4) | | | 18,282 | | | | 1,603 | | | | 585 | | | | — | | | | 20,470 | |
Other long-term liabilities (5) | | | 85 | | | | 6,841 | | | | 316 | | | | 452 | | | | 7,694 | |
| | | | | | | | | | | | | | | | | | | | |
Total (6) | | $ | 24,025 | | | $ | 18,151 | | | $ | 85,870 | | | $ | 18,700 | | | $ | 146,746 | |
| | | | | | | | | | | | | | | | | | | | |
(1) | The less than one year category represents the fiscal year ended March 31, 2017, the 1-3 years category represents fiscal years ending March 31, 2018 and 2019, the 3-5 years category represents fiscal years ending March 31, 2020 and 2021 and the greater than five years category represents fiscal years ending March 31, 2022 and thereafter. |
(2) | Amounts include principal and interest cash payments through the maturity of the outstanding debt obligations. See Note 7 to our consolidated financial statements included in Item 8 of this Annual Report. |
(3) | Sales taxes, value added taxes, and goods and services taxes included as part of recurring lease payments are excluded from the amounts shown above. |
(4) | Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding, and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty, but include open purchase orders which represent amounts we anticipate will become payable for goods and services we have negotiated for delivery. |
(5) | Amounts primarily include settlement of the non-current portion of the liability recorded for the interest rate swap agreements, contingent consideration payable due to acquisitions and future payments required under outstanding incentive awards. See Notes 5, 6 and 9 to our consolidated financial statements included in Item 8 of this Annual Report. The liability for retirement benefits payable related to our defined benefit pension plans is excluded from the contractual obligations table as it does not represent expected liquidity requirements. |
(6) | Operating lease and purchase obligations denominated in foreign currencies are projected based on the exchange rate in effect on March 31, 2016. Excludes amounts that have been eliminated in our consolidated financial statements. |
Report.
CRITICAL ACCOUNTING ESTIMATES
The process of preparing financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions to determine reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of related contingent assets and liabilities. These estimates and assumptions are based upon information available at the time of the estimates or assumptions, including our historical experience, where relevant. The most significant estimates made by management include: timing and amount of revenue recognition; deferred taxes and tax reserves;
pension benefits; and valuation of goodwill and indefinite-lived intangible
assets.assets, both at the time of initial acquisition, as well as part of recurring impairment analyses, as applicable. The significant estimates are reviewed at least annually, if not quarterly, by management. Because of the uncertainty of factors surrounding the estimates, assumptions and judgments used in the preparation of our financial statements, actual results may differ from the estimates, and the difference may be material.
Our critical accounting policies are those policies that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following represent our critical accounting policies. For a summary of all of our significant accounting policies, see Note 1 to our
consolidated financial statements included in Item 8 of this Annual Report. Management and our external auditors have discussed our critical accounting estimates and policies with the Audit Committee of our Board of Directors.
We generallyrecognize revenues to depict the transfer of control of promised goods or services to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Refer to Note 19 for further discussion. We recognize revenue upon shipment of product, at which time title and risk of loss passes to the customer. Additionally, we require thatwhen all of the following circumstancescriteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied: (a) persuasive evidencesatisfied, which are more fully described below.
(i) We identify a contract with a customer when a sales agreement indicates approval and commitment of an arrangement exists, (b) pricethe parties; identifies the rights of the parties; identifies the payment terms; has commercial substance; and it is fixed or determinable, (c) collectability is reasonably assured and (d) delivery has occurredprobable that we will collect the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer. In most instances, our contract with a customer is the customer's purchase order. For certain customers, we may also enter into a sales agreement that outlines a framework of terms and conditions that apply to all future purchase orders for that customer. In these situations, our contract with the customer is both the sales agreement and the specific customer purchase order. Because our contract with a customer is typically for a single transaction or customer purchase order, the duration of the contract is one year or less. As a result, we have been rendered. Net revenues represent gross revenues invoicedelected to customers lessapply certain related chargespractical expedients and, as permitted by the Financial Accounting Standards Board, omit certain disclosures of remaining performance obligations for contractual discountscontracts that have an initial term of one year or rebates. Discountsless.
(ii) We identify performance obligations in a contract for each promised good or service that is separately identifiable from other promises in the contract and for which the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer. Goods and services provided to our customers atthat are deemed immaterial are included with other performance obligations.
(iii) We determine the point of sale are recognized as reductions in revenuetransaction price as the productsamount of consideration we expect to be entitled to in exchange for fulfilling the performance obligations, including the effects of any variable consideration.
(iv) For any contracts that have more than one performance obligation, we allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which we expect to be entitled in exchange for satisfying each performance obligation. We have excluded disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less as the majority of our contracts are sold. Rebate amountsshort-term in nature with a term of one year or less.
(v) We recognize revenue when, or as, we satisfy the performance obligation in a contract by transferring control of a promised good or service to the customer.
We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are
recordedboth imposed on and concurrent with a specific revenue-producing transaction and collected from a customer. As such, we present revenue net of sales and other similar taxes. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as
reduction of revenue on a
monthly basis using estimates of customer participationfulfillment cost and
performance. Freight charges billed to customers are included in net revenues and the related shipping costs are included in cost of
revenuesrevenues. Costs to obtain a contract, which include sales commissions recorded in
our consolidated statements of income.selling, general and administrative expense, are expensed when incurred as the amortization period is one year or less. We do not have customer contracts that include significant financing components.
Deferred Taxes and Tax Reserves
Deferred tax assets and liabilities are determined based on temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Based on the evaluation of available evidence, both positive and negative, we recognize future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that these benefits are more likely than not to be realized. We base our judgment of the recoverability of our deferred tax assets primarily on historical earnings, our estimate of current and expected future earnings using historical and projected future operating results, and prudent and feasible tax planning strategies.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Significant judgment is required in determining income tax provisions and evaluating tax positions. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various taxing authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses
and related interest and penalties as deemed appropriate. Tax benefits recognized in the financial statements from uncertain tax positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. For
During the fiscal year ended March 31, 2016,2023, we recognizedreleased a reserve of $1.6 million primarily as a result of the conclusion of TRUaire's Vietnam's audit for the tax periods from January 1, 2019 to March 31, 2022 (refer to Note 15), including accrued interest of $0.4 million and accrued penalties of $0.5 million. We also recorded total tax contingency reserves of $2.8 million, including unrecognized tax benefit of $2.5 million, accrued interest and penalty of $0.1 million and $0.2 million, respectively, through purchase accounting in connection with the Falcon Stainless acquisition. For the year ended March 31, 2023, we recorded an uncertainadditional net tax positioncontingency reserve of less than $0.1 million, accrued interest of $0.7 million and accrued penalty of $0.6 million. During the year ended March 31, 2022, we released a reserve of $1.4 million, including accrued interest of $0.6 million and accrued penalties of $0.5 million, related to state taxes inpositions taken on tax returns for which the amount of $0.9 million, and we recognized $0.4 million in interest and penalties in income tax expense.statute has expired. Our liability for uncertain tax positions contains uncertainties as management is required to make assumptions and apply judgments to estimate exposures associated with our tax positions. We did not recognize any uncertain tax positions or interest and penalties in
Our federal income tax
expensereturns for the
fiscal years ended March 31,
2015 or 2014.We are currently not under2022, 2021 and 2020 remain subject to examination. Our income tax returns for TRUaire's pre-acquisition periods including calendar years 2018, 2019 and 2020 remain subject to examinations. Our income tax returns in certain state income tax jurisdictions remain subject to examination for any of our U.S. federal income taxes or state income taxes.
Invarious periods for the fiscal yearperiod ended March 31, 2016, as a member of a controlled group, our subsidiaries were allocated certain federal tax brackets such that $10.0 million was taxed at 34%.
September 30, 2015 and subsequent years.
While we believe we have adequately provided for any reasonably foreseeable outcome related to these matters, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities. To the extent that the expected tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made.
Pension Benefits
Certain of our employees hired prior to January 1, 2015 participate in a qualified defined benefit pension plan (the “Qualified Plan”). The Qualified Plan is closed to any employees hired or re-hired on or after January 1, 2015. The Qualified Plan was amended to freeze benefit accruals and to modify certain ancillary benefits effective as of September 30, 2015. The assets, liabilities and expenses we recognize and disclosures we make about plan actuarial and financial information are dependent on the assumptions and estimates used in calculating such amounts. The assumptions include factors such as discount rates, health care cost trend rates, inflation, expected rates of return on plan assets, retirement rates, mortality rates, turnover, rates of compensation increases and other factors. We maintain an unfunded retirement restoration plan (the “Restoration Plan”) that is a non-qualified plan providing for the payment to participating employees, upon retirement, the difference between the maximum annual payment permissible under the Qualified Plan pursuant to federal limitations and the amount that would otherwise have been payable under the Qualified Plan. Consistent with the Qualified Plan, the Restoration Plan was amended effective September 30, 2015 to freeze benefit accruals and to modify certain ancillary benefits.
The assumptions utilized to compute expense and benefit obligations are shown in Note 11 to our consolidated financial statements included in Item 8 of this Annual Report. These assumptions are assessed at least annually in consultation with independent actuaries as of March 31 and adjustments are made as needed. We evaluate prevailing market conditions, including appropriate rates of return, interest rates and medical inflation (health care cost trend) rates. We ensure that our significant assumptions are within the reasonable range relative to market data. The methodology to set our significant assumptions includes:
Discount rates are estimated using high quality corporate bond yields with a duration matching the expected benefit payments. The discount rate is obtained from a universe of Aa-rated non-callable bonds across the full maturity spectrum to establish a weighted average discount rate. Our discount rate assumptions are impacted by changes in general economic and market conditions that affect interest rates on long-term high-quality debt securities, as well as the duration of our plans’ liabilities.
The expected rates of return on plan assets are derived from reviews of asset allocation strategies, expected future experience for trust asset returns, risks and other factors adjusted for our specific
| investment strategy. These rates are impacted by changes in general market conditions, but because they are long-term in nature, short-term market changes do not significantly impact the rates. Changes to our target asset allocation also impact these rates.
|
Depending on the assumptions used, pension expense could vary within a range of outcomes and have a material effect on reported earnings. In addition, the assumptions can materially affect benefit obligations and future cash funding. Actual results in any given year may differ from those estimated because of economic and other factors.
We evaluate the funded status of the Qualified Plan using current assumptions and determine the appropriate funding level considering applicable regulatory requirements, tax deductibility, reporting considerations, cash flow requirements and other factors.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess
The initial recording of the aggregate purchase price over the fair valuegoodwill and intangible assets requires subjective judgements concerning estimates of identifiable net assets acquired in a business combination. We test goodwill at least annually for impairment at the reporting unit level, which is an operating segment or one level below an operating segment. Goodwill is tested for impairment more frequently if conditions arise or events occur that indicate that the fair value of the reporting unit is lower thanacquired assets. We test the carrying value of that reporting unit. Goodwill is recordedgoodwill for impairment as of January 31 each year or whenever events or circumstances indicate such asset may be impaired.
The test for goodwill impairment involves significant judgement in
threeestimating projections of fair value generated through future performance of each of the reporting units.
We first assess The identification of our reporting units began at the operating segment level and considered whether components one level below the operating segment levels should be identified as reporting units for purpose of testing goodwill for impairment based on certain conditions. These conditions included, among other factors, (i) the extent to which a component represents a business and (ii) the aggregation of economically similar components within the operating segments. Other factors that were considered in determining whether the aggregation of components was appropriate included the similarity of the nature of the products and services, the nature of the production processes, the methods of distribution and the types of industries served.
Accounting Standards Codification ("ASC") 350 allows an optional qualitative
factorsassessment, prior to a quantitative assessment test, to determine whether it is more likely than not that the fair value of a reporting unit
is less thanexceeds its carrying
amount as a basis for determining whether it is necessaryamount. We bypassed the qualitative assessment and proceeded directly to
perform the
two-step goodwill impairmentquantitative test.
Qualitative assessments use an evaluation of events and circumstances such as macroeconomic conditions, industry and market considerations, cost factors, financial performance factors, entity specific events, and changes inIf the carrying value
of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired and an impairment loss is recorded equal to
determine whether it is more likely than not thatthe excess of the carrying value over its fair value. We estimate the fair value of
theour reporting
unit is less than its carrying amount, including goodwill.If a reporting unit fails the qualitative assessment, then valuation models and other relevant data are used to estimate the reporting unit’s fair value. The valuation models require the input of subjective assumptions. We useunits based on an income approach, for impairment testing of goodwill using a discounted cash flow method. Significant estimates include future revenue and expense projections, growth estimates made towhereby we calculate terminal value, and a discount rate that approximates our weighted average cost of capital. We perform qualitative and quantitative assessments to test asset carrying values for impairment at January 31, which is the annual impairment testing date.
For purposes of completing the annual goodwill impairment test for fiscal year 2016, a quantitative assessment was utilized to assess the recoverability of goodwill for all three reporting units. The estimated fair value was determined using a discounted cash flow technique, and the key inputs used in the evaluation are consistent with those inputs noted above. Management concluded that the fair value of a reporting unit based on the reporting units substantially exceeded the carryingpresent value of the reporting unitestimated future cash flows. A discounted cash flow analysis requires us to make various judgmental assumptions about future sales, operating margins, growth rates and discount rates, which are based on our budgets, business plans, economic projections, anticipated future cash flows and market participants. Our quantitative test performed as a result of completing step one of the quantitative assessment. There wereJanuary 31, 2023 indicated that no goodwill impairment lossesloss should be recognized for the fiscalyear ended March 31, 2023. There was no impairment loss recognized for the years ended March 31, 2016, 2015 or 2014.
2022 and 2021, respectively.
We have indefinite-lived intangible assets in the form of trademarks and license agreements. We
reviewtest these intangible assets
for impairment at least annually
for impairment,as of January 31 or whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. Significant assumptions used in the impairment test include the discount rate, royalty rate, future
sales projections and terminal value growth rate. These inputs are considered non-recurring level three inputs within the fair value hierarchy. An impairment loss would be recognized when estimated future cash flows are less than their carrying amount. We recorded
no impairment losses on intangible assets
of $0, $0.7 million and $1.3 million for the
fiscal years ended March 31,
2016, 20152023, 2022 and
2014,2021, respectively.
We have presented the information about accounting pronouncements not yet implemented in Note 1 to our consolidated financial statements included in Item 8 of this Annual Report.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely affect our consolidated financial position and results of operations. We seek to minimize these risks through regular operating and financing activities, and when deemed appropriate, through the use of interest rate swaps. It is our policy to enter into interest rate swaps only to the extent considered necessary to meet our risk management objectives. We do not purchase, hold or sell derivative financial instruments for trading or speculative purposes.
Variable Rate Indebtedness
We are subject to interest rate risk on our variable rate indebtedness. Fluctuations in interest rates have a direct effect on
the interest expense associated with our outstanding indebtedness.
As of March 31, 2016, we had outstanding variable rate indebtedness of $43.3 million, after consideration of interest rate swaps. We manage, or hedge, interest rate risks related to our borrowings by means of interest rate swap agreements.
As discussed in Note 10, the Whitmore Term Loan interest rate swap was terminated on January 9, 2023. On February 7, 2023, we entered into an interest rate swap to hedge our exposure to variability in cash flows from interest payments on the first $100.0 million borrowing under our Revolving Credit Facility (defined in Note 8). At March 31,
2016,2023, we had
interest rate swap agreements that covered $46.4$153.0 million
of the $89.7 million of our total outstanding indebtedness. At March 31, 2016,in unhedged variable rate indebtedness
of $43.3 million had a weightedwith an average interest rate of
2.18%6.21%.
EachStarting in April 2023, each quarter point change in interest rates would result in a change of
less than $0.2approximately $0.4 million in our interest expense on an annual
basis.basis, inclusive of the interest rate swap.
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
Australian dollar.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 realized net (losses) gains associated with foreign currency translation of
$(1.4)$(3.8) million,
$(5.3)loss of less than $0.1 million and
$0.4$4.8 million for the
fiscal years ended March 31,
2016, 2015 and 2014,2023, 2022 or 2021, respectively, which are included in
accumulated other comprehensive income (loss). We recognized foreign currency transaction net
lossesgains (losses) of
$0.4 million, $(0.2) million and less than $0.1 million
$0.3 million and $0.2 million for the
fiscal years ended March 31,
2016, 2015 and 2014,2023, 2022 or 2021, respectively, which are included in other
(expense) income
(expense), net
in theon our consolidated statements of
income.operations.
Based on a sensitivity analysis atas of March 31, 2016,2023, a 10% change in the foreign currency exchange rates for the fiscal year ended March 31, 20162023 would have impacted our net earningsincome by a negligible amount.less than 1%. 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 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Opinion on the Financial Statements
We have audited the accompanying consolidatedbalance sheets of CSW Industrials, Inc. (a Delaware corporation)and subsidiaries (the(the “Company”) as of March 31, 20162023 and 2015, and2022, the related consolidated statements of income,operations, comprehensive income, equity, and cash flows for each of the three years in the period ended March 31, 2016. 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, thefinancial statements present fairly, in all material respects, the financial position of the Companyas of March 31, 2023 and 2022, and the results of itsoperations and itscash flows for each of the three years in the period ended March 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of March 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated May 25, 2023,expressed an unqualified opinion.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
thesethe Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engagedmisstatement, whether due to
perform an audit of the Company’s internal control over financial reporting.error or fraud. Our audits included
considerationperforming procedures to assess the risks of
internal control overmaterial misstatement of the financial
reporting as a basis for designing auditstatements, whether due to error or fraud, and performing procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesrespond to those risks. Such procedures included examining, on a test basis, evidence
supportingregarding the amounts and disclosures in the financial
statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial
statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In
Critical Audit Matter
The critical audit mattercommunicated below is amatterarising from the current period audit of the financial statements that wascommunicated or required to be communicated to the audit committee and that: (1) relatesto accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, referredtaken as a whole, and we are not, by communicating the critical audit matterbelow, providing aseparate opinionon the critical audit matteror on the accounts or disclosures to above present fairly,which itrelates.
Valuation of Customer Lists Intangible Asset – Falcon Stainless, Inc.
As described further in all material respects,note 2 to the financial positionstatements, on October 4, 2022, the Company completed the acquisition of CSW Industrials,Falcon Stainless, Inc. for an aggregate purchase price of $37.1 million. The Company’s accounting for the acquisition required the estimation of the fair value of assets acquired and subsidiariesliabilities assumed, which included a customer lists intangible asset of $17.7 million. The estimated fair value of the customer lists intangible asset was determined using the excess earnings method. We identified the estimation of the fair value of the customer lists intangible asset in management’s purchase price allocation as a critical audit matter.
The principal consideration for our determination that the valuation of March 31, 2016 and 2015,the customer lists intangible asset is a critical audit matter is the significant estimation uncertainty involved in determining fair value. The significant assumptions included the expected revenue growth rates, gross profit margins, and the resultsdiscount rate. These assumptions required a high degree of their operationsauditor judgment, subjectivity, and their cash flows for eacheffort in performing procedures and evaluating management’s significant assumptions and involved the use of valuation specialists.
Our audit procedures related to the valuation of customer lists intangible asset included the following, among others.
a.We tested the effectiveness of internal controls over management’s valuation of the three yearscustomer list intangible asset.
b.We evaluated the methodologies and tested the significant assumptions used by the company by involving valuation specialists to evaluate the appropriateness of the methodology and the significant assumptions in the period ended March 31, 2016 in conformity with accounting principles generally acceptedfair value estimate by comparing the discount rate to relevant observable market data.
c.We tested the underlying data by comparing the estimated future revenues and gross profit margin to historical operating results, as well as tested the completeness and accuracy of the underlying data used in the United States of America.excess earnings method valuation.
d.We also evaluated corroborative and contrary evidence when evaluating the expected future revenue growth rates, gross profit margin, and discount rate assumptions.
We have served as the Company’s auditor since 2015.
Dallas, Texas
June 8, 2016
May 25, 2023
CONSOLIDATED BALANCE SHEETS | | | | | | | | |
| | | March 31, | |
| (Amounts in thousands, except per share amounts) | | 2016 | | | 2015 | |
| ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 25,987 | | | $ | 20,448 | |
Restricted cash | | | — | | | | 2,385 | |
Bank time deposits | | | 13,278 | | | | 9,248 | |
Accounts receivable, net | | | 52,637 | | | | 48,941 | |
Inventories, net | | | 51,634 | | | | 47,175 | |
Prepaid expenses and other current assets | | | 11,985 | | | | 4,099 | |
| | | | | | | | |
Total current assets | | | 155,521 | | | | 132,296 | |
Property, plant and equipment, net | | | 64,357 | | | | 56,837 | |
Goodwill | | | 67,757 | | | | 40,645 | |
Intangible assets, net | | | 88,727 | | | | 40,997 | |
Other assets | | | 15,898 | | | | 15,746 | |
| | | | | | | | |
Total assets | | $ | 392,260 | | | $ | 286,521 | |
| | | | | | | | |
| LIABILITIES AND EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 9,912 | | | $ | 8,960 | |
Accrued and other current liabilities | | | 21,090 | | | | 16,001 | |
Current portion of long-term debt | | | 561 | | | | 13,561 | |
| | | | | | | | |
Total current liabilities | | | 31,563 | | | | 38,522 | |
Long-term debt | | | 89,121 | | | | 13,143 | |
Retirement benefits payable | | | 1,746 | | | | 22,545 | |
Other liabilities | | | 11,820 | | | | 7,710 | |
| | | | | | | | |
Total liabilities | | | 134,250 | | | | 81,920 | |
Equity: | | | | | | | | |
Common shares, $0.01 par value | | | 156 | | | | 12 | |
Shares authorized – 50,000 | | | | | | | | |
Shares issued – 15,659 | | | | | | | | |
Preferred shares, $0.01 par value | | | — | | | | 1,000 | |
Shares authorized – 10,000 | | | | | | | | |
Shares issued – 0 | | | | | | | | |
Additional paid-in capital | | | 31,597 | | | | 7,810 | |
Treasury shares, at cost | | | — | | | | (2,712 | ) |
Retained earnings | | | 233,955 | | | | 208,784 | |
Accumulated other comprehensive loss | | | (7,698 | ) | | | (10,293 | ) |
| | | | | | | | |
Total equity | | | 258,010 | | | | 204,601 | |
| | | | | | | | |
Total liabilities and equity | | $ | 392,260 | | | $ | 286,521 | |
| | | | | | | | |
| | | | | | | | | | | | | | |
| | March 31, |
| (Amounts in thousands, except per share amounts) | | 2023 | | 2022 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 18,455 | | | $ | 16,619 | |
| Accounts receivable, net | | 122,753 | | | 122,804 | |
| Inventories, net | | 161,569 | | | 150,114 | |
| Prepaid expenses and other current assets | | 20,279 | | | 10,610 | |
| | | | |
| Total current assets | | 323,056 | | | 300,147 | |
| Property, plant and equipment, net | | 88,235 | | | 87,032 | |
| Goodwill | | 242,740 | | | 224,658 | |
| Intangible assets, net | | 318,903 | | | 300,837 | |
| Other assets | | 70,519 | | | 82,686 | |
| Total assets | | $ | 1,043,453 | | | $ | 995,360 | |
| | | | |
| LIABILITIES AND EQUITY | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 40,651 | | | $ | 47,836 | |
| Accrued and other current liabilities | | 67,388 | | | 69,005 | |
| Current portion of long-term debt | | — | | | 561 | |
| | | | |
| Total current liabilities | | 108,039 | | | 117,402 | |
| Long-term debt | | 253,000 | | | 252,214 | |
| Retirement benefits payable | | 1,158 | | | 1,027 | |
| Other long-term liabilities | | 137,117 | | | 140,306 | |
| | | | |
| Total liabilities | | 499,314 | | | 510,949 | |
| Commitments and contingencies (Note 17) | | | | |
| Redeemable noncontrolling interest | | 18,464 | | 15,325 |
| Equity: | | | | |
| Common shares, $0.01 par value | | 163 | | | 162 | |
| Shares authorized – 50,000 | | | | |
| Shares issued – 16,378 and 16,283, respectively | | | | |
| Preferred shares, $0.01 par value | | — | | | — | |
| Shares authorized (10,000) and issued (0) | | | | |
| Additional paid-in capital | | 123,336 | | | 112,924 | |
| Treasury shares, at cost (902 and 576 shares, respectively) | | (82,734) | | | (46,448) | |
| Retained earnings | | 493,319 | | | 407,522 | |
| Accumulated other comprehensive loss | | (8,409) | | | (5,074) | |
| Total equity | | 525,675 | | | 469,086 | |
| Total liabilities and equity | | $ | 1,043,453 | | | $ | 995,360 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF
INCOME | | | | | | | | | | | | |
| | | Fiscal Years Ended March 31, | |
| (Amounts in thousands, except per share amounts) | | 2016 | | | 2015 | | | 2014 | |
Revenues, net | | $ | 319,831 | | | $ | 261,834 | | | $ | 231,713 | |
Cost of revenues | | | (171,967 | ) | | | (135,409 | ) | | | (119,627 | ) |
| | | | | | | | | | | | |
Gross profit | | | 147,864 | | | | 126,425 | | | | 112,086 | |
Selling, general and administrative expense | | | (100,378 | ) | | | (81,681 | ) | | | (72,864 | ) |
Impairment loss | | | — | | | | (710 | ) | | | (1,309 | ) |
| | | | | | | | | | | | |
Operating income | | | 47,486 | | | | 44,034 | | | | 37,913 | |
Interest expense, net | | | (3,035 | ) | | | (611 | ) | | | (131 | ) |
Other (expense) income, net | | | (226 | ) | | | 1,505 | | | | (256 | ) |
| | | | | | | | | | | | |
Income before income taxes | | | 44,225 | | | | 44,928 | | | | 37,526 | |
Provision for income taxes | | | (18,754 | ) | | | (15,223 | ) | | | (12,794 | ) |
| | | | | | | | | | | | |
Net income | | $ | 25,471 | | | $ | 29,705 | | | $ | 24,732 | |
| | | | | | | | | | | | |
Net earnings per common share: | | | | | | | | | | | | |
Basic | | $ | 1.63 | | | $ | 1.91 | | | $ | 1.59 | |
Diluted | | | 1.62 | | | | 1.90 | | | | 1.58 | |
OPERATIONS
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| (Amounts in thousands, except per share amounts) | | 2023 | | 2022 | | 2021 |
| Revenues, net | | $ | 757,904 | | | $ | 626,435 | | | $ | 419,205 | |
| Cost of revenues | | (439,690) | | | (370,473) | | | (234,655) | |
| Gross profit | | 318,214 | | | 255,962 | | | 184,550 | |
| Selling, general and administrative expenses | | (179,148) | | | (158,582) | | | (125,330) | |
| | | | | | |
| Operating income | | 139,066 | | | 97,380 | | | 59,220 | |
| Interest expense, net | | (13,197) | | | (5,449) | | | (2,383) | |
| Other income (expense), net | | 42 | | | (466) | | | (5,969) | |
| Income before income taxes | | 125,911 | | | 91,465 | | | 50,868 | |
| Provision for income taxes | | (29,337) | | | (24,146) | | | (10,769) | |
| | | | | | |
| | | | | | |
| Net income | | 96,574 | | | 67,319 | | | 40,099 | |
| Income attributable to redeemable noncontrolling interest | | (139) | | | (934) | | | — | |
| Net income attributable to CSW Industrials, Inc. | | $ | 96,435 | | | $ | 66,385 | | | $ | 40,099 | |
| | | | | | |
| | | | | | |
| Basic earnings per common share: | | $ | 6.22 | | | $ | 4.21 | | | $ | 2.67 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Diluted earnings per common share: | | $ | 6.20 | | | $ | 4.20 | | | $ | 2.65 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Weighted average number of shares outstanding: | | | | | | |
| Basic | | 15,509 | | 15,755 | | 15,015 |
| Diluted | | 15,546 | | 15,807 | | 15,126 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | |
| | | Fiscal Years Ended March 31, | |
| (Amounts in thousands) | | 2016 | | | 2015 | | | 2014 | |
Net income | | $ | 25,471 | | | $ | 29,705 | | | $ | 24,732 | |
Other comprehensive income (loss): | | | | | | | | | | | | |
Foreign currency translation adjustments | | | (1,371 | ) | | | (5,277 | ) | | | 363 | |
Cash flow hedging activity, net of taxes of $8, $649 and $0, respectively | | | (15 | ) | | | (1,206 | ) | | | — | |
Pension and other postretirement effects, net of taxes of $(2,145), $3,396 and $(1,734), respectively | | | 3,981 | | | | (6,307 | ) | | | 3,220 | |
| | | | | | | | | | | | |
Other comprehensive income (loss) | | | 2,595 | | | | (12,790 | ) | | | 3,583 | |
| | | | | | | | | | | | |
Comprehensive income | | $ | 28,066 | | | $ | 16,915 | | | $ | 28,315 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| (Amounts in thousands) | | 2023 | | 2022 | | 2021 |
| Net income | | $ | 96,574 | | | $ | 67,319 | | | $ | 40,099 | |
| Other comprehensive (loss) income: | | | | | | |
| Foreign currency translation adjustments | | (3,752) | | | (44) | | | 4,791 | |
| Cash flow hedging activity, net of taxes of $(41), $(142) and $(156), respectively | | 156 | | | 533 | | | 587 | |
| Pension and other postretirement effects, net of taxes of $(67), $(138) and $(34), respectively | | 261 | | | 433 | | | 72 | |
| Other comprehensive income (loss) | | (3,335) | | | 922 | | | 5,450 | |
| Comprehensive income | | $ | 93,239 | | | $ | 68,241 | | | $ | 45,549 | |
| Less: Comprehensive income attributable to redeemable noncontrolling interest | | (139) | | | (934) | | | — | |
| Comprehensive income attributable to CSW Industrials, Inc. | | $ | 93,100 | | | $ | 67,307 | | | $ | 45,549 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EQUITY | | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | Common
Stock | | | Additional
Paid-In
Capital | | | Retained
Earnings | | | Net
Investment
of Capital
Southwest | | | Accumulated
Other
Comprehensive
Loss | | | Total
Equity | |
Balance at April 1, 2013 | | $ | — | | | $ | — | | | $ | 171,292 | | | $ | 6,316 | | | $ | (1,086 | ) | | $ | 176,522 | |
Net income | | | — | | | | — | | | | 24,732 | | | | — | | | | — | | | | 24,732 | |
Dividends | | | — | | | | — | | | | (8,651 | ) | | | — | | | | — | | | | (8,651 | ) |
Other comprehensive income, net of tax | | | — | | | | — | | | | — | | | | — | | | | 3,583 | | | | 3,583 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2014 | | $ | — | | | $ | — | | | $ | 187,373 | | | $ | 6,316 | | | $ | 2,497 | | | $ | 196,186 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | 29,705 | | | | — | | | | — | | | | 29,705 | |
Dividends | | | — | | | | — | | | | (8,294 | ) | | | — | | | | — | | | | (8,294 | ) |
Repurchases of common shares | | | — | | | | — | | | | — | | | | (206 | ) | | | — | | | | (206 | ) |
Other comprehensive income, net of tax | | | — | | | | — | | | | — | | | | — | | | | (12,790 | ) | | | (12,790 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2015 | | $ | — | | | $ | — | | | $ | 208,784 | | | $ | 6,110 | | | $ | (10,293 | ) | | $ | 204,601 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Share-based and other executive compensation | | | — | | | | 2,231 | | | | — | | | | — | | | | — | | | | 2,231 | |
Stock activity under stock plans | | | — | | | | 96 | | | | — | | | | — | | | | — | | | | 96 | |
Tax benefit associated with share-based compensation | | | — | | | | 212 | | | | — | | | | — | | | | — | | | | 212 | |
Net income | | | — | | | | — | | | | 25,471 | | | | — | | | | — | | | | 25,471 | |
Dividends | | | — | | | | — | | | | (300 | ) | | | — | | | | — | | | | (300 | ) |
Other comprehensive income, net of tax | | | — | | | | — | | | | — | | | | — | | | | 2,595 | | | | 2,595 | |
Effects of Share Distribution and contributions from Capital Southwest | | | 156 | | | | 29,058 | | | | — | | | | (6,110 | ) | | | — | | | | 23,104 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2016 | | $ | 156 | | | $ | 31,597 | | | $ | 233,955 | | | $ | — | | | $ | (7,698 | ) | | $ | 258,010 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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 | | | $ | 318,702 | | | $ | (11,446) | | | $ | 280,365 | |
| Share-based compensation | | — | | | — | | | 5,085 | | | — | | | — | | | 5,085 | |
| Stock activity under stock plans | | 2 | | | (2,812) | | | (2) | | | — | | | — | | | (2,812) | |
| Reissuance of treasury shares | | — | | | 51,405 | | | 51,233 | | | — | | | — | | | 102,638 | |
| Repurchase of common shares | | — | | | (7,291) | | | — | | | — | | | — | | | (7,291) | |
| Net income | | — | | | — | | | — | | | 40,099 | | | — | | | 40,099 | |
| Dividends | | — | | | — | | | 47 | | | (8,132) | | | — | | | (8,085) | |
| Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 5,450 | | | 5,450 | |
| Balance at March 31, 2021 | | $ | 161 | | | $ | (34,075) | | | $ | 104,690 | | | $ | 350,669 | | | $ | (5,996) | | | $ | 415,449 | |
| Share-based compensation | | — | | | — | | | 8,450 | | | — | | | — | | | 8,450 | |
| Stock activity under stock plans | | 1 | | | (4,884) | | | — | | | — | | | — | | | (4,883) | |
| Reissuance of treasury shares | | — | | | 6,938 | | | (289) | | | — | | | — | | | 6,649 | |
| Repurchase of common shares | | — | | | (14,427) | | | — | | | — | | | — | | | (14,427) | |
| Net income | | — | | | — | | | — | | | 66,385 | | | — | | | 66,385 | |
| Dividends | | — | | | — | | | 73 | | | (9,532) | | | — | | | (9,459) | |
| Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 922 | | | 922 | |
| Balance at March 31, 2022 | | $ | 162 | | | $ | (46,448) | | | $ | 112,924 | | | $ | 407,522 | | | $ | (5,074) | | | $ | 469,086 | |
| Share-based compensation | | — | | | — | | | 9,752 | | | — | | | — | | | 9,752 | |
| Stock activity under stock plans | | 1 | | | (3,417) | | | — | | | — | | | — | | | (3,416) | |
| Reissuance of treasury shares | | — | | | 2,786 | | | 578 | | | — | | | — | | | 3,364 | |
| Repurchase of common shares | | — | | | (35,655) | | | — | | | — | | | — | | | (35,655) | |
| Net income | | — | | | — | | | — | | | 96,435 | | | — | | | 96,435 | |
| Dividends | | — | | | — | | | 82 | | | (10,638) | | | — | | | (10,556) | |
| Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | (3,335) | | | (3,335) | |
| Balance at March 31, 2023 | | $ | 163 | | | $ | (82,734) | | | $ | 123,336 | | | $ | 493,319 | | | $ | (8,409) | | | $ | 525,675 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | | | | | | | |
| | | Fiscal Years Ended March 31, | |
| (Amounts in thousands) | | 2016 | | | 2015 | | | 2014 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 25,471 | | | $ | 29,705 | | | $ | 24,732 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation | | | 7,032 | | | | 5,922 | | | | 5,225 | |
Amortization of intangible and other assets | | | 7,129 | | | | 4,593 | | | | 3,888 | |
Provision for doubtful accounts | | | (282 | ) | | | 1,515 | | | | 130 | |
Share-based and other executive compensation | | | 2,231 | | | | — | | | | — | |
Acquisition-related non-cash gain | | | (1,950 | ) | | | — | | | | — | |
Net loss (gain) on sales of property, plant and equipment | | | 60 | | | | (1,627 | ) | | | (251 | ) |
Pension plan curtailment benefit | | | (8,020 | ) | | | — | | | | — | |
Net pension expense | | | 3,506 | | | | 3,392 | | | | 3,616 | |
Impairment of assets | | | — | | | | 710 | | | | 1,309 | |
Net deferred taxes | | | 7,262 | | | | (7,887 | ) | | | (1,023 | ) |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable, net | | | 2,522 | | | | (37 | ) | | | (9,964 | ) |
Inventories, net | | | 5,056 | | | | (6,655 | ) | | | (6,764 | ) |
Prepaid expenses and other current assets | | | (4,945 | ) | | | 4,351 | | | | (680 | ) |
Other assets | | | (3,275 | ) | | | 109 | | | | 2,004 | |
Accounts payable and other current liabilities | | | 910 | | | | 1,086 | | | | (850 | ) |
Retirement benefits payable and other liabilities | | | (1,177 | ) | | | 291 | | | | 257 | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 41,530 | | | | 35,468 | | | | 21,629 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Capital expenditures | | | (11,053 | ) | | | (8,672 | ) | | | (15,042 | ) |
Proceeds from sale of assets held for investment | | | — | | | | 3,494 | | | | 1,740 | |
Proceeds from sale of assets | | | 46 | | | | 6,393 | | | | 5 | |
Net change in bank time deposits | | | (1,978 | ) | | | 3,353 | | | | (2,013 | ) |
Cash paid for acquisitions | | | (97,236 | ) | | | (7,193 | ) | | | (24,632 | ) |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (110,221 | ) | | | (2,625 | ) | | | (39,942 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Borrowings on lines of credit | | | 81,000 | | | | 12,229 | | | | 37,217 | |
Repayments on lines of credit | | | (94,561 | ) | | | (30,622 | ) | | | (15,467 | ) |
Borrowings on revolving credit agreement | | | 98,040 | | | | — | | | | — | |
Payments on revolving line of credit agreement | | | (21,500 | ) | | | — | | | | — | |
Payments of deferred loan costs | | | (1,081 | ) | | | — | | | | (30 | ) |
Purchase of treasury shares | | | — | | | | (206 | ) | | | — | |
Cash contribution from Capital Southwest | | | 13,000 | | | | — | | | | — | |
Proceeds from stock option activity | | | 96 | | | | — | | | | — | |
Dividends paid to Capital Southwest | | | (300 | ) | | | (8,294 | ) | | | (8,651 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 74,694 | | | | (26,893 | ) | | | 13,069 | |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash and equivalents | | | (464 | ) | | | (913 | ) | | | (704 | ) |
| | | | | | | | | | | | |
Net change in cash and cash equivalents | | | 5,539 | | | | 5,037 | | | | (5,948 | ) |
Cash and cash equivalents, beginning of period | | | 20,448 | | | | 15,411 | | | | 21,359 | |
| | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 25,987 | | | $ | 20,448 | | | $ | 15,411 | |
| | | | | | | | | | | | |
Supplemental non-cash disclosure: | | | | | | | | | | | | |
Cash paid during the year for interest | | $ | 3,074 | | | $ | 1,053 | | | $ | 742 | |
Cash paid during the year for income taxes | | | 18,298 | | | | 16,721 | | | | 12,781 | |
Pension plan assets contributed by Capital Southwest | | | 10,357 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| (Amounts in thousands) | | 2023 | | 2022 | | 2021 |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 96,574 | | | $ | 67,319 | | | $ | 40,099 | |
| | | | | | |
| | | | | | |
| Adjustments to reconcile net income to net cash provided by operating activities: |
| Depreciation | | 12,838 | | | 11,572 | | | 9,194 | |
| Amortization of intangible and other assets | | 22,716 | | | 25,314 | | | 13,843 | |
| Provision for inventory reserves | | 1,522 | | | 1,553 | | | 1,558 | |
| Provision for doubtful accounts | | 2,013 | | | 1,498 | | | 696 | |
| Share-based and other executive compensation | | 9,751 | | | 8,450 | | | 5,086 | |
| | | | | | |
| Net gain on disposals of property, plant and equipment | | 104 | | | (85) | | | (23) | |
| | | | | | |
| Net pension benefit | | 150 | | | 31 | | | 163 | |
| Impairment of intangible assets | | 156 | | | — | | | — | |
| | | | | | |
| Net deferred taxes | | (6,011) | | | (3,261) | | | (1,798) | |
| Changes in operating assets and liabilities: | | | | | | |
| Accounts receivable | | 1,105 | | | (26,729) | | | (7,219) | |
| Inventories | | (11,422) | | | (49,403) | | | (3,377) | |
| Prepaid expenses and other current assets | | (1,282) | | | 3,479 | | | (4,246) | |
| Other assets | | 458 | | | 626 | | | (1,532) | |
| Accounts payable and other current liabilities | | (7,000) | | | 27,983 | | | 13,856 | |
| Retirement benefits payable and other liabilities | | (219) | | | 742 | | | (46) | |
| Net cash provided by operating activities | | 121,453 | | | 69,089 | | | 66,254 | |
| | | | | | |
| | | | | | |
| Cash flows from investing activities: | | | | | | |
| Capital expenditures | | (13,951) | | | (15,653) | | | (8,833) | |
| Proceeds from sale of assets held for investment | | — | | | — | | | 6,152 | |
| Proceeds from sale of assets | | 120 | | | 139 | | | 30 | |
| | | | | | |
| Cash paid for acquisitions | | (58,335) | | | (35,942) | | | (287,238) | |
| Net cash used in investing activities | | (72,166) | | | (51,456) | | | (289,889) | |
| | | | | | |
| | | | | | |
| Cash flows from financing activities: | | | | | | |
| Borrowings on lines of credit | | 143,177 | | | 94,000 | | | 255,000 | |
| Repayments of lines of credit | | (142,952) | | | (83,561) | | | (23,561) | |
| Payments of deferred loan costs | | (710) | | | (2,328) | | | (148) | |
| Purchase of treasury shares | | (39,072) | | | (19,311) | | | (10,489) | |
| Proceeds from stock option activity | | 272 | | | 1,327 | | | 1,330 | |
| Proceeds from acquisition of redeemable noncontrolling interest shareholder | | 3,000 | | | 6,293 | | | — | |
| Dividends paid to shareholders | | (10,555) | | | (9,459) | | | (8,083) | |
| Net cash (used in) provided by financing activities | | (46,840) | | | (13,039) | | | 214,049 | |
| Effect of exchange rate changes on cash and equivalents | | (611) | | | 1,937 | | | 1,336 | |
| Net change in cash and cash equivalents | | 1,836 | | | 6,531 | | | (8,250) | |
| Cash and cash equivalents, beginning of period | | 16,619 | | | 10,088 | | | 18,338 | |
| Cash and cash equivalents, end of period | | $ | 18,455 | | | $ | 16,619 | | | $ | 10,088 | |
| Supplemental non-cash disclosure: | | | | | | |
| Cash paid during the year for interest | | $ | 12,502 | | | $ | 4,955 | | | $ | 1,875 | |
| Cash paid during the year for income taxes | | 41,476 | | | 20,485 | | | 14,021 | |
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | ORGANIZATION AND OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
CSW Industrials, Inc. (“
1. ORGANIZATION AND OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CSWI” the “Company,” “we,” “our” or “us”) is a diversified industrial growth company with well-established, scalable platformsa strategic focus on providing niche, value-added products in the end markets we serve. We operate in three business segments: Contractor Solutions, Engineered Building Solutions and domain expertise across three segments: Industrial Products; Coatings, Sealants & Adhesives; and Specialty Chemicals. Our broad portfolio of leading products provides performance optimizing solutions to our customers.Specialized Reliability Solutions. Our products include mechanical products for heating, ventilating andventilation, air conditioning (“HVAC”) and refrigeration applications, coatings("HVAC/R"), plumbing products, grilles, registers and sealantsdiffusers ("GRD"), building safety solutions and high performancehigh-performance specialty lubricants.lubricants and sealants. End markets that we serve include HVAC/R, architecturally-specified building products, general industrial, plumbing, energy, rail transportation and mining. Drawing on our innovative and proven technologies, we seek to deliver solutions to our professional customers that require superior performance and reliability. Our diverseThe reputation of our product portfolio includesis built on more than 100 highly respected industrial brands including RectorSealwell-respected brand names, such as AC GuardTM,Air Sentry®,Cover GuardTM,Deacon®, Falcon Stainless®, Greco®, Jet-Lube®, Kopr-Kote®, Leak Freeze®, Metacaulk®, No. 5 ™ thread sealants, KOPR KOTE™ anti-seize lubricants, Safe-T-Switch® condensate overflow shutoff devices, KATS® coatings, Air Sentry® breathers,5®, OilSafe®, Safe-T-Switch®, Shoemaker Manufacturing®, Smoke Guard®, TRUaire® and RailPlex® tank car coatings. Additionally, we recently acquired Deacon® high temperature sealantsWhitmore®.
The COVID-19 pandemic and AC Leak Freeze® to stop refrigerant leaks. Our products are well knownits resulting impacts had an overall negative impact on our financial results in the specific industriesprior fiscal years ended March 31, 2022 and March 31, 2021. During our current fiscal year ended March 31, 2023, the direct and indirect impacts of the COVID-19 pandemic on our consolidated operating results were immaterial as economic activities recovered and the effects of the pandemic lessened. While the Federal COVID-19 Public Health Emergency Declaration expired on May 11, 2023, the extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted. As such, we servecannot reasonably estimate the future impact of the COVID-19 pandemic at this time.
We are closely monitoring the Russian invasion of Ukraine and its global impact. We have no operations, employees or assets in Russia, Belarus or Ukraine, nor do we source goods or services of any material amount from those countries, whether directly or indirectly. Shortly after the Russian invasion of Ukraine began in February 2022, we indefinitely suspended all
commercial activities in Russia. During the fiscal year ended March 31, 2023, we had no sales into Belarus or Ukraine. While the conflict continues to evolve and the outcome remains highly uncertain, we do not currently believe the Russia-Ukraine conflict will have a
reputation for high qualitymaterial impact on our business and
reliability. Markets that we serve include HVAC, industrial, rail, plumbing, architecturally-specified building products, energy, mining,results of operations. However, if the Russia-Ukraine conflict continues or worsens, leading to greater global economic or political disruptions and
other general industrial markets.The Share Distribution – On December 2, 2014, Capital Southwest Corporation (“Capital Southwest”) announced its plan to spin-off certainuncertainty, our business and results of its industrial products, coatings, sealants and adhesives and specialty chemicals businesses by means ofoperations could be materially impacted as a distribution of the outstanding shares of common stock of CSWI on a pro rata basis to holders of Capital Southwest common stock (the “Share Distribution”). The Share Distribution occurred on September 30, 2015, and CSWI became an independent, publicly traded company. Prior to the Share Distribution, Capital Southwest contributed to CSWI all of the outstanding capital stock of The RectorSeal Corporation (“RectorSeal”), The Whitmore Manufacturing Company (“Whitmore”), Jet-Lube, Inc. (“Jet-Lube”), Strathmore Holdings, LLC. (“Strathmore”), Balco, Inc. (“Balco”), Smoke Guard, Inc. (“Smoke Guard”) and CapStar Holdings Corporation (“CapStar”), $13.0 million in cash and pension assets of $10.4 million (CSWI assumed both the pension plan assets and obligations associated with the defined benefit pension plan), and net of $0.3 million in equity issuance costs. The following is a brief description of each business:
| • | | RectorSeal formulates and manufactures specialty chemical products including pipe thread sealants, firestop sealants, plastic solvent cements and other formulations. RectorSeal also makes specialty tools for tradesmen and innovative systems for containing flames and smoke from building fires. |
| • | | Whitmore manufactures high performance, specialty lubricants for heavy equipment used in surface mining, railroad and other industries. Whitmore also manufactures lubrication equipment, specifically for rail applications, and lubrication-centric reliability solutions for a wide variety of industries, and produces water-based coatings for the automotive and primary metals industries. |
| • | | Jet-Lube is a world leader in anti-seize compounds, thread sealants and specialty lubrication products and greases for the energy industry. |
| • | | Strathmore is engaged in the manufacturing of paint for sale to industrial clients and is a leading manufacturer of specialized industrial coating products including urethanes, epoxies, acrylics and alkyds. |
| • | | Balco is engaged in the fabrication of aluminum and plastic extrusions and other materials related to safety, slip resistance and emergency egress. |
| • | | Smoke Guard manufactures certified custom safety products for the commercial construction market and other markets requiring smoke and fire protection. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
result.
Basis of Presentation – CSWI began operations on September 30, 2015 as a result of the Share Distribution. With the exception of cash funded at inception and the contributed capital stock of the businesses discussed above, we did not own any material assets prior to the Share Distribution. The historicalconsolidated financial position, results of operations and cash flows included in this Annual Report on Form 10-K for the fiscal year ended March 31, 20162023 (“Annual Report”) represent the consolidated financial statements of the businesses discussed above. As these businesses were under common control of Capital Southwest forinclude all periods priorrevenues, costs, assets and liabilities directly attributable to September 30, 2015, the financial statements have been consolidated for all historical periodsCSWI and equity accounts presented in the balance sheet as of March 31, 2015 represent the combined equity accounts of these businesses. Equity accounts presented in the balance sheet as of March 31, 2016 represent the equity of CSWI. The consolidated financial statements have been prepared on a standalone basis and are derived from the underlying accounting records of the underlying businesses in conformityaccordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).The consolidated financial statements include all revenues, costs, assetsare for us and liabilities directly attributable toour consolidated subsidiaries, each of which is a wholly-owned subsidiary, except our 50% investment in a variable interest entity for which we have determined that we are the businesses discussed above. However, theprimary beneficiary and therefore have consolidated into our financial statements for periods prior to the Share Distribution may not include all of the expenses that would have been incurred had the businesses been operating as separate publicly-traded (“standalone”) companies during those periods and may not reflect the consolidated results of operations, financial position and cash flows as a standalone company during all periods presented.statements. All significant intercompany balances and transactions have been eliminated in consolidation.
Certain prior period balances have been reclassified
Variable Interest Entities - We evaluate whether an entity is a variable interest entity (“VIE”) and determine if the primary beneficiary status is appropriate on a quarterly basis. We consolidate a VIE for which we are the primary beneficiary. When assessing the determination of the primary beneficiary, we consider all relevant facts and circumstances, including: the power to conformdirect the activities of the VIE that most significantly impact the VIE’s economic performance, the obligation to current period presentation with no effect on previously reported total assets, equity, net income absorb the expected losses and/or cash flows from operations.the right to receive the expected returns of the VIE. Through this evaluation, we determined that the Whitmore JV is a VIE and the Company is the primary beneficiary of this VIE, primarily due to Whitmore having the power to direct the manufacturing activities, which are considered the most significant activities for the Whitmore JV.
Use of Estimates – The process of preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses. We believe our estimates and assumptions are reasonable; however, actual results may differ materially from such estimates. The most significant estimates and assumptions are used in determining: •Timing and amount of revenue recognition;
•Deferred taxes and tax reserves; and
Pension benefits; and
•Valuation of goodwill and indefinite-lived intangible assets.
Cash and Cash Equivalents – We consider all highly liquid instruments purchased with original maturities of three months or less and money market accounts to be cash equivalents. We maintain our cash and cash equivalents at financial institutions
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for which the combined account balances in individual institutions may exceed
Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of
FDIC insurance coverage. We had deposits in domestic banks of
$17.6$10.1 million and
$10.3 million, of which $15.2 million and $8.3$11.3 million at March 31,
20162023 and
20152022, respectively,
were in excess of FDIC limits.Cash and cash equivalent balances of $8.4 million and $10.1$5.3 million arewere held in foreign currencies in foreign banks at March 31, 20162023 and 2015, respectively,2022, respectively.
Accounts Receivable, Allowance for Doubtful Accounts and Credit Risk – Trade accounts receivables are recorded at the invoiced amounts and do not bear interest. 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 which $5.0 millioncustomer-specific factors such as financial difficulties, liquidity issues or insolvency, as well as both current and $3.0 million exceeded insurance limits atforecasted 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 March 31, 2016 and 2015, respectively.Restricted Cash– Restricted cash includes compensating cash balances related2023 was $1.4 million, compared to certain credit facilities and cash held in escrowrelated to real estate sales.
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Bank Time Deposits– Bank time deposits include investments with maturities of over three months that are redeemable within one year of the fiscal year end without significant penalty. Our bank time deposits of $13.3 million and $9.2$1.2 million as of March 31, 2016 and 2015, respectively,2022.
Credit risks are
certificates of deposit. Of the $13.3 million and $9.2 million of bank time deposits held at March 31, 2016 and 2015, respectively, $10.4 million and $6.5 million, respectively, are fully insuredmitigated by the
provincediversity of
Alberta, Canada or the Financial Services Compensation Scheme (U.K.).Allowance for Doubtful Accounts–our customer base across many different industries and by performing creditworthiness analyses on our customers. Additionally, we mitigate credit risk through letters of credit and advance payments received from our customers. We estimate a bad debt reserve under the allowance method. Using payment history in lightdo not believe that we have any significant concentrations of current economic conditions, management examines the status of customer accounts on the aged accounts receivable report. With this information, management estimates an appropriate allowance for doubtful accounts. Accounts receivable are written off when it is determined that the receivable will not be collected.
credit risk.
Inventories and Related Reserves– Inventories are stated at the lower of cost or marketnet realizable value and include raw materials, supplies, direct labor and manufacturing overhead. Cost is determinedInventories are accounted for using the last-in,a standard costing methodology, which approximates cost on a first-in, first-out (“LIFO”FIFO”) method for valuing inventories at our primary domestic operations. Our foreign subsidiaries use either the first-in, first out method or the weighted average cost method to value inventory. Foreign inventories represent approximately 8% and 10% of total inventories as of March 31, 2016 and March 31, 2015, respectively.basis.
Reserves are provided for slow-moving or excess and obsolete inventory based on the difference between the cost of the inventory and its net realizable value and by reviewing quantities on hand in comparison
towith historical and expected future usage. In estimating the reserve for excess or
slow movingslow-moving inventory, management considers factors such as product aging, current and future customer demand and market conditions.
Property, Plant and Equipment– Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the individual assets. When property, plant and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and the resulting gain or loss is included in income from operations for the period. Generally, the estimated useful lives of assets are:
| | | | | | | | | | | |
Land improvements | 5 | to | 5 to 40 years | |
Buildings and improvements | 7 | to | 7 to 40 years | |
Plant, office and lab equipment | 5 | to | 5 to 4010 years | |
We review property, plant and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Repairs and maintenance costs are expensed as incurred, and significant improvements that either extend the useful life or increase the capacity or efficiency of property and equipment are capitalized and depreciated.
Valuation of Goodwill and Intangible Assets – Goodwill represents the excess of the aggregate purchase price over the fair The value of identifiable net assets acquired in a business combination. We test goodwill is tested for impairment at least annually as of January 31 or whenever events or circumstances indicate such assets may be impaired. The identification of our reporting units began at the operating segment level and considered whether components one level below the operating segment levels should be identified as reporting units for impairment. We first assesspurpose of testing goodwill for impairment based on certain conditions. These conditions included, among other factors, (i) the extent to which a component represents a business and (ii) the aggregation of economically similar components within the operating segments. Other factors that were considered in determining whether the aggregation of components was appropriate included the similarity of the nature of the products and services, the nature of the production processes, the methods of distribution and the types of industries served.
Accounting Standards Codification ("ASC") 350 allows an optional qualitative factorsassessment, prior to a quantitative assessment test, to determine whether it is more likely than not that the fair value of a reporting unit is less thanexceeds its carrying amount as a basis for determining whether it is necessaryamount. We bypassed the qualitative assessment and proceeded directly to perform the two-step goodwill impairmentquantitative test. Qualitative assessments use an evaluation of events and circumstances such as macroeconomic conditions, industry and market considerations, cost factors, financial performance factors, entity specific events, and changes inIf the carrying value of a
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reporting unit exceeds it fair value, the goodwill of that reporting unit is impaired and an impairment loss is recorded equal to
determine whether it is more likely than not thatthe excess of the carrying value over its fair value. We estimate the fair value of
our reporting units based on an income approach, whereby we calculate the
reporting unit is less than its carrying amount, including goodwill.CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Iffair value of a reporting unit failsbase on the qualitative assessment, then valuation models and other relevant data are used to estimate the reporting unit’s fair value. The valuation models require the inputpresent value of subjective assumptions. We use an income approach for impairment testing of goodwill and indefinite lived intangible assets, using aestimated future cash flows. A discounted cash flow method. Estimates ofanalysis requires us to make various judgmental assumptions about future revenuesales, operating margins, growth rates and expensediscount rates, which are made for five years, growth estimatesbased on our budgets, business plans, economic projections, anticipated future cash flows and market participants and are made to calculate terminalconsidered non-recurring Level III inputs within the fair value and a discount rate is used that approximates our weighted average cost of capital. We perform qualitative or quantitative assessments to test asset carrying values for impairment at January 31, which is the annual impairment testing date.hierarchy. No goodwill impairment loss was recognized as a result of the impairment tests for the fiscal years ended March 31, 2016, 20152023, 2022 or 2014.
Intangible Assets– 2021.
We have intangible assets consisting of patents, trademarks, customer lists and non-compete agreements. Definite-lived intangible assets are assessed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. In addition, we have other trademarks and license agreements that are considered to have indefinite lives. We
reviewtest indefinite-lived intangible assets
for impairment at least annually
for impairment,as of January 31 or whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. Significant assumptions used in the impairment test include the discount rate, royalty rate, future
sales projections and terminal value growth rate. These inputs are considered non-recurring
level threeLevel III inputs within the fair value hierarchy. An impairment loss would be recognized when estimated future cash flows are less than their carrying amount. We recorded
anno impairment of intangible assets
of $0, $0.7 million and $1.3 million for the
fiscal years ended March 31,
2016, 20152023, 2022 and
2014,2021, respectively.
Property Held for Investment– CapstarOne of our non-operating subsidiaries holds and manages certain excessa non-operating properties. Properties areproperty, which is valued at lower of cost or market and will be disposed of as opportunities arise to maximize value. Properties are valued at lower of cost or market.
Deferred Loan Costs – Deferred loan costs related to our credit facility, which are reported in other assets and consist of fees and other expenses associated with debt financing, are amortized over the term of the associated debt using the effective interest method.
Fair Values of Financial Instruments– Our financial instruments are presented at fair value in our consolidated balance sheets, with the exception of our long-term debt.debt, as discussed in Note 8. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied.
Assets and liabilities recorded at fair value in our consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Hierarchical levels, as defined by Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities. An asset or a liability’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Hierarchical levels are as follows:
Level I – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level II – Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
CSW INDUSTRIALS, INC
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Level III – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Recurring fair value measurements are limited to redeemable noncontrolling interest and investments in derivative instrumentsinstruments. The redemption value of the redeemable noncontrolling interest is estimated using a discounted cash flow analysis, which requires management judgment with respect to future revenue, operating margins, growth rates and reserves for contingent consideration.discount rates and is classified as Level III under the fair value hierarchy. The fair value measurements of our derivative instruments are determined using models that maximize the use of the observable market inputs including interest rate curves and both forward and spot prices for currencies, and are classified as Level II under the fair value hierarchy. The redemption value of the redeemable noncontrolling interest is discussed in Note 3. The fair values of our derivative instruments are included in Note 9. The fair value measurements10.
Leases – We determine if a contract is or contains a lease at inception by evaluating whether the contract conveys the right to control the use of our reserves for contingent considerationan identified asset. Right-of-Use (“ROU”) assets and lease liabilities are classified as Level III and are generally determined using a weighted average probability model based primarily on projected net revenues, withinitially recognized at the following exception: contingent consideration related to the acquisition of Strathmore utilized the Monte Carlo simulation methodology and employed 200,000 trials using a risk neutral Geometric Brownian Motion methodology. The volatility used in the Monte Carlo analysis wascommencement date based on the observed equity volatilitypresent value of comparable companies,remaining lease payments over the lease term calculated using our
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
incremental borrowing rate, unless the implicit rate is readily determinable. ROU assets represent the right to use an underlying asset for the lease term, including any upfront lease payments made and excluding lease incentives. Lease liabilities represent the obligation to make future lease payments throughout the lease term. As most of our operating leases do not provide an implicit rate, we apply our incremental borrowing rate to determine the present value of remaining lease payments. Our incremental borrowing rate is determined based on information available at the commencement date of the lease. The lease term includes renewal periods when we are reasonably certain to exercise the option to renew. The ROU asset is amortized over the expected lease term. Lease and non-lease components, when present on our leases, are accounted for separately. Leases with an initial term of 12 months or less are excluded from recognition in the balance sheet, and the
risk free discount rate wasexpense for these short-term leases and for operating leases is recognized on a straight-line basis over the
U.S. treasury rate corresponding to the respective term of each earn-out. The most significant factorlease term. We have certain lease contracts with terms and conditions that provide for variability in the
valuationpayment amount based on changes in facts or circumstances occurring after the commencement date. These variable lease payments are recognized in our consolidated income statements as the obligation is
Strathmore’s projected earnings before interest, taxes, depreciation and amortization.incurred. As of March 31, 2023, we did not have material leases that imposed significant restrictions or covenants, material related party leases or sale-leaseback arrangements.
Derivative Instruments and Hedge Accounting – We do not use derivative instruments for trading or speculative purposes. We enter into interest rate swap agreements for the purpose of hedging our cash flow exposure to floating interest rates on certain portions of our debt. All derivative instruments are recognized on the balance sheet at their fair values. Changes in the fair value of a designated interest rate swap are recorded in other comprehensive loss until earnings are affected by the underlying hedged item. Any ineffective portion of the gain or loss is immediately recognized in earnings. Upon settlement, realized gains and losses are recognized in interest expense in the consolidated statements of income. See Note 9 for further discussion of interest rate swaps.operations.
We discontinue hedge accounting when (1) we deem the hedge to be ineffective and determine that the designation of the derivative as a hedging instrument is no longer appropriate; (2) the derivative matures, terminates or is sold; or (3) occurrence of the contracted or committed transaction is no longer probable or will not occur in the originally expected period. When hedge accounting is discontinued and the derivative remains outstanding, we carry the derivative at its estimated fair value on the balance sheet, recognizing changes in the fair value in current period earnings. If a cash flow hedge becomes ineffective, any deferred gains or losses remain in accumulated other comprehensive loss until the underlying hedged item is recognized. If it becomes probable that a hedged forecasted transaction will not occur, deferred gains or losses on the hedging instrument are recognized in earnings immediately.
We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluations of our counterparties under forward exchange contracts and interest rate swap agreements and expect all counterparties to meet their obligations. If necessary, we
would adjust the values of our derivative contracts for our or our counterparties’ credit risk.
Pension Obligations – Determination of pension benefitsbenefit obligations is based on estimates made by management in consultation with independent actuaries. Inherent in these valuations are assumptions including discount rates, expected rates of return on plan assets, retirement rates, mortality rates and rates of compensation increase and other factors, all of which are reviewed annually and updated if necessary. Current market conditions, including changes in rates of return, interest rates and medical inflation rates, are considered in selecting these assumptions.Discount rates are estimated using high quality corporate bond yields with a duration matching the expected benefit payments. The discount rate is obtained from a universe of Aa-rated non-callable
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| bonds across the full maturity spectrum to establish a weighted average discount rate. Our discount rate assumptions are impacted by changes in general economic and market conditions that affect interest rates on long-term high-quality debt securities, as well as the duration of our plans’ liabilities.
|
The expected rates of return on plan assets are derived from reviews of asset allocation strategies, expected future experience for trust asset returns, risks and other factors adjusted for our specific investment strategy. These rates are impacted by changes in general market conditions, but because they are long-term in nature, short-term market changes do not significantly impact the rates. Changes to our target asset allocation also impact these rates.
Actuarial gains and losses and prior service costs are recognized in accumulated other comprehensive loss as they arise, and we amortize these costs into net pension expense over the remaining expected service period.
We used a measurement date of March 31 for all periods presented.
Redeemable Noncontrolling Interests - Noncontrolling interests with redemption features that are not solely within our control are considered redeemable noncontrolling interests. Our redeemable noncontrolling interest relates to Shell's 50% equity interest in the Whitmore JV and is classified in temporary equity that is reported between liabilities and shareholders' equity on our Consolidated Balance Sheets initially at its formation-date fair value. We adjust the redeemable noncontrolling interest each reporting period for the net income (or loss) attributable to the noncontrolling interest. We also make a measurement period adjustment, if any, to adjust the redeemable noncontrolling interest to the higher of the redemption value or carrying value each reporting period. These adjustments are recognized through retained earnings and are not reflected in net income or net income attributable to CSWI. The redemption value of the redeemable noncontrolling interest is estimated using a discounted cash flow analysis, which requires management judgment with respect to future revenue, operating margins, growth rates and discount rates. Net income (loss) attributable to the redeemable noncontrolling interests are presented as a separate line on the consolidated statements of operations which is necessary to identify those income (loss) specifically attributable to CSWI. The financial results and position of the redeemable noncontrolling interest acquired through the formation of the Whitmore JV are included in their entirety in our consolidated statements of operations and consolidated balance sheets beginning with the first quarter of fiscal 2022.
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When calculating earnings per share attributable to CSWI, we adjust net income attributable to CSWI for the excess portion of the measurement period adjustment to the extent the redemption value exceeds both the carrying value and the fair value of the redeemable noncontrolling interest on a cumulative basis. Refer to Note 3 for further information regarding the redeemable noncontrolling interest.
Revenue Recognition – We generallyrecognize revenues to depict the transfer of control of promised goods or services to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Refer to Note 19 for further discussion. We recognize revenue upon shipment of product, at which time title and risk of loss passes to the customer. Additionally, we require thatwhen all of the following circumstancescriteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied: a) persuasive evidencesatisfied, which are more fully described below.
(i) We identify a contract with a customer when a sales agreement indicates approval and commitment of an arrangement exists, b) pricethe parties; identifies the rights of the parties; identifies the payment terms; has commercial substance; and it is fixed or determinable, c) collectability is reasonably assured and d) delivery has occurredprobable that we will collect the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer. In most instances, our contract with a customer is the customer's purchase order. For certain customers, we may also enter into a sales agreement that outlines a framework of terms and conditions that apply to all future purchase orders for that customer. In these situations, our contract with the customer is both the sales agreement and the specific customer purchase order. Because our contract with a customer is typically for a single transaction or customer purchase order, the duration of the contract is one year or less. As a result, we have been rendered. Net revenues represent gross revenues invoicedelected to customers lessapply certain related chargespractical expedients and, as permitted by the Financial Accounting Standards Board ("FASB"), omit certain disclosures of remaining performance obligations for contractual discountscontracts that have an initial term of one year or rebates. Discountsless.
(ii) We identify performance obligations in a contract for each promised good or service that is separately identifiable from other promises in the contract and for which the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer. Goods and services provided to our customers atthat are deemed immaterial are included with other performance obligations.
(iii) We determine the point of sale are recognized as reductions in revenuetransaction price as the productsamount of consideration we expect to be entitled to in exchange for fulfilling the performance obligations, including the effects of any variable consideration.
(iv) For any contracts that have more than one performance obligation, we allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which we expect to be entitled in exchange for satisfying each performance obligation. We have excluded disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less as the majority of our contracts are sold. Rebate amountsshort-term in nature with a term of one year or less.
(v) We recognize revenue when, or as, we satisfy the performance obligation in a contract by transferring control of a promised good or service to the customer.
We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are
recordedboth imposed on and concurrent with a specific revenue-producing transaction and collected from a customer. As such, we present revenue net of sales and other similar taxes. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as
reduction of revenue on a
monthly basis using estimates of customer participationfulfillment cost and
performance. Freight charges billed to customers are included in net revenues and the related shipping costs are included in cost of
revenuesrevenues. Costs to obtain a contract, which include sales commissions recorded in
our consolidated statements of income.selling, general and administrative expense, are expensed when incurred as the amortization period is one year or less. We do not have customer contracts that include significant financing components.
Research and Development ("R&D") – Research and developmentR&D costs are expensed as incurred. Costs incurred for research and developmentR&D primarily include salaries and benefits and consumable supplies, as well as rent, professional fees, utilities and the depreciation of property and equipment used in research and developmentR&D activities. Research and developmentR&D costs included in selling, general and administrative expense were $4.5$4.8 million, $5.7$4.8 million and $5.5$4.5 million for the fiscal years ended March 31, 2016, 20152023, 2022 and 2014,2021, respectively.
Share-based Compensation – Share-based compensation is measured at the grant-date fair value. The exercise price of stock option awards and the fair value of restricted share awards are set at the closing price of our common stock on the NASDAQ StockNasdaq Global Select Market LLC on the date of grant, which is the date such grants are authorized by our Board of Directors. The fair value of performance-based restricted share awards is determined using a Monte Carlo simulation model incorporating all possible outcomes against a defined peer group.the Russell 2000 Index. The fair value of share-based payment arrangements is amortized on a straight-line basis to compensation expense over the period in which the restrictions lapse based on the expected number of shares that will vest. To cover the exercise of options and vesting of restricted shares, we generally issue new shares from our authorized but unissued share pool, although we may instead issue treasury shares in certain circumstances.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes, Deferred Taxes, Tax Valuation Allowances and Tax Reserves – We apply the liability method in accounting and reporting for income taxes. Under the liability approach, deferred tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax rates expected to be in effect when these differences are expected to reverse. The effect on deferred tax assets and liabilities resulting from a change in tax rates is recognized in the period that includes the enactment date. The deferred income tax assets are adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent, based on available evidence, that it is more likely than not to be realized. This analysis isCSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
performed on a jurisdictional basis and reflects our ability to utilize these deferred tax assets through a review of past, current and estimated future taxable income in addition to the establishment of viable tax strategies that will result in the utilization of the deferred assets.
We recognize income tax related interest and penalties, if any, as a component of income tax expense.
Unremitted Earnings – We consider During the fiscal quarter ended March 31, 2023, we lifted our assertion that the earnings of non-U.S. subsidiaries to beGreco Canada are indefinitely invested outside of the United States onU.S. During the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs andfiscal quarter ended March 31, 2019, we lifted our specific plans for reinvestment of those subsidiary earnings. Should we decide to repatriate foreign earnings, a deferred tax liability will be recorded and our income tax provision will be adjusted in the period we determinedassertion that the earnings will no longer beof our United Kingdom ("U.K.") and Australian subsidiaries were indefinitely invested outside of the U.S. During the fiscal quarter ended September 30, 2020, we lifted our assertion that the earnings of our Jet Lube Canada subsidiary were indefinitely invested outside of the U.S. We provide deferredassert that the foreign earnings of the U.K., Australian, Vietnam and Canada subsidiaries will be remitted to the U.S. through distributions, and have made provisions for taxes forthat may become payable upon distribution of earnings accordingly. As of March 31, 2023, we are not indefinitely reinvested outside of the temporary differences associated with our investment in foreign subsidiaries that have a financial reporting basis that exceeds tax basis, unless we can assert permanent reinvestment in foreign jurisdictions. Financial reporting basis and tax basis differences in investments in foreign subsidiaries consist of both unremitted earnings and losses, as well as foreign currency translation adjustments.U.S.
Uncertain Tax Positions – We establish income tax liabilities to remove some or all of the income tax benefit of any of our income tax positions based upon one of the following: (1) the tax position is not “more likely than not” to be sustained, (2) the tax position is “more likely than not” to be sustained, but for a lesser amount or (3) the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. The amount of income taxes we pay is subject to ongoing audits by federal, state, and foreign taxing authorities, which often result in proposed assessments. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various taxing authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
For the fiscal year ended March 31, 2016, we recognized an uncertain tax position related to state taxes in the amount of $0.9 million, and we recognized $0.4 million in interest and penalties in income tax expense. We did not recognize any uncertain tax positions or interest and penalties in income tax expense for the fiscal years ended March 31, 2015 or 2014.
Earnings Per Share – We use the two-class method of calculating earnings per share, which determines earnings per share for each class of common stock and participating security as if all earnings of the period had been distributed. AsIf the holders of restricted stock awards are entitled to vote and receive dividends during the restriction period, unvested shares of restricted stock qualify as participating securities and, accordingly, are included in the basic computation of earnings per share. Our unvested restricted shares participate on an equal basis with common shares; therefore, there is no difference in undistributed earnings allocated to each participating security. Accordingly, the presentation in Note 811 is prepared on a combined basis and is presented as earnings per common share. Diluted earnings per share is based on the weighted average number of shares as determined for basic earnings per share plus shares potentially issuable in conjunctionconnection with stock options.options and restricted stock awards not entitled to vote and receive dividends during the restriction period.
Foreign Currency Translation– Assets and liabilities of our foreign subsidiaries are translated to U.S. dollars at exchange rates prevailing at the balance sheet date, while income and expenses are translated atCSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
average rates for each month. Translation gains and losses are reported as a component of accumulated other comprehensive loss. Transactional currency gains and losses arising from transactions in currencies other than our sites’ functional currencies are included in our consolidated statements of income.
operations.
Transaction and translation gains and losses arising from intercompany balances are reported as a component of accumulated other comprehensive loss when the underlying transaction stems from a long-term equity investment or from debt designated as not due in the foreseeable future. Otherwise, we recognize transaction gains and losses arising from intercompany transactions as a component of income.
Segment Reporting –
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segments - We conduct our operations through three business segments based on type of product and how we manage the business. The products for our segments are distributed both domestically and internationally. For decision-making purposes, ourOur Chief Executive Officer views our business, assesses performance and other members of senior executive management useallocates resources using financial information generated and reported at the reportable segment level. We evaluate segment performance and allocate resources based on each reportable segment’ssegment's operating income. Our reportable segments are as follows: Industrial Products includes specialty mechanical
1.Contractor Solutions, whichmanufactures efficiency and performance enhancing products firepredominantly for residential and smoke protectioncommercial HVAC/R and plumbing applications, which are designed primarily for the professional trades. This segment is comprised primarily of our RectorSeal and Shoemaker operating companies.
2.Engineered Building Solutions, whichprovides primarily code-driven products architecturally-specified building productsfocused on life safety that are engineered to provide aesthetically-pleasing solutions for the construction, refurbishment and storage, filtrationmodernization of commercial, institutional, and application equipment for use with our specialty chemicals and other products for general industrial application.
Coatings, Sealants & Adhesivesmulti-family residential buildings. This segment is comprised of coatingsour Balco, Greco and penetrants, pipe thread sealants, firestopping sealantsSmoke Guard operating companies.
3.Specialized Reliability Solutions, whichprovides products for increasing the reliability, performance and caulkslifespan of industrial assets and adhesives/solvent cements.
Specialty Chemicals includes lubricantssolving equipment maintenance challenges. This segment is comprised primarily of our Whitmore operating company and greases, drilling compounds, anti-seize compounds, chemical formulations and degreasers and cleaners.the Whitmore JV.
Intersegment sales and transfers are recorded at cost plus a profit margin, with the
salesrevenues and related margin on such sales eliminated in consolidation. We do not allocate
share-based compensation expense, interest expense, interest income or other
(expense) income, net to our segments. Our corporate headquarters does not constitute a separate segment. The Eliminations and Other segment information is included to reconcile segment data to the consolidated financial statements and includes assets and expenses primarily related to
CapStarcorporate functions and
corporate functions.excess non-operating properties.
Pronouncements Implemented
In
May 2014,October 2021, the Financial Accounting Standards Board
(“FASB”("FASB") issued
an Accounting Standards Update
(“ASU”("ASU") No.
2014-09, “Revenue2021-08, "Accounting for Contract Assets and Contract Liabilities from Contracts with
Customers (Topic 606),” which was subsequently amended by ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),”Customers." This update improves comparability for both the recognition and
ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” ASU No. 2014-09, as amended, supersedesmeasurement of acquired customer revenue contracts at the
revenue recognition requirements in “Revenue Recognition (Topic 605).” The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. There are also expanded disclosure requirements in this ASU. In July 2015, the FASB voted to delay the effective date of
ASU 2014-09 by one year. Asand after a
result, public entities will apply the new standardbusiness combination. The amendments are effective for
annual reporting periodsfiscal years beginning after December 15,
2017,2022, including interim periods within those
reporting periods. Early adoption as of the original public entity effective date is permitted. We are currently evaluating the impact of ASU No. 2014-09 on our consolidated financial conditionfiscal years and
results of operations.In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” This ASU requires debt issuance costs be presented in the
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
balance sheet as a direct deduction from the carrying value of the associated debt liability. Amortization of those costs should be reported as interest expense. This ASU is effective for financial statements issued for annual and interim periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The new guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company early adopted the ASU 2021-08 on a retrospectiveprospective basis for each period presented in the balance sheet. We doon April 1, 2022 and did not believe that adoption of this ASU will have a material impact on our condensed consolidated financial condition and results of operations.
statements.
In
April 2015,March 2020, the FASB issued ASU
No. 2015-05, “Intangibles – Goodwill2020-04, "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
Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.”London Interbank Offered Rate ("LIBOR"). This ASU
provides guidanceincludes practical expedients for contract modifications due to
customers about whether a cloud computing arrangement includes software. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangementreference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not
includerequire remeasurement or reassessment of a
software license,previous accounting determination at the
customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts.modification date. This ASU is effective for
annual periods,all entities through December 31, 2022. In December 2022, the FASB issued ASU 2022-06 to defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. As discussed in Note 8, the Company terminated our interest rate swap agreement in January 2023 and therefore, will not apply the practical expedients and exceptions as required by the ASU. As discussed in Note 8, the Company’s Second Amendment replaced the LIBOR Rate with individualized metrics based on the specific denomination of borrowings, including
interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. We adopteda metric based on Term SOFR (as defined in the
amendmentsSecond Credit Agreement) for borrowings denominated in U.S. Dollars. The transition of
this ASU for the year ended March 31, 2016, and itLIBOR did not have a material impact on our consolidated financial
condition and results of operations.In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement Period Adjustments,” which eliminates the requirement to retrospectively account for measurement period adjustments related to a business combination. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and is to be applied prospectively. Earlystatements. The adoption is permitted. We adopted the amendments of this ASU for the year ended March 31, 2016, and it did not have an impact on our consolidated financial condition and results of operations.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification
Table of Deferred Taxes,” which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016, and may be applied prospectively or retrospectively. Early adoption is permitted. We retrospectively adopted the amendments of this ASU as of March 31, 2016, and as a result, $2.7 million of current deferred tax assets that were included in prepaid expenses and other current assets at March 31, 2015 have been reclassified to noncurrent deferred tax assets, which are included in other assets in the consolidated balance sheet.In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Modified retrospective application is permitted with certain practical expedients. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2016-02 on our consolidated financial condition and results of operations.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718),” which simplifies the accounting for share-based compensation. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences,
Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2016-09 on our consolidated financial condition and results of operations.
AC Leak Freeze
2. ACQUISITIONS
Falcon Stainless, Inc.
On December 16, 2015,October 4, 2022, we acquired substantially all100% of the outstanding equity of Falcon Stainless, Inc ("Falcon"), based in Temecula, California, for an aggregate purchase price of $37.1 million (including $1.0 million cash acquired), comprising cash consideration of $34.6 million and an additional payment of $2.5 million due one-year from the acquisition date assuming certain business conditions are met. The cash consideration was funded with cash on hand and borrowings under our existing Revolving Credit Facility (as defined in Note 8). Falcon's products are well-known among the professional trades for supplying enhanced water flow delivery and supplement our Contractor Solutions segment's existing product portfolio.
The Falcon acquisition was accounted for as a business combination under FASB Accounting Standards Codification Topic 805, Business Combinations ("Topic 805"). The excess of the purchase price over the preliminary fair value of the identifiable assets acquired was $17.4 million allocated to goodwill, which represents the value expected to be obtained from owning products that are complementary to our existing plumbing offerings and provide a meaningful value proposition to our customers. The preliminary allocation of the fair value of the assets acquired comprises customer lists ($17.7 million), trademarks ($4.7 million), accounts receivable ($1.4 million), cash ($1.0 million), inventory ($0.7 million), other current asset ($0.1 million) and other assets ($2.9 million), net of current liabilities (0.5 million) and other liabilities ($8.3 million). Customer lists are being amortized over 15 years, while trademarks and goodwill are not being amortized. The Company's evaluation of the facts and circumstances available as of October 4, 2022, to assign fair values to assets acquired is ongoing. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date. Goodwill and all intangible assets are not deductible for income tax purposes. Falcon activity has been included in our Contractor Solutions segment since the acquisition date. No pro forma information has been provided due to immateriality.
Cover Guard, Inc. and AC Leak FreezeTMGuard, Inc.
On July 8, 2022, we acquired the assets of Cover Guard, Inc. (“Leak Freeze”CG”) and AC Guard, Inc. ("ACG"), based in Baltimore, MarylandOrlando, Florida, for $16.3an aggregate purchase price of $18.4 million, incomprised of cash consideration of $18.0 million and additional contingent considerations initially measured at $0.4 million based on CG and ACG meeting defined financial targets over a period of 5 years. In conjunction with the acquisition, we agreed to pay an additional $3.7 million, comprised of cash consideration of $1.5 million and 5-year annuity payments (value of $2.2 million) to a third party to secure the related intellectual property. The total cash consideration at closing of $19.5 million was funded bywith cash on hand and borrowings under CSWI’sour existing Revolving Credit Facility (discussed(as defined in Note 7)8). Leak FreezeCG and ACG product lines further expand Contractor Solutions’ offering of leading HVAC/R accessories, including lineset covers and HVAC/R condenser protection cages. Through these differentiated products, our Contractor Solutions segment expects to achieve incremental ductless and ducted HVAC/R market penetration. As of the acquisition date, the estimated fair value of the contingent consideration was classified as a long-term liability of $0.4 million and was determined using an option pricing model simulation that determines an average projected payment value across numerous iterations.
The CG and ACG acquisition was accounted for as a business combination under Topic 805. The excess of the purchase price over the preliminary fair value of the identifiable assets acquired was $1.7 million allocated to goodwill, which represents the value expected to be obtained from owning products that are complementary to our existing HVAC/R and plumbing offerings and provide a meaningful value proposition to our customers. The preliminary allocation of the fair value of the assets acquired included customer lists ($9.8 million), patent ($1.8 million), trademarks ($0.7 million), inventory ($3.1 million), accounts receivable ($1.0 million) and equipment ($0.3 million). Customer lists and patents are being amortized over 15 years and 10 years, respectively, while trademarks and goodwill are not being amortized. The Company's evaluation of the facts and circumstances available as of July 8, 2022, to assign fair values to assets acquired is ongoing. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date. Goodwill and all intangible assets are deductible and amortized over 15 years for income tax purposes. CG and ACG activity has been included in our Contractor Solutions segment since the acquisition date. No pro forma information has been provided due to immateriality.
The additional $3.7 million we agreed to pay a leading manufacturerthird party was accounted for as an acquisition of original equipment manufacturer-approved air conditioningintellectual property and refrigerant leak repair solutions.will be amortized over 15 years.
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shoemaker Manufacturing, LLC
On December 15, 2021, we acquired 100% of outstanding equity of Shoemaker Manufacturing, LLC (“Shoemaker”), based in Cle Elum, Washington, for an aggregate purchase price of $43.6 million, including working capital and closing cash adjustments and expected contingent consideration. Shoemaker offers high-quality customizable GRD for commercial and residential markets, and expands CSWI’s HVAC/R product offering and regional exposure in the northwest U.S. The aggregate purchase price was comprised of cash consideration of $38.6 million (including $1.2 million cash acquired), 25,483 shares of the Company's common stock valued at $3.0 million at transaction close and additional contingent consideration of up to $2.0 million based on Shoemaker meeting a defined financial target during the quarter ended March 31, 2022, which was achieved. The cash consideration was funded with cash on hand and borrowings under our existing Revolving Credit Facility. The 25,483 shares of common stock delivered to the sellers as consideration were issued from treasury shares. As of the acquisition date, the estimated fair value of the contingent consideration obligation was classified as a current liability of $2.0 million and was determined using a scenario-based analysis on forecasted future results. In May 2022, the full earn-out amount of $2.0 million was remitted to the sellers due to the performance obligation had been met. During the year ended March 31, 2022, we incurred $0.7 million in transaction expenses in connection with the Shoemaker acquisition, which were included in selling, general and administrative expenses in the Consolidated Statement of Operations under the Contractor Solution segment.
The Shoemaker acquisition was accounted for as a business combination under Topic 805. The excess of the purchase price over the fair value of the identifiable assets acquired was
$5.7$8.1 million
and was allocated to goodwill, which
will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from
owning a more extensive
specialty chemicalGRD product portfolio for the
HVACHVAC/R market and
leveraging our larger distributor network.increased regional exposure to the northwest U.S. The
preliminary allocation of the fair value of the
net assets acquired included customer lists
($23.0 million), trademarks
($6.5 million), noncompete agreements ($0.7 million), backlog ($0.3 million), inventory ($3.6 million), accounts receivable ($1.7 million), cash ($1.2 million), equipment ($1.4 million) and
trade names and a non-compete agreementprepaid expenses ($0.2 million), net of
$8.1 million, $1.4 million and $0.2 million, respectively, as well as inventory in the amount of $0.7 million.current liabilities ($3.1 million). Customer lists,
noncompete agreements and
the non-compete agreementbacklog are being amortized over
1015 years, 5 years and
five years,1 month, respectively, while trademarks
and trade names and goodwill are not being amortized.
Leak FreezeThe Company completed the analysis of tangible assets, intangible assets, liabilities assumed and the related allocation during the three months ended December 31, 2022. Goodwill and all intangible assets are deductible and amortized over 15 years for income tax purposes. Shoemaker activity has been included in our
Specialty ChemicalsContractor Solutions segment since the acquisition date. No
pro formaproforma information has been provided due to immateriality.
Deacon
On October 1, 2015,December 15, 2020, we acquired substantially all100% of the assetsoutstanding equity of DeaconT.A. Industries, Inc. (“Deacon”TRUaire”), a leading manufacturer of grilles, registers, and diffusers for the residential and commercial HVAC/R end market, based in Washington, Pennsylvania for $12.6 million.Santa Fe Springs, California. The acquisition also included TRUaire’s wholly-owned manufacturing facility based in Vietnam. The acquisition extended the Company’s product offerings to the HVAC market and provided strategic distribution facilities.
The contractual consideration paid for TRUaire included cash of $288.0 million (after working capital and closing cash adjustments) and 849,852 shares of the Company’s common stock 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 by $11.0 millionthrough a combination of cash on hand and borrowings under our Revolving Credit Facility. The 849,852 shares of common stock delivered to the RectorSeal Linesellers as consideration were reissued from treasury shares.
| | | | | |
Acquisition Consideration (Amounts in thousands, except for shares) | |
| Cash (a) | $ | 287,986 | |
| Common stock (849,852 shares) | 97,656 | |
| Total consideration transferred | $ | 385,642 | |
(a) Amount includes working capital and closing cash adjustments and includes a $1.0 million to be paid to the sellers as a result of Creditan expected tax refund pursuant to the purchase agreement.
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The TRUaire acquisition was accounted for as a business combination under Topic 805. Pursuant to Topic 805, the Company allocated the TRUaire purchase price to tangible and $1.1 million cashidentifiable intangible assets acquired and liabilities assumed based on hand.their estimated fair values as of the acquisition date, December 15, 2020. The remaining $0.5 millionexcess of the purchase price represents a payment contingent uponover those fair values was recorded to goodwill. The Company completed the achievementanalysis of certain performance metricstangible assets, intangible assets, liabilities assumed and the related allocation during the fiscal year endingthree months ended December 31, 2021. The following table summarizes the Company's estimate of the aggregate fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands).
| | | | | | | | | | | | | | | | | | | | |
| | Initial Estimated Fair Value | | Measurement Period Adjustments | | Updated Estimated Fair Value |
| Cash | | $ | 1,471 | | | $ | — | | | $ | 1,471 | |
| Accounts Receivable, net | | 13,467 | | | (17) | | | 13,450 | |
| Inventory | | 46,313 | | | (1,300) | | | 45,013 | |
| Short-Term Tax Indemnity Assets | | 5,000 | | | — | | | 5,000 | |
| Other Current Assets | | 1,285 | | | 2,103 | | | 3,388 | |
| Property, Plant and Equipment | | 28,832 | | | (4,201) | | | 24,631 | |
| Trade Name (indefinite life) | | 43,500 | | | — | | | 43,500 | |
| Customer Lists (useful life of 15 years) | | 194,000 | | | 8,500 | | | 202,500 | |
| Right-Of-Use Assets | | 49,040 | | | — | | | 49,040 | |
| Long-Term Tax Indemnity Assets | | 7,500 | | | — | | | 7,500 | |
| Other Long-term Assets | | 2,850 | | | (698) | | | 2,152 | |
| Accounts Payable | | (4,074) | | | — | | | (4,074) | |
| Accrued and Other Current Liabilities | | (3,678) | | | (172) | | | (3,850) | |
| Lease Liabilities - Short-Term | | (4,811) | | | — | | | (4,811) | |
| | | | | | |
| Deferred Tax Liabilities | | (56,249) | | | (3,784) | | | (60,033) | |
| Tax Contingency Reserve | | (22,511) | | | 5,190 | | | (17,321) | |
| Lease Liabilities - Long-Term | | (45,369) | | | — | | | (45,369) | |
| Estimated fair value of net assets acquired | | 256,566 | | | 5,621 | | | 262,187 | |
| Goodwill | | 129,169 | | | (5,714) | | | 123,455 | |
| Total Purchase Price | | $ | 385,735 | | | $ | (93) | | | $ | 385,642 | |
Deferred tax liabilities were established to record the deferred tax impact of purchase price accounting adjustments, primarily related to intangibles assets. Tax contingency reserves relate to uncertain tax positions TRUaire took in the periods prior to the acquisition date.
In accordance with the tax indemnification included in the purchase agreement of TRUaire, the seller provided contractual indemnification to the Company for up to $12.5 million related to uncertain tax positions taken in prior years. During the three months ended March 31, 2017. Deacon2021, TRUaire received an audit closing letter from Internal Revenue Service related to calendar 2017, a pre-acquisition tax year. As a result of this, $5.0 million of the relevant tax indemnification was released in accordance with the purchase agreement. The release of the relevant uncertain tax position accrual of $5.3 million was recorded as an income tax benefit for the three months ended March 31, 2021, and the offsetting indemnification expense of $5.0 million was recorded in other expense on the consolidated statement of operations. As of March 31, 2023, $7.5 million tax indemnification asset remains outstanding and is a leading manufacturerreported in our condensed consolidated balance sheets in prepaid expenses and other current assets. This tax indemnification asset will either be settled by or expire on December 15, 2023.
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill of industrial end markets, both on an emergency and maintenance basis. The$123.5 million represents the excess of the purchase price over the fair value of the identifiableunderlying tangible and intangible assets acquired was $4.1 million and was allocated toliabilities assumed. The acquisition goodwill which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from aexpanding the Company’s product offerings more extensive sealant and injectable packing product portfolio and leveraging our larger distributor network.broadly across the HVAC end market. The allocationgoodwill recorded as part of the fair value of the assets acquiredthis acquisition is included customer lists, know-how, trademarks and trade names and a non-compete agreement of $2.9 million, $2.6 million, $1.1 million, and $0.1 million, respectively, as well as property, plant, and equipment and inventory in the amounts of $0.9 millionContractor Solutions segment. The goodwill associated with the acquisition will not be amortized for financial reporting purposes and $0.5 million, respectively. Customer lists, know-how and the non-compete agreement are being amortized over 15 years, 10 years and five years, respectively, while trademarks and trade names and goodwill arewill not being amortized. Deaconbe deductible for income tax purposes.
TRUaire activity has been included in our
Coatings, Sealants & AdhesivesContractor Solutions segment since the acquisition date.
No pro forma information has been provided due to immateriality.Strathmore Products, Inc.
Effective April 1, 2015, we acquiredDuring the assets of Strathmore, a leading manufacturer of specialized industrial coating products including urethanes, epoxies, acrylics and alkyds, for $68.8 million, plus up to an additional $16.5 million within a prescribed period of time followingyears ended March 31, 2017, depending on the achievement of certain performance metrics during the fiscal years ending2022 and March 31, 20162021, the Company incurred and 2017. A liability
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of $2.0paid $0 and $7.8 million was recorded at acquisition based on the projected achievement of the performance metrics as estimated using the Monte Carlo simulation methodology. This liability was reduced to $0 during the quarter ended December 31, 2015 based on expected achievement of performance metrics. The acquisition was funded from borrowings of $70.0 million (as discussed in Note 7). Transaction costs incurredtransaction expenses in connection with the acquisition were $2.7 million (including $0.2 million incurred duringTRUaire acquisition. Effective April 1, 2022, TRUaire was fully integrated with RectorSeal, the fiscalprimary operating company of the Contractor Solutions segment.
Pursuant to Topic 805, unaudited supplemental proforma results of operations for the year ended March 31,
2015) and2021 as if the acquisition of TRUaire had occurred on April 1, 2019 are
reported in selling, general and administrative expense in the accompanying consolidated statements of income. The preliminary excess of the purchase price over the fair value of the identifiable assets acquired was $15.1 million and was allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be achieved from an increased market presence in the industrial coatings sector and a platform from which to grow through end-market and geographic expansion. During the quarter ended December 31, 2015, a measurement period adjustment was recorded to recognize $2.7 million in prepaid compensation cost, which reduced the preliminary estimate of goodwill to $12.4 million. Prepaid compensation is being amortized ratably to expense over the vesting period, which ends March 31, 2018. The preliminary fair value of the assets acquired included trade names and trademarks, customer relationships and non-compete agreements of $14.9 million, $27.4 million and $0.4 million, respectively. During the quarter ended March 31, 2016, we finalized our allocation of the purchase price and recorded a measurement period adjustment, which resulted in a change in the fair values of customer relationships and trade names and trademarks to $23.7 million and $13.6 million, respectively, which resulted in an increase of $5.0 million to goodwill. Customer relationships and the non-compete agreements are being amortized over 15 years and five years, respectively, while trade names, trademarks and goodwill are not being amortized.The following table summarizes the fair values of assets acquired and liabilities assumed (in thousands):
| | | | |
Accounts receivable | | $ | 4,902 | |
Inventory | | | 8,447 | |
Property, plant and equipment | | | 3,761 | |
Intangible assets | | | 37,650 | |
Other, net | | | 2,941 | |
Current liabilities | | | (4,297 | ) |
| | | | |
Net tangible and intangible assets | | | 53,404 | |
Goodwill | | | 17,395 | |
| | | | |
Purchase price | | $ | 70,799 | |
| | | | |
Strathmore has been included in the Coatings, Sealants & Adhesives segment since its effective acquisition date. Net revenue attributable to Strathmore since the date of acquisition was $52.9 million. Pro forma information regarding Strathmore is providedpresented below (in thousands, except per share amounts):
| | | | | | | | |
| | | Fiscal Years Ended March 31, | |
| | | 2016 | | | 2015 | |
Revenues, net | | $ | 319,831 | | | $ | 325,025 | |
Operating income | | | 47,486 | | | | 50,443 | |
Net income | | | 25,471 | | | | 32,012 | |
Earnings per share – Basic | | | 1.63 | | | | 2.05 | |
Earnings per share – Diluted | | | 1.62 | | | | 2.05 | |
SureSeal Manufacturing
On January 2, 2015, we acquired selected assets
| | | | | | |
| Year Ended March 31, 2021 |
| Revenue, net | $ | 495,788 | | |
| Net income | 47,648 | | |
| | |
| Net earnings per common share: | | |
| Diluted | $ | 3.03 | | |
| Basic | 3.05 | | |
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:
•Additional depreciation expense of $0.4 million that would have been recognized as a result of the fair value step-up of the property, plant and equipment;
•Additional amortization expense of $9.6 million that would have been recognized as a result of the SureSeal brand from SureSeal Manufacturing in Tacoma, Washington,allocation of purchase consideration to customer lists subject to amortization;
•Estimated additional interest expense of $3.3 million as a producer and distributorresult of waterless floor drain trap seals for an initial purchase priceincurring additional borrowing;
•Income tax effect of the proforma adjustments calculated using a blended statutory income tax rate of 24.5% of $3.2 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$8.1 million. Of
3. CONSOLIDATION OF VARIABLE INTEREST ENTITY AND REDEEMABLE NONCONTROLLING INTEREST
Whitmore Joint Venture
On April 1, 2021, Whitmore Manufacturing, LLC (“Whitmore”), a wholly-owned subsidiary of CSWI, completed the total purchase price, $3.2 million has been paid using $2.9 million funded from borrowings and $0.3formation of a joint venture (the "Whitmore JV") with Pennzoil-Quaker State Company dba SOPUS Products (“Shell”), a wholly-owned subsidiary of Shell Oil Company that comprises Shell’s U.S. lubricants business. The formation was consummated through a transaction in which Whitmore sold to Shell a 50% interest in a wholly-owned subsidiary (containing certain existing operating assets) in exchange for consideration of $13.4 million from available cash. The remaining purchase price is contingent upon SureSeal achieving certain performance metrics duringShell in the three- and six-year periods following the acquisition, and is based on a multipleform of the lesser of gross margin or 67% of net sales during the final 12 months of the measurement period. A liability of $4.9 million was originally recorded based on the achievement of the performance metrics as estimated using a weighted average probability model. The excess of the purchase price over the fair value of the identifiable assets acquired was $4.5 million and was allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from a more extensive product portfolio and leveraging our larger distributor network. The identifiable tangiblecash ($5.3 million) and intangible assets included customer lists, trademarks($8.1 million). The Whitmore JV has been consolidated into the operations of the Company and names, patents and a non-compete agreement of $1.8 million, $0.9 million, $0.6 million, and $0.1 million, respectively, as well as equipment of $0.2 million. Patents, customer lists and the non-compete agreement are being amortized over 15 years, 10 years and five years, respectively, while trademarks and goodwill are not being amortized. The SureSeal product lineits activity has been included in the Industrial Productsour Specialized Reliability Solutions segment since the formation date.
The Whitmore JV is deemed to be a VIE as the equity investors at risk, as a group, lack the characteristics of a controlling financial interest. The major factor that led to the conclusion that the Company is the primary beneficiary of this VIE is that Whitmore has the power to direct the manufacturing activities, which are considered the most significant activities for the Whitmore JV. Whitmore JV's total net assets are presented below (in thousands):
| | | | | |
| March 31, 2023 |
| Cash | $ | 7,519 | |
| Accounts receivable, net | 7,376 | |
| Inventories, net | 2,971 | |
| Prepaid expenses and other current assets | 115 | |
| Property, plant and equipment, net | 11,923 | |
| Intangible assets, net | 6,478 | |
| Other assets | 137 | |
| Total assets | $ | 36,519 | |
| |
| Accounts payable | $ | 6,274 | |
| Accrued and other current liabilities | 1,417 | |
| Other long-term liabilities | 66 | |
| Total liabilities | $ | 7,757 | |
For the year ended March 31, 2023, the Whitmore JV generated net income of $0.3 million.
The Whitmore JV's LLC Agreement contains a put option that gives either member the right to sell its
acquisition date. No pro forma information has been provided due50% equity interest in the Whitmore JV to
immateriality.Evo-Crete and Polyslab product lines
On August 15, 2014, we acquired the Evo-Crete and Polyslab product lines for $4.5 million fromother member at a dollar amount equivalent to 90% of the Evolve Group located in Brisbane, Queensland and formed a new entity, RectorSeal Australia, Pty. Ltd. RectorSeal Australia focusesinitiating member's equity interest determined based on the plumbing, HVAC and irrigation markets. Evo-Crete and Polyslab continue to be manufactured in Australia. The purchase was funded from borrowings of $3.0 million with the remainder funded from internal working capital. The excess of the purchase price over the fair market value of the identifiable assets acquired was $1.5 million and was allocatedWhitmore JV's net assets. This put option can be exercised, at either member's discretion, by providing written notice to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expectedother member after three years from the Whitmore JV's formation, subject to be obtained from a more extensive HVAC product portfolio, especially incertain timing restrictions. This redeemable noncontrolling interest is recorded at the condensate management niche, and expansion of existing RectorSeal product sales into the Australian market. The fair valuehigher of the assets acquired included customer lists, patents, trademarks and a non-compete agreementredemption value or carrying value each reporting period. Changes in redeemable noncontrolling interest for the year ended March 31, 2023 were as follows (in thousands):
| | | | | |
| Balance at March 31, 2022 | $ | 15,325 | |
| |
| Net income attributable to redeemable noncontrolling interest | 139 | |
| Contributions from noncontrolling interest | 3,000 | |
| |
| |
| Balance at March 31, 2023 | $ | 18,464 | |
Table of $1.2 million, $0.7 million, $0.4 million, and $0.1 million, respectively, as well as property, plant, and equipment in the amount of $0.7 million. Customer lists, patents and the non-compete agreement are being amortized over 15 years, 10 years and five years, respectively, while trademarks and goodwill are not being amortized. The RectorSeal Australia activity has been included in the Industrial Products segment since the acquisition date. No pro forma information has been provided due to immateriality.Fluid Defense Systems, LLC.
On January 31, 2014, we acquired the assets of Fluid Defense Systems, LLC (“Fluid Defense”), a manufacturer of fully integrated lubricant storage and handling solutions sold under the Oil Safe® brand, for $5.6 million. The purchase was funded from borrowings of $5.0 million with the remainder funded from available cash. The excess of the purchase price over the fair value of the identifiable assets acquired was $1.7 million and was allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from a more extensive lubrication solution product portfolio and leveraging our larger distributor network. The fair value of the assets acquired included customer lists, trademarks and patents and technology of $1.1 million, $1.0 million and $0.1 million, respectively, as well as working capital and property, plant, and equipment in the amounts of $1.4 million and $0.3 million, respectively. Trademarks, customer lists and patents and technology are being amortized over 20 years, 10 years and five to seven years, respectively, while goodwill is not being amortized. Fluid Defense activity has been included in the Industrial Products segment since the acquisition date. No pro forma information has been provided due to immateriality.
Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Resource Conservation Technologies, Inc.
On January 2, 2014,
4. GOODWILL AND INTANGIBLE ASSETS
During the three months ended June 30, 2021, we
acquired the assetsrevised our segment structure creating three reportable segments: Contractor Solutions, Engineered Building Solutions and Specialized Reliability Solutions. As part of
Resource Conservation Technologies, Inc. (“RCT”) for $18.5 millionour segment realignment, we changed our reporting units and reallocated existing goodwill to
enhance product offerings to the HVAC market. The purchase was funded from borrowings of $18.3 million with the remainder funded from available cash. The excesseach of the
purchase price overnew reportable segments and associated reporting units, based on management's estimate of the
relative fair value of
the identifiable assets acquired was $8.5 million and was allocated toeach reporting unit. The result of this reallocation of goodwill
which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from a more extensive HVAC product portfolio and leveraging our larger distributor network. The fair value of the assets acquired included customer lists, patents, trademarks and a non-compete agreement of $5.8 million, $2.3 million, $1.7 million, and $0.1 million, respectively, as well as property, plant, and equipment in the amount of $0.1 million. Customer lists, patents and the non-compete agreement are being amortized over 10 years, five to 16 years and five years, respectively, while trademarks and goodwill are not being amortized. RCT activity has been
included in the Industrial Productsrecast, by reportable segment,
since the acquisition date. No pro forma information has been provided due to immateriality.3. | GOODWILL AND INTANGIBLE ASSETS |
as of March 31, 2021.
The changes in the carrying amount of goodwill for the
fiscal years ended March 31,
20162023 and
20152022 were as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | | Industrial
Products | | | Coatings,
Sealants and
Adhesives | | | Specialty
Chemicals | | | Total | |
Balance at April 1, 2014 | | $ | 30,996 | | | $ | 920 | | | $ | 3,402 | | | $ | 35,318 | |
Acquisition of SureSeal | | | 4,502 | | | | — | | | | — | | | | 4,502 | |
Currency translation and other | | | 825 | | | | — | | | | — | | | | 825 | |
| | | | | | | | | | | | | | | | |
Balance at March 31, 2015 | | | 36,323 | | | | 920 | | | | 3,402 | | | | 40,645 | |
| | | | | | | | | | | | | | | | |
Acquisition of Strathmore | | | — | | | | 17,395 | | | | — | | | | 17,395 | |
Acquisition of Deacon | | | — | | | | 4,105 | | | | — | | | | 4,105 | |
Acquisition of Leak Freeze | | | — | | | | — | | | | 5,741 | | | | 5,741 | |
Currency translation | | | (129 | ) | | | — | | | | — | | | | (129 | ) |
| | | | | | | | | | | | | | | | |
Balance at March 31, 2016 | | $ | 36,194 | | | $ | 22,420 | | | $ | 9,143 | | | $ | 67,757 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Total |
| Balance at April 1, 2021 | | $ | 169,345 | | | $ | 22,238 | | | $ | 27,212 | | | $ | 218,795 | |
| Goodwill re-allocation | | 14,813 | | | 2,727 | | | (17,540) | | | — | |
| TRUaire acquisition | | (2,099) | | | — | | | — | | | (2,099) | |
| Shoemaker acquisition | | 8,115 | | | — | | | — | | | 8,115 | |
| Currency translation | | (22) | | | 42 | | | (173) | | | (153) | |
| Balance at March 31, 2022 | | $ | 190,152 | | | $ | 25,007 | | | $ | 9,499 | | | $ | 224,658 | |
| Falcon acquisition | | 17,417 | | | — | | | — | | | 17,417 | |
| CG and ACG acquisitions | | 1,686 | | | — | | | — | | | 1,686 | |
| Shoemaker acquisition | | 6 | | | — | | | — | | | 6 | |
| Currency translation | | (101) | | | (705) | | | (221) | | | (1,027) | |
| Balance at March 31, 2023 | | $ | 209,160 | | | $ | 24,302 | | | $ | 9,278 | | | $ | 242,740 | |
The following table
providedprovides information about
outour intangible assets for the
fiscal years ended March 31,
20162023 and
20152022 (in thousands, except years):
| | | | | | | | | | | | | | | | | | | | |
| | | | | | March 31, 2016 | | | March 31, 2015 | |
| | | Wtd Avg
Life
(Years) | | | Ending
Gross
Amount | | | Accumulated
Amortization | | | Ending
Gross
Amount | | | Accumulated
Amortization | |
Finite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | |
Patents | | | 12 | | | $ | 14,458 | | | $ | (8,600 | ) | | $ | 14,284 | | | $ | (7,608 | ) |
Customer lists and amortized trademarks | | | 12 | | | | 71,475 | | | | (17,080 | ) | | | 37,091 | | | | (11,516 | ) |
Non-compete agreements (a) | | | 5 | | | | 1,310 | | | | (405 | ) | | | 2,877 | | | | (2,458 | ) |
Other | | | 12 | | | | 3,769 | | | | (354 | ) | | | 412 | | | | (137 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | $ | 91,012 | | | $ | (26,439 | ) | | $ | 54,664 | | | $ | (21,719 | ) |
| | | | | | | | | | | | | | | | | | | | |
Trade names and trademarks not being amortized: | | | | | | $ | 24,154 | | | $ | — | | | $ | 8,052 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2023 | | March 31, 2022 |
| | Wtd Avg Life (Years) | | Ending Gross Amount | | Accumulated Amortization | | Ending Gross Amount | | Accumulated Amortization |
| Finite-lived intangible assets: | | | | | | | | | | |
| Patents | | 11 | | $ | 13,608 | | | $ | (8,546) | | | $ | 9,417 | | | $ | (8,065) | |
| Customer lists and amortized trademarks | | 14 | | 324,472 | | | (81,901) | | | 297,909 | | | (61,368) | |
| Non-compete agreements | | 5 | | 950 | | | (272) | | | 939 | | | (258) | |
| Other | | 11 | | 6,377 | | | (2,235) | | | 5,123 | | | (3,957) | |
| | | | $ | 345,407 | | | $ | (92,954) | | | $ | 313,388 | | | $ | (73,648) | |
| Trade names and trademarks not being amortized: | | | | $ | 66,450 | | | $ | — | | | $ | 61,097 | | | $ | — | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) | During the fiscal year ended March 31, 2016, we wrote off $2.9 million of expired and fully amortized non-compete agreements. |
Amortization expense for the years ended March 31,
2016, 20152023, 2022 and
20142021 was
$7.1$22.1 million,
$4.6$24.8 million
(including the amortization of inventory purchase accounting adjustment of $3.9 million) and
$3.9$10.5 million, respectively. The following table presents the estimated future amortization of finite-lived intangible assets for the next five fiscal years ending March 31 (in thousands):
| | | | |
2017 | | $ | 7,363 | |
2018 | | | 7,233 | |
2019 | | | 6,385 | |
2020 | | | 6,142 | |
2021 | | | 5,919 | |
On August 28, 2014,
| | | | | | | | |
| 2024 | | $ | 22,404 | |
| 2025 | | 21,525 | |
| 2026 | | 21,158 | |
| 2027 | | 20,363 | |
| 2028 | | 19,982 | |
| Thereafter | | 147,021 | |
| Total | | $ | 252,453 | |
5. SHARE-BASED COMPENSATION
We maintain the
board of directors of Capital Southwest adopted an executive compensation plan consisting of grants of nonqualified stock options, restricted stock and cash incentive awards to executive officers of Capital Southwest. The plan was intended to align the compensation of Capital Southwest’s executive officers with Capital Southwest’s key strategic objective of increasing the market value of Capital Southwest’s shares through a transformative transaction for the benefit of Capital Southwest’s shareholders. Under the plan, Joseph B. Armes, Kelly Tacke, and Bowen S. Diehl, receive an amount equal to 6.0% of the aggregate appreciation in Capital Southwest’s share price from August 28, 2014 (using a base price of $36.16 per share) to the Trigger Event Date (December 29, 2015). Effective immediately with the spin-off of CSWI, both Joseph B. Armes and Kelly Tacke became employees of CSWI and Bowen Diehl remained an employee of Capital Southwest. The initial plan component consists of nonqualified options awarded to purchase a total of 258,000 shares of common stock. The second plan component consists of total awards of 127,000 shares of restricted stock, which have voting rights, but do not have cash dividend rights. The final plan component consists of cash incentive payments awarded to each of Mr. Armes, Ms. Tacke and Mr. Diehl in an amount equal to the excess of each awardee’s allocable portion of the Total Payment Amount over the aggregate value as of the Trigger Event Date of the awardee’s restricted common stock and nonqualified option awards under the plan. The equity based awards vest or become exercisable, as applicable, as follows: (1) 1/3 on the Trigger Event Date; (2) 1/3 on the first anniversary of the Trigger Event Date; and (3) 1/3 on the second anniversary of the Trigger Event Date. Generally, entitlement to such awards is conditioned on the awardee remaining in the employment of the Capital Southwest or its subsidiaries on the vesting date, or in the event the employment of the awardee was transferred to CSWI, continuing employment by CSWI.On September 8, 2015, the board of directors of Capital Southwest designated the Share Distribution as a transformative transaction for purposes of the executive compensation plan and amended the award agreements granted under the plan to provide for accelerated vesting of the awards held by an executive in the event of a termination of such executive’s service effected by the executive for good reason, by the employer without cause, or as a result of the disability or death of the executive. As a result of the Share Distribution completed on September 30, 2015, the Trigger Event Date was determined to be December 29, 2015.
As of December 29, 2015, the cash component of the executive compensation plan was calculated based on the volume weighted average price of Capital Southwest and CSWI common stock for the 20 trading days ended December 29, 2015. Effective with the Share Distribution, CSWI entered into an Employee Matters Agreement with Capital Southwest. Under this agreement, Capital Southwest will retain the obligation to fund the cash incentive awards granted under the Executive Compensation Plan, and all liabilities with respect to such cash
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
incentive awards will remain liabilities of Capital Southwest. During the fiscal year ended March 31, 2016, we recorded total executive compensation expense for the cash incentive payments of $1.3 million for Mr. Armes and Ms. Tacke, and total stock compensation expense of $0.3 million. The remaining cash and stock compensation of $2.4 million and $1.2 million, respectively, will be recognized as compensation expense over the remaining vesting period.
5. | SHARE-BASED COMPENSATION |
In September 2015, in connection with the Share Distribution, we adopted ourshareholder-approved 2015 Equity and Incentive Compensation Plan (the “2015 Plan”), which provides for the issuance of up to 2,000,0001,230,000 shares of CSWI common stock through the grant of stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units or other share-based awards, to employees, officers and non-employee directors, as well as the issuance of awards in connection with the Share Distribution.directors. As of March 31, 2016, 1,404,0832023, 421,546 shares were available for issuance under the 2015 Plan, which includes the impact of 510,447 shares issued in connection with the Share Distribution and discussed below.
In connection with the Share Distribution, all stock option and restricted stock awards granted by Capital Southwest, including awards granted under the executive compensation plan discussed in Note 4, were adjusted and each holder of an award received both Capital Southwest and CSWI stock options and restricted stock awards.
Plan. Each Capital Southwest stock option was converted into both a Capital Southwest stock option and a CSWI stock option, with adjustments made to the exercise prices and number of shares subject to each option in order to preserve the aggregate intrinsic value of the original Capital Southwest stock option as measured immediately before and immediately after the Share Distribution, subject to rounding. The adjusted Capital Southwest stock options and CSWI stock options are subject to substantially the same terms, vesting conditions, post-termination exercise rules and other restrictions that applied to the original Capital Southwest stock options immediately before the Share Distribution. Options generally expire 10 years from the date of grant and generally vest on or after the first anniversary of the date of grant in five annual installments. The fair value of stock options is determined using the Black-Scholes pricing model and such fair value is expensed on a straight-line basis over the requisite service period.
The Capital Southwest restricted stock awards will remain outstanding and the awardees additionally received one share of CSWI restricted stock for each share of Capital Southwest restricted stock held, which shares are subject to substantially the same terms, vesting conditions and other restrictions applicable to the Capital Southwest restricted stock award immediately before the Share Distribution. Restricted Stock awards generally have full voting and dividend rights, but are restricted with regard to sale or transfer. Unless otherwise specified in the award agreement, the restrictions do not expire for a minimum of one year and a maximum of five years and are subject to forfeiture during the restriction period. Typically, restricted share grants have staggered vesting periods over one to five years from the grant date. The fair value of restricted stock is based on the closing price of common stock on the date of grant and such fair value is expensed on a straight-line basis over the requisite service period.
The issuance of share-based compensation awards discussed above occurred in conjunction with the Share Distribution after the market closed on September 30, 2015. We record compensation expense for share-based awards granted by CSWI to CSWI employees and share-based awards granted by Capital Southwest to employees who are now employed by CSWI.
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recorded share-based compensation expense for restricted stock as follows for the fiscal yearyears ended March 31, 20162023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | |
| | | Fiscal Year Ended March 31, 2016 | |
| | | Stock Options | | | Restricted Stock | | | Total | |
Share-based compensation expense | | $ | 206 | | | $ | 750 | | | $ | 956 | |
Related income tax benefit | | | (72 | ) | | | (263 | ) | | | (335 | ) |
| | | | | | | | | | | | |
Net share-based compensation expense | | $ | 134 | | | $ | 487 | | | $ | 621 | |
| | | | | | | | | | | | |
No share-based compensation expense was recorded prior to October 1, 2015.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | 2022 | | 2021 |
| Share-based compensation expense | | $ | 9,751 | | | $ | 8,450 | | | $ | 5,085 | |
| Related income tax benefit | | (2,438) | | | (2,197) | | | (1,220) | |
| Net share-based compensation expense | | $ | 7,313 | | | $ | 6,253 | | | $ | 3,865 | |
Stock option activity, which represents outstanding CSWI awards
including awards held by
CSWI employees resulting from the conversion of Capital Southwest stock options held by former Capital Southwest employees,
iswas as follows:
| | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended March 31, 2016 | |
| | | Number of
Shares | | | Weighted
Average
Exercise
Price | | | Remaining
Contractual
Life (Years) | | | Aggregate
Intrinsic
Value (in
Millions) | |
Outstanding at April 1, 2015 | | | — | | | $ | — | | | | | | | | | |
Granted | | | 368,487 | | | | 24.40 | | | | | | | | | |
Exercised | | | (5,974 | ) | | | 16.11 | | | | | | | | | |
Canceled | | | — | | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at March 31, 2016 | | | 362,513 | | | $ | 24.53 | | | | 8.0 | | | $ | 2.7 | |
| | | | | | | | | | | | | | | | |
Exercisable at March 31, 2016 | | | 131,161 | | | $ | 23.67 | | | | 7.5 | | | $ | 1.1 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price | | Remaining Contractual Life (Years) | | Aggregate Intrinsic Value (in Millions) |
| Outstanding and Exercisable at April 1, 2021 | | 63,413 | | | $ | 25.23 | | | | | |
| Exercised | | (52,613) | | | 25.23 | | | | | |
| Outstanding and Exercisable at March 31, 2022 | | 10,800 | | | 25.23 | | | 2.4 | | $ | 1.0 | |
| Exercised | | (10,800) | | | 25.23 | | | | | |
| Outstanding and Exercisable at March 31, 2023 | | — | | | $ | — | | | 0.0 | | $ | — | |
No options were granted or vested during the years ended March 31, 2023, 2022 and 2021, and all stock options were vested and recognized prior to the year ended March 31, 2021. The intrinsic value of options exercised during the years ended March 31, 2023, 2022 and 2021 was $1.2 million, $5.8 million and $2.5 million, respectively. Cash received for options exercised during the years ended March 31, 2023, 2022 and 2021 was $0.3 million, $1.3 million and $1.3 million, respectively, and the tax benefit received was $0.3 million, $1.4 million and $0.4 million, respectively. As of March 31, 2023, there were no outstanding stock options.
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock activity was as follows:
| | | | | | | | | | | | | | |
| | Year Ended March 31, 2023 |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
| Outstanding at April 1, 2022 | | 228,331 | | | $ | 126.02 | |
| Granted | | 96,877 | | | 130.85 | |
| Vested | | (87,516) | | | 86.01 | |
| Canceled | | (5,641) | | | 112.60 | |
| Outstanding at March 31, 2023 | | 232,051 | | | $ | 138.14 | |
During the three months ended June 30, 2021, Joe Armes, the Company's Chairman, Chief Executive Officer and President, was awarded special long-term incentive awards with the purpose of retaining him through retirement and promoting successful succession planning and transition practices. Mr. Armes' awards include 31,496 shares of restricted stock (which cliff vest on March 31, 2026), 27,559 performance shares (which vest in equal amounts on each of March 31, 2025, 2026 and 2027, subject to performance criteria being achieved) and 19,685 performance restricted stock units (40% of which vest upon recruiting of a successor CEO and 60% of which vest upon the first employment anniversary of the successor CEO).
During the restriction period, the holders of restricted shares are entitled to vote and receive dividends. Unvested restricted shares outstanding as of March 31, 2023 and 2022 included 99,463 and 102,360 shares (at target), respectively, with performance-based vesting provisions, having 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, and 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. We granted 21,087 and 47,845 awards with performance-based vesting provisions during the years ended March 31, 2023 and 2022, respectively, with a vesting range of 0-200%.
At March 31,
2016,2023, we had unrecognized compensation cost related to
non-vested stock optionsunvested restricted shares of
$0.8$19.4 million, which will be amortized into net income over the remaining weighted average vesting period of
approximately 1.92.7 years.
The calculation of unrecognized compensation cost and weighted average periods include share-based awards granted by CSWI to CSWI employees and share-based awards granted by Capital Southwest to employees who are now employed by CSWI. Other than options granted in conjunction with the Share Distribution, which were granted at a weighted average fair value of $6.67 per share, no options were granted during the fiscal year ended March 31, 2016. No options were exercised during the fiscal year ended March 31, 2015. The total fair value of stock options vested during the fiscal year ended March 31, 2016 was $0.5 million.Restricted stock activity, which represents outstanding CSWI awards, including awards held by Capital Southwest employees is as follows:
| | | | | | | | |
| | | Number of
Shares | | | Weighted
Average
Grant Date
Fair Value | |
Outstanding at April 1, 2015 | | | — | | | $ | — | |
Granted | | | 230,706 | | | | 22.14 | |
Vested | | | (45,453 | ) | | | 15.41 | |
Canceled | | | (3,276 | ) | | | 28.21 | |
| | | | | | | | |
Outstanding at March 31, 2016 | | | 181,977 | | | $ | 23.72 | |
| | | | | | | | |
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the restriction period, the holders of restricted stock are entitled to vote and receive dividends, except for restricted shares awarded under the executive compensation plan discussed in Note 4. At March 31, 2016, we had unrecognized compensation cost related to unvested restricted shares of $3.0 million, which will be amortized into net income over the remaining weighted average vesting period of approximately 2.0 years. The calculation of unrecognized compensation cost and weighted average periods include share-based awards granted by CSWI to CSWI employees and share-based awards granted by Capital Southwest to employees who are now employed by CSWI. The total fair value of restricted shares vested during the fiscal yearyears ended March 31, 20162023 and 2022 was $0.7 million.
Restricted stock granted during$10.2 million and $14.2 million, respectively.
6. INVENTORY
Inventories are stated at the fiscal year ended March 31, 2016 includes 17,449 shares with market-based vesting provisions,lower of cost or net realizable value and vesting ranges from 0-100% basedinclude raw materials, supplies, direct labor and manufacturing overhead. Inventories are accounted for using a standard costing methodology, which approximates cost on pre-defined performance targets. Market-based restricted stocka first-in, first-out (“FIFO”) basis.
The Inventories, net caption in the Consolidated Balance Sheet is earned uponcomprised of the achievementfollowing components:
| | | | | | | | | | | | | | |
| | March 31, |
| | 2023 | | 2022 |
| Raw materials and supplies | | $ | 48,300 | | | $ | 46,136 | |
| Work in process | | 5,250 | | | 7,471 | |
| Finished goods | | 113,104 | | | 100,792 | |
| Total inventories | | 166,654 | | | 154,399 | |
| | | | |
| Less: Obsolescence reserve | | (5,085) | | | (4,285) | |
| Inventories, net | | $ | 161,569 | | | $ | 150,114 | |
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS
Accounts receivable, net consists of the following (in thousands): | | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Accounts receivable trade | | $ | 53,423 | | | $ | 50,487 | |
Other receivables | | | 422 | | | | 146 | |
| | | | | | | | |
| | | 53,845 | | | | 50,633 | |
Less: Allowance for doubtful accounts | | | (1,208 | ) | | | (1,692 | ) |
| | | | | | | | |
Accounts receivable, net | | $ | 52,637 | | | $ | 48,941 | |
| | | | | | | | |
Inventories, net consist
| | | | | | | | | | | | | | |
| | | March 31, |
| | | 2023 | | 2022 |
| Accounts receivable trade | | $ | 121,164 | | | $ | 120,603 | |
| Other receivables | | 2,954 | | | 3,378 | |
| | 124,118 | | | 123,981 | |
| Less: Allowance for doubtful accounts | | (1,365) | | | (1,177) | |
| Accounts receivable, net | | $ | 122,753 | | | $ | 122,804 | |
Prepaid expenses and other current assets consists of the following (in thousands): | | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Raw materials and supplies | | $ | 26,019 | | | $ | 21,837 | |
Work in process | | | 5,432 | | | | 5,626 | |
Finished goods | | | 26,087 | | | | 25,325 | |
| | | | | | | | |
Total inventories | | | 57,538 | | | | 52,788 | |
Less: LIFO reserve | | | (5,302 | ) | | | (5,456 | ) |
Less: Obsolescence reserve | | | (602 | ) | | | (157 | ) |
| | | | | | | | |
Inventories, net | | $ | 51,634 | | | $ | 47,175 | |
| | | | | | | | |
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | |
| | March 31, |
| | 2023 | | 2022 |
| Prepaid expenses | | $ | 9,485 | | | $ | 8,531 | |
| Short-term tax indemnification assets | | 7,500 | | | — | |
| Income taxes receivable | | 1,344 | | | 690 | |
| Current derivative asset | | 877 | | | — | |
| Other current assets | | 1,073 | | | 1,389 | |
| | $ | 20,279 | | | $ | 10,610 | |
Property, plant and equipment, net, consist of the following (in thousands): | | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Land improvements | | $ | 2,129 | | | $ | 2,129 | |
Buildings and improvements | | | 46,004 | | | | 42,191 | |
Plant, office and laboratory equipment | | | 65,732 | | | | 62,358 | |
| | | | | | | | |
| | | 113,865 | | | | 106,678 | |
Less: Accumulated depreciation | | | (59,035 | ) | | | (52,954 | ) |
| | | | | | | | |
| | | 54,830 | | | | 53,724 | |
Land | | | 2,610 | | | | 1,242 | |
Construction in progress | | | 6,917 | | | | 1,871 | |
| | | | | | | | |
Property, plant and equipment, net | | $ | 64,357 | | | $ | 56,837 | |
| | | | | | | | |
| | | | | | | | | | | | | | |
| | | March 31, |
| | | 2023 | | 2022 |
| Land and improvements | | $ | 3,226 | | | $ | 3,226 | |
| Buildings and improvements | | 52,975 | | | 53,346 | |
| Plant, office and laboratory equipment | | 112,271 | | | 99,770 | |
| Construction in progress | | 12,466 | | | 11,083 | |
| | 180,938 | | | 167,425 | |
| Less: Accumulated depreciation | | (92,703) | | | (80,393) | |
| Property, plant and equipment, net | | $ | 88,235 | | | $ | 87,032 | |
Depreciation of property, plant and equipment was
$7.0$12.9 million,
$5.9$11.6 million and
$5.2$9.2 million for the
fiscal years ended March 31,
2016, 20152023, 2022 and
2014,2021, respectively. Of these amounts, cost of revenues includes
$4.6$8.4 million,
$3.9$8.3 million and
$3.2$7.1 million, respectively.
Other assets consist of the following (in thousands):
| | | | | | | | | | | | | | |
| | | March 31, |
| | | 2023 | | 2022 |
| Right-of-use lease assets | | $ | 59,815 | | | $ | 67,076 | |
| Long-term tax indemnification assets | | 2,849 | | | 7,500 | |
| Deferred financing fees | | 2,363 | | | 2,271 | |
| Rent receivable | | 2,028 | | | 2,073 | |
| Property held for investment | | 418 | | | 418 | |
| Deferred income taxes | | 462 | | | 304 | |
| | | | |
| Other | | 2,584 | | | 3,044 | |
| Other assets | | $ | 70,519 | | | $ | 82,686 | |
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued and other current liabilities consist of the following (in thousands):
| | | | | | | | | | | | | | |
| | | March 31, |
| | | 2023 | | 2022 |
| Compensation and related benefits | | $ | 27,096 | | | $ | 21,617 | |
| Rebates and marketing agreements | | 16,158 | | | 16,340 | |
| | | | |
| Operating lease liabilities | | 9,784 | | | 9,269 | |
| Acquisition deferred payments | | 3,427 | | | 3,061 | |
| Non-income taxes | | 1,802 | | | 1,949 | |
| Billings in excess of costs | | 637 | | | 1,026 | |
| Income taxes payable | | 403 | | | 4,266 | |
| Other accrued expenses | | 8,081 | | | 11,477 | |
| Accrued and other current liabilities | | $ | 67,388 | | | $ | 69,005 | |
Other long-term liabilities consists of the following (in thousands): | | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Property held for investment (a) | | $ | 9,290 | | | $ | 9,300 | |
Deferred income taxes | | | — | | | | 5,651 | |
Retirement assets in excess of benefit obligations | | | 2,063 | | | | 338 | |
Other | | | 4,545 | | | | 457 | |
| | | | | | | | |
Other assets | | $ | 15,898 | | | $ | 15,746 | |
| | | | | | | | |
|
(a) As of March 31, 2016, $6.2 million in assets were held for sale. | |
Accrued and other current expenses consist of the following (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Compensation and related benefits | | $ | 12,502 | | | $ | 9,212 | |
Rebates and marketing agreements | | | 1,976 | | | | 1,515 | |
Commissions | | | 1,378 | | | | 1,157 | |
Sales and property taxes | | | 517 | | | | 373 | |
Other accrued expenses | | | 4,717 | | | | 3,744 | |
| | | | | | | | |
Accrued and other current liabilities | | $ | 21,090 | | | $ | 16,001 | |
| | | | | | | | |
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other liabilities consists of the following (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Contingent consideration | | $ | 5,854 | | | $ | 5,115 | |
Deferred income taxes | | | 3,793 | | | | — | |
Other | | | 2,173 | | | | 2,595 | |
| | | | | | | | |
Other liabilities | | $ | 11,820 | | | $ | 7,710 | |
| | | | | | | | |
| | | | | | | | | | | | | | |
| | | March 31, |
| | | 2023 | | 2022 |
| Deferred income taxes | | $ | 62,144 | | | $ | 62,810 | |
| Operating lease liabilities | | 55,590 | | | 63,275 | |
| Tax Reserve | | 16,509 | | | 13,987 | |
| Derivative liability | | 1,021 | | | 234 | |
| Acquisition deferred payments | | 1,853 | | | — | |
| | | | |
| Other long-term liabilities | | $ | 137,117 | | | $ | 140,306 | |
8. LONG-TERM DEBT AND COMMITMENTS
Debt consists of the following (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Revolving Credit Facility, interest rate of 2.18% | | $ | 76,539 | | | $ | — | |
RectorSeal line of credit, interest rate of 1.77% | | | — | | | | 13,000 | |
Whitmore term loan, interest rate of 2.43% and 2.17%, respectively | | | 13,143 | | | | 13,704 | |
| | | | | | | | |
Total debt | | | 89,682 | | | | 26,704 | |
Less: Current portion | | | (561 | ) | | | (13,561 | ) |
| | | | | | | | |
Long-term debt | | $ | 89,121 | | | $ | 13,143 | |
| | | | | | | | |
| | | | | | | | | | | | | | |
| | | March 31, |
| | | 2023 | | 2022 |
| Revolving Credit Facility, interest rate of 6.21% and 1.95% (a), respectively | | $ | 253,000 | | | $ | 243,000 | |
| Whitmore term loan, interest rate of 0.00% and 2.45% (a), respectively | | — | | | 9,775 | |
| Total debt | | 253,000 | | | 252,775 | |
| Less: Current portion | | — | | | (561) | |
| Long-term debt | | $ | 253,000 | | | $ | 252,214 | |
(a) Represents the unhedged interest rate effective on March 31, 2023, and 2022, respectively.
Revolving Credit Facility Agreement
On December 11, 2015, we entered into a five-year $250.0 million revolving credit facility agreement (“Revolving Credit Facility”),Facility agreement, with an additional $50.0 million accordion feature, with JPMorgan Chase Bank, N.A., as administrative agent. agent, and the other lenders party thereto. The agreement was amended on September 15, 2017 to allow for multi-currency borrowing with a $125.0 million sublimit and to extend the maturity date to September 15, 2022. On December 1, 2020, the Company entered into an amendment to the Revolving Credit Facility (the "First Credit Agreement") to utilize the accordion feature, thus increasing the commitment from $250.0 million to $300.0 million, and hence eliminating the available incremental commitment by a corresponding amount. On March 10, 2021, the Revolving Credit Facility was amended to facilitate the formation and future operation of the joint venture discussed in Note 3.
On May 18, 2021, we entered into a Second Amended and Restated Credit Agreement (the “Second Credit Agreement”), which replaced the First Credit Agreement and provides for a $400.0 million revolving credit facility that contains a $25.0 million sublimit for the issuance of letters of credit and a $10.0 million sublimit for swingline loans, with an additional $150.0 million accordion feature. The Second Credit Agreement is scheduled to mature on May 18, 2026. The Company incurred a total of $2.3 million in underwriting fees, which are being amortized over the life of the Second Credit Agreement.
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Borrowings under this facilitythe Second Credit Agreement bear interest at aeither base rate of prime plus 0.75%between 0.25% to 1.5% or London Interbank Offered Rate (“LIBOR”)LIBOR plus 1.75%between 1.25% to 2.5%, which may be adjusted based on ourthe Company’s leverage ratio.ratio calculated on a quarterly basis. The base rate is described in the Second Credit Agreement as the highest of (i) the Federal funds effective rate plus 0.50%, (ii) the prime rate quoted by The Wall Street Journal, and (iii) the one-month LIBOR rate plus 1.00%. We pay a commitment fee of 0.25%between 0.15% to 0.4% based on the Company's leverage ratio for the unutilized portion of the Revolving Credit Facility.this facility. Interest and commitment fees are payable at leastmonthly and quarterly, respectively, and the outstanding principal balance is due at maturity. This facilitythe maturity date. The Second Credit Agreement is secured by substantiallya first priority lien on all tangible and intangible assets and stock issued by the Company and its domestic subsidiaries, subject to specified exceptions, and 65% of our assets. Borrowings underthe voting equity interests in its first-tier foreign subsidiaries.
On December 15, 2022, the Company entered into an Incremental Assumption Agreement No. 1 and Amendment No. 2 to the Second Credit Agreement (the “Second Amendment”) to utilize a portion of the accordion feature, thus increasing the commitment from $400.0 million to $500.0 million, and concurrently reduced the available incremental accordion by a corresponding amount (the term "Revolving Credit Facility" as used throughout this facility were useddocument refers to the First Credit Agreement, the Second Credit Agreement and the Second Amendment, as follows: (1) to repayapplicable). The Second Amendment also replaced the principalLIBOR Rate with individualized metrics based on the specific denomination of borrowings, including a metric based on Term SOFR (as defined in the Second Credit Agreement) for borrowings denominated in U.S. Dollars. The Company incurred a total of $0.7 million in underwriting fees, which are being amortized over the remaining term of the Revolving Credit Facility.
During the year ended March 31, 2023, we borrowed $143.2 million and interest outstandingrepaid $133.2 million under the RectorSeal Line ofRevolving Credit and the Strathmore Acquisition Term Loan, (2) to pay fees incurred to enter into the agreement and (3) to acquire Leak Freeze.Facility. As of March 31, 2016,2023 and 2022, we had $76.5$253.0 million and $243.0 million, respectively, in our outstanding borrowingsbalance, which resulted in borrowing capacity under this facility.the Revolving Credit Facility of $247.0 million and $157.0 million, respectively. The agreement containsfinancial covenants contained in the Revolving Credit Facility require the maintenance of a maximum leverage ratio of 3.00 to 1.00, subject to a temporary increase to 3.75 to 1.00 for 18 months following the consummation of permitted acquisitions with consideration in excess of certain restrictive covenants, including requiring us to maintainthreshold amounts set forth in the Revolving Credit Facility. The Revolving Credit Facility Agreement also requires the maintenance of a minimum fixed charge coverage of ratio of 1.25 to 1.00, the calculations and a maximum leverage ratioterms of EBITDA to Funded Debt (aswhich are defined in the agreement) of 3.00 to 1.00.Revolving Credit Facility Agreement. Covenant compliance is tested quarterly, and we were in compliance with all covenants as of March 31, 2016. Interest payments related2023.
Whitmore Term Loan
Prior to
a portionJanuary 20, 2023, Whitmore Manufacturing, LLC (one of
the outstanding balance under the Revolving Credit Facility are hedged under an interest rate swap agreement as described in Note 9.During April 2016, we repaid $5.0 million of the amount that was outstanding at March 31, 2016 under this facility.
RectorSeal Line of Credit
RectorSeal hadour wholly-owned operating subsidiaries) maintained a $30.0 million secured line of credit with a bank available for acquisitions and general corporate purposes, which was scheduled to mature on July 31, 2016. Quarterly interest payments were required.
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Borrowings under the line of credit bore interest at a variable annual rate of either the one month LIBOR plus 1.5% or 0.75% less than the bank floating rate. The line of credit was secured by accounts receivable, inventory, equipment, investments, and other assets of RectorSeal (excluding its subsidiaries). As of March 31, 2015, RectorSeal had $13.0 million in outstanding borrowings under the line of credit. The remaining principal balance of $6.5 million was repaid on December 11, 2015 with borrowings under the Revolving Credit Facility, and the line of credit was terminated.
Strathmore Acquisition Term Loan
Whitmore had a $70.0 million secured term loan outstandingrelated to support the acquisitionwarehouse, corporate office building and remodel of Strathmore.the existing manufacturing and R&D facility. The term loan was scheduled to mature on April 27, 2020 and was secured by the assetsrequired a payment of Whitmore and Strathmore, excluding certain real property.$140,000 each quarter. Borrowings under the term loan bore interest at a variable annual rate equal to one monthone-month LIBOR plus 3.0%2.0%. We made quarterly payments of $875,000 in both July 2015 and October 2015. The remaining principal balance of $68.3 millionOn January 20, 2023, the Whitmore Term Loan was repaid on December 11, 2015 withpaid off using borrowings under theour existing Revolving Credit Facility and the term loan was terminated.
Whitmore Line of Credit
Whitmore had a $20.0 million secured line of credit with a syndicate of four commercial banks available for general corporate purposes, which was scheduled to mature on April 27, 2020. Borrowings under the line of credit bore interest at a variable annual rate of 0.5% less than the bank floating rate. Whitmore repaid the entire balance during the quarter ended December 31, 2014. This line of credit was terminated in conjunction with our Revolving Credit Facility.
Whitmore Term Loan
discussed above. As of March 31, 2016,2023 and 2022, Whitmore had a secured term loan outstanding related to a newly constructed warehouse and corporate office building and the remodel of an existing manufacturing and research and development facility. The term loan matures on July 31, 2029, and Whitmore has quarterly payments of $140,000 due in each of the next four quarters. Borrowings under the term loan bear interest at a variable annual rate equal to one month LIBOR plus 2.0%. As of March 31, 2016 and 2015, Whitmore had $13.1$0.0 million and $13.7$9.8 million, respectively, in outstanding borrowings under the term loan.
Interest payments under the Whitmore
term loan areTerm Loan were hedged under an interest rate swap agreement
as described in Note 9.Balco Line of Credit
Balco had a $1.5 million unsecured revolving line of credit with a bank available for working capital purposes that matured on October 29, 2015 and was not renewed. Borrowings underuntil January 9, 2023, when the line of credit bore interest at a variable annual rate of 0.5% less than the U.S. prime interest rate with a floor of 3.75%. As of March 31, 2015, Balco had no outstanding borrowings under the line of credit.
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
swap agreement was terminated.
Future Minimum Debt Payments
Future minimum debt payments are as follows for
fiscal years ending March 31 (in thousands):
| | | | |
2017 | | $ | 561 | |
2018 | | | 561 | |
2019 | | | 561 | |
2020 | | | 561 | |
2021 | | | 77,100 | |
Thereafter | | | 10,338 | |
| | | | |
Total | | $ | 89,682 | |
| | | | |
Operating Leases
We have entered into non-cancelable operating leases with initial terms in excess
| | | | | | | | |
| 2024 | | $ | — | |
| 2025 | | — | |
| 2026 | | — | |
| 2027 | | 253,000 | |
| 2028 | | — | |
| Thereafter | | — | |
| Total | | $ | 253,000 | |
Table of one year for manufacturing and office facilities. The leases expire at various times through 2031. Future minimum lease payments under these leases for fiscal years ending March 31 are as follows (in thousands): | | | | |
2017 | | $ | 2,364 | |
2018 | | | 1,733 | |
2019 | | | 1,467 | |
2020 | | | 1,404 | |
2021 | | | 1,238 | |
Thereafter | | | 4,648 | |
| | | | |
Total | | $ | 12,854 | |
| | | | |
Rental expense under operating leases was $2.6 million, $2.4 million and $2.1 million for the fiscal years ended March 31, 2016, 2015 and 2014, respectively.
On September 30, 2015, 15.6 million CSWI common shares were distributed to Capital Southwest shareholders in connection with the Share Distribution. For comparative purposes, and to provide a more meaningful calculation for weighted average shares, this amount was assumed to be outstanding throughout all periods presented up to and including September 30, 2015 in the calculation of basic weighted average shares. In addition, for the dilutive weighted average share calculations, the dilutive securities outstanding at September 30, 2015 were also assumed to be outstanding throughout all periods presented up to and including September 30, 2015.
Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LEASES
We have operating leases for manufacturing facilities, offices, warehouses, vehicles and certain equipment. Our leases have remaining lease terms of 1 year to 25 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.
| | | | | | | | | | | | | | |
| (in thousands) | | March 31, 2023 | | March 31, 2022 |
| Components of Operating Lease Expenses | | | | |
| Operating lease expense | | $ | 10,793 | | | $ | 9,893 | |
| Short-term lease expense | | 815 | | | 326 | |
| Total operating lease expense (a) | | $ | 11,608 | | | $ | 10,219 | |
| (a) Included in cost of revenues and selling, general and administrative expense | | | | |
| | | | |
| (in thousands) | | March 31, 2023 | | March 31, 2022 |
| Operating Lease Assets and Liabilities | | | | |
| Right-of-use lease assets, net (a) | | $ | 59,815 | | | $ | 67,076 | |
| | | | |
| Short-term lease liabilities | | $ | 9,784 | | | $ | 9,269 | |
| Long-term lease liabilities | | 55,590 | | | 63,275 | |
| Total operating lease liabilities (b) | | $ | 65,374 | | | $ | 72,544 | |
| (a) Included in other assets | | | | |
| (b) Included in accrued and other current liabilities and other long-term liabilities, as applicable | | | | |
| | | | | | | | | | | | | | |
| (in thousands) | | March 31, 2023 | | March 31, 2022 |
| Supplemental Cash Flow | | | | |
| Cash paid for amounts included in the measurement of operating lease liabilities (a) | | $ | 11,058 | | | $ | 9,974 | |
| Right-of-use assets obtained in exchange for new operating lease obligations | | 2,526 | | | 8,464 | |
| (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) | | 7.0 | | 7.9 |
| Weighted average discount rate (percent) | | 2.3 | % | | 2.2 | % |
| | | | | |
| Maturities of operating lease liabilities were as follows (in thousands): | |
| 2024 | $ | 11,082 | |
| 2025 | 10,903 | |
| 2026 | 10,558 | |
| 2027 | 10,316 | |
| 2028 | 9,037 | |
| Thereafter | 18,787 | |
| Total lease liabilities | $ | 70,683 | |
| Less: Imputed interest | (5,309) | |
| Present value of lease liabilities | $ | 65,374 | |
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING
We enter into interest rate swap agreements to hedge exposure to floating interest rates on certain portions of our debt. All interest rate swaps are highly effective.
As of March 31, 2022, we had $9.8 million of notional amount in outstanding designated interest rate swap to hedge our exposure to variability in cash flows from interest payments on our Whitmore Term Loan. On January 9, 2023, the interest rate swap was terminated and resulted a cash receipt of $0.2 million.
On February 7, 2023, we entered into an interest rate swap to hedge our exposure to variability in cash flows from interest payments on the first $100.0 million borrowing under our Revolving Credit Facility. This interest rate swap fixes the one-month SOFR rate at 3.85% for the first $100.0 million borrowing under our Revolving Credit Facility, and will expire May 18, 2026. As of March 31, 2023, we had $100.0 million of notional amount in outstanding designated interest rate swaps with third parties.
The fair value of interest rate swaps designated as hedging instruments are summarized below (in thousands):
| | | | | | | | | | | | | | |
| | | March 31, |
| | | 2023 | | 2022 |
| Current derivative asset | | $ | 877 | | | $ | — | |
| Current derivative liabilities | | — | | | 109 | |
| Non-current derivative liabilities | | 1,021 | | | 233 | |
The impact of changes in the fair value of interest rate swaps is included in Note 18.
Current derivative assets are reported in our consolidated balance sheets in prepaid expenses and other current assets. Current and non-current derivative liabilities are reported in our consolidated balance sheets in accrued and other current liabilities and other long-term liabilities, respectively.
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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
fiscal years ended March 31,
2016, 20152023, 2022 and
2014 (amounts in thousands, except per share data): | | | | | | | | | | | | |
| | | Fiscal Years Ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
Net income for basic and diluted earnings per share | | $ | 25,471 | | | $ | 29,705 | | | $ | 24,732 | |
Weighted average shares: | | | | | | | | | | | | |
Common stock | | | 15,443 | | | | 15,441 | | | | 15,441 | |
Participating securities | | | 182 | | | | 142 | | | | 142 | |
| | | | | | | | | | | | |
Denominator for basic earnings per common share | | | 15,625 | | | | 15,583 | | | | 15,583 | |
Potentially dilutive securities (a) | | | 50 | | | | 41 | | | | 41 | |
| | | | | | | | | | | | |
Denominator for diluted earnings per common share | | | 15,675 | | | | 15,624 | | | | 15,624 | |
| | | | | | | | | | | | |
Earnings per common share: | | | | | | | | | | | | |
Basic | | $ | 1.63 | | | $ | 1.91 | | | $ | 1.59 | |
Diluted | | | 1.62 | | | | 1.90 | | | | 1.58 | |
(a) | No shares were excluded for anti-dilution for the fiscal year ended March 31, 2016. We have excluded 29,877 shares for each of the fiscal years ended March 31, 2015 and 2014 as their effect would have been anti-dilutive. |
9. | DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING |
We enter into interest rate swap agreements2021:
| | | | | | | | | | | | | | | | | | | | |
| | March 31, |
| (amounts in thousands, except per share data) | | 2023 | | 2022 | | 2021 |
| Net income | | $ | 96,574 | | | $ | 67,319 | | | $ | 40,099 | |
| | | | | | |
| Income attributable to redeemable noncontrolling interest | | (139) | | | (934) | | | — | |
| Net income attributable to CSW Industrials, Inc. | | $ | 96,435 | | | $ | 66,385 | | | $ | 40,099 | |
| Weighted average shares: | | | | | | |
| Common stock | | 15,401 | | | 15,646 | | | 14,919 | |
| Participating securities | | 108 | | | 109 | | | 96 | |
| Denominator for basic earnings per common share | | 15,509 | | | 15,755 | | | 15,015 | |
| Potentially dilutive securities | | 37 | | | 52 | | | 111 | |
| Denominator for diluted earnings per common share | | 15,546 | | | 15,807 | | | 15,126 | |
| | | | | | |
| Basic earnings per common share: | | $ | 6.22 | | | $ | 4.21 | | | $ | 2.67 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Diluted earnings per common share: | | $ | 6.20 | | | $ | 4.20 | | | $ | 2.65 | |
| | | | | | |
| | | | | | |
| | | | | | |
12. SHAREHOLDERS' EQUITY
Share Repurchase Programs
On November 7, 2018, we announced that our Board of Directors authorized a program to hedge exposurerepurchase up to floating interest rates on certain portions$75.0 million of our debt.common stock over a two-year time 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. On December 16, 2022, we announced that our Board of Directors authorized a new $100.0 million share repurchase program, which replaced the previously announced $100.0 million program. Under the current repurchase 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, 2024 for completion of the new repurchase program; however, the program may be limited or terminated at any time at our discretion without notice. Through March 31, 2023, no shares have been repurchased under the current $100.0 million repurchase program. Under the prior $100.0 million repurchase program, 336,347 shares were repurchased during the year ended March 31, 2023 for $35.7 million, and 126,115 shares were repurchased during the year ended March 31, 2022 for $14.4 million. A total of 462,462 shares had been repurchased for an aggregate amount of $50.1 million under the prior $100.0 million program. As of March 31, 2016 and 2015,2023, no shares were repurchased under the current $100.0 million program.
Dividends
On April 4, 2019, we announced we had $46.4commenced a dividend program and that our Board of Directors approved a regular quarterly dividend of $0.135 per share. On April 15, 2021, we announced a quarterly dividend increase to $0.15 per share. On April 14, 2022, we announced a quarterly dividend increase to $0.17 per share. On April 14, 2023, we announced a quarterly dividend increase to $0.19 per share, which dividend was paid on May 12, 2023 to shareholders of record as of April 28, 2023. Any future dividends at the existing $0.19 per share quarterly rate or otherwise will be reviewed individually and declared by our Board of Directors in its discretion. Total dividends of $10.6 million and $13.7$9.5 million respectively, of notional amount in outstanding designated interest rate swaps with third parties. All interest rate swaps are highly effective. Atwere paid during the years ended March 31, 2016, the maximum remaining length2023 and 2022, respectively.
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. FAIR VALUE MEASUREMENTS
The fair value of interest rate swaps discussed in Note
910 are determined using Level
2II inputs. The carrying value of our debt, included in Note
7,8, approximates fair value as it bears interest at floating rates. The carrying amounts of other financial instruments (i.e., cash and cash equivalents,
restricted cash, bank time deposits, accounts receivable, net, accounts payable) approximated their fair values at March 31,
20162023 and
20152022 due to their short-term nature.
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fairredeemable noncontrolling interest is recorded at the higher of the redemption value or carrying value each reporting period. The redemption value of contingent payments was $5.9 million,the redeemable noncontrolling interest is estimated using a discounted cash flow analysis, which includes the addition of a $0.4 million contingent payment for Deacon,requires management judgment with respect to future revenue, operating margins, growth rates and $5.1 milliondiscount rates and is classified as of March 31, 2016 and 2015, respectively. During the fiscal year ended March 31, 2016,Level III under the fair value of the contingent payment related to the SureSeal acquisition increased by $0.4 million, net to $5.5 million due primarily to accretion. During the fiscal year ended March 31, 2016, the fairhierarchy. The redemption value of the contingent payment recorded related to the Strathmore acquisition was reduced by $2.0 million to $0 due toredeemable noncontrolling interest is discussed in Note 3.
14. RETIREMENT PLANS
We had a
decline in the probability that Strathmore would meet the minimum threshold for payment. All changes in the fair value of contingent payments are recorded in selling, general and administrative expense.Defined Benefit Plans
We maintain afrozen qualified defined benefit pension plan (the “Qualified Plan”) that covers substantially allcovered certain of our U.S. employees. Benefits are based on years of service and an average of the highest five consecutive years of compensation during the last ten years of employment. The Qualified Plan iswas previously closed to any employees hired or re-hired on or after January 1, 2015. The Qualified Plan has been2015, and it was amended to freeze benefit accruals and to modify certain ancillary benefits provided under the Qualified Plan effective as of September 30, 2015. A remeasurement was performed atIn September 30, 2015 to reflect the amendment of the Qualified Plan that froze participation and all future benefit accruals. The freeze of the Qualified Plan as of September 30, 2015 required the immediate recognition of a curtailment gain due to the accelerated recognition of all remaining prior service costs (benefits) and the decrease in the projected benefit obligation. The freeze of the Qualified Plan will reduce net periodic pension expense for the remainder of the current year based on the remeasurement.
The funding policy of the plan is to contribute annual amounts that are currently deductible for federal income tax purposes. No contributions were made in the fiscal year ended March 31, 2016, 2015 or 2014.
The following are assumptions related to the Qualified Plan:
| | | | | | | | | | | | |
| | | Year ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
Assumptions used to determine benefit obligations: | | | | | | | | | | | | |
Discount rate | | | 4.50 | % | | | 4.25 | % | | | 5.00 | % |
Rate of compensation increases | | | (a | ) | | | 5.00 | % | | | 5.00 | % |
Assumptions used to determine net pension expense: | | | | | | | | | | | | |
Discount rate | | | 4.25 | % | | | 5.00 | % | | | 4.50 | % |
Expected return on plan assets | | | 7.00 | % | | | 7.00 | % | | | 7.00 | % |
Rate of compensation increases | | | (a | ) | | | 5.00 | % | | | 5.00 | % |
|
(a) Rate of compensation increase is no longer relevant due to the freeze of the Qualified Plan. | |
The factors used in determination of these assumptions are described in Note 1.
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net pension expense for2019, the Qualified Plan was (in thousands):
| | | | | | | | | | | | |
| | | For the year ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
Service cost – benefits earned during the year | | $ | 2,042 | | | $ | 3,039 | | | $ | 2,965 | |
Interest cost on projected benefit obligation | | | 2,666 | | | | 2,513 | | | | 2,066 | |
Expected return on assets | | | (3,226 | ) | | | (2,406 | ) | | | (2,115 | ) |
Net amortization and deferral | | | (27 | ) | | | 58 | | | | 363 | |
Curtailment benefit | | | (8,051 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net pension (benefit) expense | | $ | (6,596 | ) | | $ | 3,204 | | | $ | 3,279 | |
| | | | | | | | | | | | |
The estimated prior service coststerminated 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 estimated net loss for the Qualified Planrecognition of expenses that will be amortized from accumulated other comprehensive loss into pension expense in the fiscal year ended March 31, 2017 is $0 and $0, respectively.
The following is a summary of the changes in the Qualified Plan’s pension obligations (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Benefit obligation at beginning of year | | $ | 64,015 | | | $ | 50,344 | |
Service cost | | | 2,042 | | | | 3,039 | |
Interest cost | | | 2,666 | | | | 2,513 | |
Actuarial loss | | | (2,589 | ) | | | 9,033 | |
Benefits paid | | | (1,410 | ) | | | (914 | ) |
Curtailment impact | | | (14,238 | ) | | | — | |
Impact of Share Distribution (a) | | | 8,329 | | | | — | |
| | | | | | | | |
Benefit obligation at end of year | | $ | 58,815 | | | $ | 64,015 | |
| | | | | | | | |
Accumulated benefit obligation | | $ | 58,815 | | | $ | 50,081 | |
| | | | | | | | |
|
(a) Additional obligations were included related to employees who transferred from Capital Southwest to CSWI upon completion of the Share Distribution. | |
The following is a reconciliation of the Qualified Plan’s assets (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Fair value of plan assets at beginning of year | | $ | 43,087 | | | $ | 42,124 | |
Actual return on plan assets | | | 578 | | | | 1,877 | |
Benefits paid | | | (1,410 | ) | | | (914 | ) |
Impact of Share Distribution (a) | | | 18,623 | | | | — | |
| | | | | | | | |
Fair value of plan assets at end of year | | $ | 60,878 | | | $ | 43,087 | |
| | | | | | | | |
|
(a) Assets previously held by Capital Southwest were contributed to CSWI in conjunction with the Share Distribution. | |
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the net pension asset (liability) for the Qualified Plan (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Plan assets at fair value | | $ | 60,878 | | | $ | 43,087 | |
Benefit obligation | | | (58,815 | ) | | | (64,015 | ) |
| | | | | | | | |
Funded status | | $ | 2,063 | | | $ | (20,928 | ) |
| | | | | | | | |
The following summarizes amounts recognized in the balance sheet for the Qualified Plan (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Noncurrent assets | | $ | 2,063 | | | $ | — | |
Noncurrent liabilities | | | — | | | | (20,928 | ) |
| | | | | | | | |
Funded status | | $ | 2,063 | | | $ | (20,928 | ) |
| | | | | | | | |
The following table presents the changewere previously included in accumulated other comprehensive loss attributable to the components of the net cost and the changerecognition of additional costs associated with the annuity purchase contract. After the participant data for the annuity purchase contract was finalized in the benefit obligation (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Accumulated other comprehensive (loss) income at beginning of year | | $ | (4,707 | ) | | $ | 1,493 | |
Amortization of net loss | | | — | | | | 74 | |
Amortization of prior service credit | | | (18 | ) | | | (36 | ) |
Curtailment impact | | | 5,233 | | | | — | |
Impact of Share Distribution | | | 35 | | | | — | |
Net loss arising during the year | | | (1,433 | ) | | | (6,238 | ) |
| | | | | | | | |
Accumulated other comprehensive loss at end of year | | $ | (890 | ) | | $ | (4,707 | ) |
| | | | | | | | |
Amounts recorded in accumulated other comprehensive loss consist of (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Net prior service cost | | $ | — | | | $ | 279 | |
Net loss | | | (890 | ) | | | (4,986 | ) |
| | | | | | | | |
Accumulated other comprehensive loss | | $ | (890 | ) | | $ | (4,707 | ) |
| | | | | | | | |
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The current target allocations for managed plan assets are 25% – 43% equity securities, 40% – 65% for fixed income securities and 5% – 15% for alternatives. The actual asset allocations forquarter ended March 31, 2020, the Qualified Plan are as follows:
| | | | | | | | |
| | | As of March 31, | |
Asset category | | 2016 | | | 2015 | |
Equity securities | | | 35 | % | | | 58 | % |
Fixed income securities | | | 59 | % | | | 36 | % |
Other | | | 2 | % | | | 3 | % |
Cash and cash equivalents | | | 4 | % | | | 3 | % |
| | | | | | | | |
Total | | | 100 | % | | | 100 | % |
| | | | | | | | |
The Qualified Plan’s financial instruments, shown below, are presented at fair value, as described in Note 1. The fair valueshad excess funds of our Qualified$0.5 million, which were distributed into the Defined Contribution Plan assets were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of March 31, 2016 | | | As of March 31, 2015 | |
| | | | | | Hierarchical Levels | | | | | | Hierarchical Levels | |
Asset category | | Total | | | I | | | II | | | III | | | Total | | | I | | | II | | | III | |
Equity securities (a) | | $ | 21,183 | | | $ | 2,455 | | | $ | 18,728 | | | $ | — | | | $ | 24,928 | | | $ | 13,647 | | | $ | 11,281 | | | $ | — | |
Fixed income securities (b) | | | 35,719 | | | | 3,979 | | | | 31,740 | | | | — | | | | 15,400 | | | | 1,488 | | | | 13,912 | | | | — | |
Other (c) | | | 1,474 | | | | 935 | | | | 539 | | | | — | | | | 1,252 | | | | 754 | | | | 498 | | | | — | |
Cash and cash equivalents | | | 2,502 | | | | 2,502 | | | | — | | | | — | | | | 1,507 | | | | 1,507 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 60,878 | | | $ | 9,871 | | | $ | 51,007 | | | $ | — | | | $ | 43,087 | | | $ | 17,396 | | | $ | 25,691 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(a) | This category includes investment in equity securities of large, medium and small companies and equity investments in foreign companies. Mutual funds included in this category are valued using the net asset value per unit as of the valuation date. These investments include shares of Capital Southwest common stock. As of March 31, 2016 and 2015, Capital Southwest common stock represented 1.2% and 17.7%, respectively, of the fair value of the plan assets and CSWI common stock represented 1.9% and 0%, respectively, of the fair value of the plan assets. |
(b) | This category includes investments in investment grade fixed income instruments, primarily U.S. government obligations. |
(c) | This category includes investments in commodity linked and real estate funds within the U.S. |
The following table summarizes the expected cash benefit payments for the Qualified Plan for fiscal years ending March 31 (in millions):
| | | | |
2017 | | $ | 2.1 | |
2018 | | | 2.3 | |
2019 | | | 2.5 | |
2020 | | | 2.8 | |
2021 | | | 2.9 | |
2022-2026 | | | 16.9 | |
One of our foreign subsidiaries has a defined benefit plan covering substantially all of its employees. Assets, liabilities and expenses related to this plan are immaterial to CSWI.
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restoration Plan
discussed below.
We maintain
ana frozen unfunded retirement restoration plan (the “Restoration Plan”) that is a non-qualified plan providing for the payment to participating employees, upon retirement,
of the difference between the maximum annual payment permissible under the Qualified Plan pursuant to federal limitations and the amount that would otherwise have been payable under the Qualified Plan.
The following are assumptions relatedRestoration Plan was closed to new participants on January 1, 2015 and was amended to freeze benefit accruals and to modify certain ancillary benefits effective as of September 30, 2015. As of March 31, 2023 and 2022, the Restoration Plan reported liabilities of $1.3 million and $1.4 million, respectively.
We had a registered defined benefit pension plan (the "Canadian Plan") that covered all of our employees based at our facility in Alberta, Canada. The plan was amended to freeze benefit accruals effective as of January 31, 2022. In January 2023, the Canadian Plan was terminated and resulted in an overall termination charge of $0.5 million ($0.4 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.
The plans described above (collectively, the "Plans") are presented in aggregate as the impact of the Restoration
Plan: | | | | | | | | | | | | |
| | | Year ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
Assumptions used to determine benefit obligations: | | | | | | | | | | | | |
Discount rate | | | 4.50 | % | | | 4.25 | % | | | 5.00 | % |
Rate of compensation increases | | | (a | ) | | | 5.00 | % | | | 5.00 | % |
Assumptions used to determine net pension expense: | | | | | | | | | | | | |
Discount rate | | | 4.25 | % | | | 5.00 | % | | | 4.50 | % |
Rate of compensation increases | | | (a | ) | | | 5.00 | % | | | 5.00 | % |
|
(a) Rate of compensation increase is no longer relevant due to the freeze of the Qualified Plan. | |
The factors used in determinationPlan and Canadian Plan to our consolidated financial position and results of these assumptions are described in Note 1.
operations is not material.
Net pension
(benefit) expense for the
Restoration Plan was (in thousands): | | | | | | | | | | | | |
| | | For the year ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
Service cost – benefits earned during the year | | $ | 27 | | | $ | 66 | | | $ | 65 | |
Interest cost on projected benefit obligation | | | 73 | | | | 66 | | | | 61 | |
Net amortization and deferral | | | 36 | | | | 63 | | | | 66 | |
Curtailment expense | | | 31 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net pension expense | | $ | 167 | | | $ | 195 | | | $ | 192 | |
| | | | | | | | | | | | |
ThePlans was:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| (in thousands) | | 2023 | | 2022 | | 2021 |
| Service cost – benefits earned during the year | | $ | — | | | $ | 43 | | | $ | 40 | |
| Interest cost on projected benefit obligation | | 56 | | | 138 | | | 144 | |
| Expected return on assets | | — | | | (120) | | | (96) | |
| Net amortization and deferral | | 42 | | | 69 | | | 74 | |
| | | | | | |
| Pension plan termination (a) | | 453 | | | — | | | — | |
| Curtailment impact | | — | | | (30) | | | — | |
| | | | | | |
| Net pension expense | | $ | 551 | | | $ | 100 | | | $ | 162 | |
(a) Reflects impact of the termination of the Canadian Plan.
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No estimated prior service costs
and the estimatedor net loss for the
Restoration Plan thatPlans will be amortized from accumulated other comprehensive loss into pension expense in the
fiscal year ended March 31,
2017 is $0 and less than $0.1 million, respectively.The following is a summary of the changes in the Restoration Plan’s pension obligations (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Benefit obligation at beginning of year | | $ | 1,616 | | | $ | 1,513 | |
Service cost | | | 27 | | | | 66 | |
Interest cost | | | 73 | | | | 66 | |
Actuarial loss (gain) | | | 304 | | | | (29 | ) |
Curtailment impact | | | (555 | ) | | | — | |
Benefits paid | | | (6 | ) | | | — | |
Impact of Share Distribution (a) | | | 287 | | | | — | |
| | | | | | | | |
Benefit obligation at end of year | | $ | 1,746 | | | $ | 1,616 | |
| | | | | | | | |
Accumulated benefit obligation | | $ | 1,746 | | | $ | 1,423 | |
| | | | | | | | |
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (a) | Additional obligations were included related to employees who transferred from Capital Southwest to CSWI upon completion of the Share Distribution. | |
The following summarizes amounts recognized in the balance sheet for the Restoration Plan (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Noncurrent liabilities | | $ | (1,746 | ) | | $ | (1,616 | ) |
| | | | | | | | |
Funded status | | $ | (1,746 | ) | | $ | (1,616 | ) |
| | | | | | | | |
The following table presents the change in accumulated other comprehensive loss attributable to the components of the net cost and the change in the benefit obligation (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Accumulated other comprehensive loss at beginning of year | | $ | (503 | ) | | $ | (396 | ) |
Amortization of net loss | | | 20 | | | | 14 | |
Amortization of prior service (credit) cost | | | (3 | ) | | | 6 | |
Curtailment impact | | | (20 | ) | | | — | |
Impact of Share Distribution (a) | | | (502 | ) | | | — | |
Net gain (loss) arising during the year | | | 669 | | | | (127 | ) |
| | | | | | | | |
Accumulated other comprehensive loss at end of year | | $ | (339 | ) | | $ | (503 | ) |
| | | | | | | | |
|
(a) Deferred losses attributable to obligations related to employees who transferred from Capital Southwest to CSWI upon completion of the Share Distribution. | |
Amounts recorded in accumulated other comprehensive loss consist of (in thousands):
| | | | | | | | |
| | | March 31, | |
| | | 2016 | | | 2015 | |
Net prior service credit | | $ | — | | | $ | (23 | ) |
Net loss | | | (339 | ) | | | (480 | ) |
| | | | | | | | |
Accumulated other comprehensive loss | | $ | (339 | ) | | $ | (503 | ) |
| | | | | | | | |
The following table summarizes the expected cash benefit payments for the Restoration Plan for fiscal years ending March 31 (in millions):
| | | | |
2017 | | $ | 0.1 | |
2018 | | | 0.1 | |
2019 | | | 0.1 | |
2020 | | | 0.1 | |
2021 | | | 0.1 | |
2022-2026 | | | 0.5 | |
2024.
Defined Contribution Plan
Effective October 1, 2015, we began to sponsor a defined contribution plan covering substantially all of our U.S. employees. Employees may contribute to this plan, and these contributions are matched
100% by us up to
the firstCSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6.0% contributed by the employee. Additionally, weof eligible earnings. We also contribute 3.0%an additional percentage of eligible earnings to employees regardless of their level of participation in the plan, which is discretionary and subject to adjustmentvaries based on profitability. ContributionsWe made total contributions to the defined contribution plan were $1.7of $5.7 million forand $4.8 million during the yearyears ended March 31, 2016.
2023 and 2022, respectively.
Employee Stock Ownership Plan
Prior to the Share Distribution, RectorSeal and Whitmore each sponsored
We sponsor a qualified, non-leveraged employee stock ownership plansplan (“ESOP”) in which eligible domestic employees of RectorSeal, Jet-Lube, Smoke Guard and Whitmore wereare eligible to participate following the completion of one year of service. The ESOPs providedESOP provides annual discretionary contributions of up to the maximum amount that is deductible under the Internal Revenue Code. Contributions to the ESOPs wereESOP are invested in Capital Southwestour common stock. A participant’s interest in contributions to the ESOPsESOP fully vests after three years of credited service or upon retirement, permanent disability (each, as defined in the plan document) or death. RectorSeal and Whitmore
We recorded total contributions to the
ESOPsESOP of
$1.6$3.1 million, $2.3 million and
$2.3$3.6 million during the
fiscal years ended March 31,
20152023, 2022 and
2014, respectively. The ESOPs held 929,600 and 898,177 shares of Capital Southwest common stock as of March 31, 2015 and 2014, respectively.Effective with the Share Distribution, Whitmore’s ESOP was merged into RectorSeal’s ESOP, sponsorship of RectorSeal’s ESOP was transferred to CSWI and eligible domestic employees of CSWI and Balco were included. Employees of Strathmore will become eligible for participation in the fiscal year ending March 31, 2017. During the fiscal year ended March 31, 2016, $1.7 million was contributed to the ESOP2021, respectively, based on performance in the fiscalprior year. During the year ended March 31, 2015. Future contributions to the ESOP will be invested in CSWI common stock. During the fiscal year ended March 31, 2016, $2.12023, $5.1 million was recorded to expense based on performance in the fiscal year ended March 31, 20162023 and is expected to be contributed to the ESOP induring the fiscal year ending March 31, 2017. 2024.
The ESOP held
907,748537,293 and 549,863 shares of
both Capital Southwest and CSWI common stock as of March 31,
2016.2023 and 2022, respectively.
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES
In August 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. Among other things, the IRA imposes a fifteen percent corporate alternative minimum tax (the “Corporate AMT”) for tax years beginning after December 31, 2022 and levies a one percent excise tax on net share repurchases after December 31, 2022. The excise tax on the share repurchase portion of the IRA did not have an impact on our results of operations or financial position for the year ended March 31, 2023. We do not expect the Corporate AMT, excise tax or other provisions of the IRA to have a material impact on our consolidated financial statements.
Income before income taxes was comprised of the following (in thousands):
| | | | | | | | | | | | |
| | | Fiscal Years Ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
U.S. Federal | | $ | 40,981 | | | $ | 39,511 | | | $ | 31,241 | |
Foreign | | | 3,244 | | | | 5,417 | | | | 6,285 | |
| | | | | | | | | | | | |
Income before income taxes | | $ | 44,225 | | | $ | 44,928 | | | $ | 37,526 | |
| | | | | | | | | | | | |
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | 2022 | | 2021 |
| U.S. Federal | | $ | 118,181 | | | $ | 87,607 | | | $ | 48,142 | |
| Foreign | | 7,730 | | | 3,858 | | | 2,726 | |
| Income before income taxes | | $ | 125,911 | | | $ | 91,465 | | | $ | 50,868 | |
Income tax expense consists of the following (in thousands):
| | | | | | | | | | | | |
| | | Current | | | Deferred | | | Total | |
Fiscal year ended March 31, 2016: | | | | | | | | | | | | |
U.S. Federal | | $ | 9,210 | | | $ | 7,573 | | | $ | 16,783 | |
State and local | | | 1,368 | | | | (136 | ) | | | 1,232 | |
Foreign | | | 914 | | | | (175 | ) | | | 739 | |
| | | | | | | | | | | | |
Provision for income taxes | | $ | 11,492 | | | $ | 7,262 | | | $ | 18,754 | |
| | | | | | | | | | | | |
Fiscal year ended March 31, 2015: | | | | | | | | | | | | |
U.S. Federal | | $ | 14,920 | | | $ | (1,848 | ) | | $ | 13,072 | |
State and local | | | 933 | | | | 3 | | | | 936 | |
Foreign | | | 1,637 | | | | (422 | ) | | | 1,215 | |
| | | | | | | | | | | | |
Provision for income taxes | | $ | 17,490 | | | $ | (2,267 | ) | | $ | 15,223 | |
| | | | | | | | | | | | |
Fiscal year ended March 31, 2014: | | | | | | | | | | | | |
U.S. Federal | | $ | 11,570 | | | $ | (567 | ) | | $ | 11,003 | |
State and local | | | 475 | | | | (74 | ) | | | 401 | |
Foreign | | | 1,374 | | | | 16 | | | | 1,390 | |
| | | | | | | | | | | | |
Provision for income taxes | | $ | 13,419 | | | $ | (625 | ) | | $ | 12,794 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| For the year ended: | | Current | | Deferred | | Total |
| March 31, 2023 | | | | | | |
| U.S. Federal | | $ | 27,920 | | | $ | (3,549) | | | $ | 24,371 | |
| State and local | | 6,135 | | | (2,471) | | | 3,664 | |
| Foreign | | 1,482 | | | (180) | | | 1,302 | |
| Provision for income taxes | | $ | 35,537 | | | $ | (6,200) | | | $ | 29,337 | |
| March 31, 2022 | | | | | | |
| U.S. Federal | | $ | 20,139 | | | $ | (1,578) | | | $ | 18,561 | |
| State and local | | 5,271 | | | 761 | | | 6,032 | |
| Foreign | | 638 | | | (1,085) | | | (447) | |
| Provision for income taxes | | $ | 26,048 | | | $ | (1,902) | | | $ | 24,146 | |
| March 31, 2021 | | | | | | |
| U.S. Federal | | $ | 6,773 | | | $ | (1,211) | | | $ | 5,562 | |
| State and local | | 3,561 | | | (500) | | | 3,061 | |
| Foreign | | 1,641 | | | 505 | | | 2,146 | |
| Provision for income taxes | | $ | 11,975 | | | $ | (1,206) | | | $ | 10,769 | |
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense differed from the amounts computed by applying the U.S. federal statutory income tax rate of
35%21.0% to income before income taxes as a result of the following (in thousands):
| | | | | | | | | | | | |
| | | Fiscal Years Ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
Computed tax expense at statutory rate | | $ | 15,479 | | | $ | 15,727 | | | $ | 13,225 | |
Increase (reduction) in income taxes resulting from: | | | | | | | | | | | | |
Permanent differences | | | 1,399 | | | | 529 | | | | 542 | |
FIN 48 liability | | | 1,277 | | | | — | | | | — | |
State and local income taxes, net of federal benefits | | | 1,055 | | | | 569 | | | | 205 | |
Foreign rate differential | | | (642 | ) | | | (75 | ) | | | (168 | ) |
Domestic production activity deduction | | | (420 | ) | | | (817 | ) | | | (719 | ) |
Difference in U.S. rate | | | (107 | ) | | | (45 | ) | | | 108 | |
Other, net | | | 713 | | | | (665 | ) | | | (399 | ) |
| | | | | | | | | | | | |
Provision for income taxes | | $ | 18,754 | | | $ | 15,223 | | | $ | 12,794 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | 2022 | | 2021 |
| Computed tax expense at statutory rate | | $ | 26,441 | | | $ | 19,206 | | | $ | 10,674 | |
| Increase (reduction) in income taxes resulting from: | | | | | | |
| State and local income taxes, net of federal benefits | | 2,895 | | | 4,765 | | | 2,419 | |
| Nondeductible executive compensation | | 1,555 | | | 992 | | | 248 | |
| Global intangible low-taxed income ("GILTI") inclusion | | 1,123 | | | 580 | | | 2,118 | |
| Repatriation tax, net of tax credit | | 904 | | | 170 | | | 822 | |
| Other permanent differences | | 557 | | | (143) | | | 1,931 | |
| IRC section 250 deductions | | (1,626) | | | (1,102) | | | (1,678) | |
| Foreign tax credits | | (604) | | | (450) | | | (554) | |
| Vesting of stock-based compensation | | (408) | | | (1,916) | | | (741) | |
| | | | | | |
| | | | | | |
| Uncertain tax positions | | (224) | | | 759 | | | (4,717) | |
| Valuation allowance | | (96) | | | 379 | | | — | |
| | | | | | |
| Foreign rate differential | | 67 | | | 91 | | | 85 | |
| Other, net | | (1,247) | | | 815 | | | 162 | |
| Provision for income taxes | | $ | 29,337 | | | $ | 24,146 | | | $ | 10,769 | |
The effective tax rates for the fiscal years ended March 31, 2016, 20152023, 2022 and 20142021 were 42.4%23.3%, 33.9%26.4% and 34.1%21.2%, respectively. The current year tax rate was higher,As compared to the prior years, as a result of transaction costs incurred with the Share Distribution that are not deductiblestatutory rate for the year ended March 31, 2023, the provision for income taxes was primarily impacted by state tax purposes, a reserve for uncertain tax positionsexpense (net of federal benefits), which increased the provision by $2.9 million and acquisition-related costs. Other items impactingeffective rate by 2.3%, executive compensation limitation, which increased the provision by $1.6 million and the effective tax rate includeby 1.2%; impact of GILTI inclusions, which increased the provision by $1.1 million and the effective tax rate by 0.9%; impact of repatriation of foreign operations activitiesearnings, which increased the provision by $0.9 million and the effective rate by 0.7%; and the additional non-deductible expenses, which increased the provision by $0.6 million and the effective tax rate by 0.4%. This was offset by IRC section 250 deductions, which decreased the provision by $1.6 million and the effective tax rate by 1.3%; foreign tax credits, which decreased the provision by $0.6 million and the effective tax rate by 0.5% and tax benefits related to the restricted stock vesting, which decreased the provision by $0.4 million and the effective tax rate by 0.3%.
As compared with the statutory rate for the year ended March 31, 2022, the provision for income taxes was primarily impacted by the state tax expense, which increased the provision by $4.8 million and the effective rate by 5.2%, executive compensation limitation, which increased the provision by $1.0 million and the effective rate by 1.1%, and a net increase in
countries with lower statutory ratesuncertain tax positions, which increased the provision by $0.8 million and
domestic operations activity in states with higher statutory rates.the effective rate by 0.8%. This was offset by tax benefits related to the restricted stock vesting, which decreased the provision by $1.9 million and the effective rate by 2.1% and IRC section 250 deductions, which decreased the provision by $1.1 million and the effective tax rate by 1.2%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31,
2023 and 2022 are presented below (in thousands):
| | | | | | | | |
| | | As of March 31, | |
| | | 2016 | | | 2015 | |
Deferred tax assets: | | | | | | | | |
Inventory reserves | | $ | 2,319 | | | $ | 1,540 | |
Accrued compensation | | | 1,712 | | | | 694 | |
Accrued expenses | | | 370 | | | | 138 | |
Net operating loss carryforwards | | | 160 | | | | — | |
Pension and other employee benefits | | | 38 | | | | 8,370 | |
Other, net | | | 2,289 | | | | 1,119 | |
| | | | | | | | |
Deferred tax assets | | | 6,888 | | | | 11,861 | |
Valuation allowance | | | (107 | ) | | | — | |
| | | | | | | | |
Deferred tax assets, net of valuation allowance | | | 6,781 | | | | 11,861 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Property, plant and equipment | | | (5,819 | ) | | | (4,239 | ) |
Goodwill and intangible assets | | | (2,567 | ) | | | (1,473 | ) |
FIN 48 liability | | | (1,277 | ) | | | — | |
1031 Exchanges | | | (716 | ) | | | (460 | ) |
Other, net | | | (195 | ) | | | (38 | ) |
| | | | | | | | |
Deferred tax liabilities | | | (10,574 | ) | | | (6,210 | ) |
| | | | | | | | |
Net deferred tax (liabilities) assets | | $ | (3,793 | ) | | $ | 5,651 | |
| | | | | | | | |
| | | | | | | | | | | | | | |
| | March 31, |
| | 2023 | | 2022 |
| Deferred tax assets: | | | | |
| Operating lease liabilities | | $ | 15,684 | | | $ | 17,774 | |
| Accrued compensation | | 6,636 | | | 4,826 | |
| Inventory reserves | | 3,422 | | | 3,720 | |
| Accrued expenses | | 1,580 | | | 1,010 | |
| State R&D credit carry-forward | | 968 | | | 75 | |
| Transaction Costs | | 828 | | | 714 | |
| Pension and other employee benefits | | 452 | | | 412 | |
| Foreign tax credit carry-forward | | 284 | | | 379 | |
| Net operating loss carryforwards | | 144 | | | 145 | |
| Other, net | | 747 | | | 1,492 | |
| Deferred tax assets | | 30,745 | | | 30,547 | |
| Valuation allowance | | (428) | | | (524) | |
| Deferred tax assets, net of valuation allowance | | 30,317 | | | 30,023 | |
| Deferred tax liabilities: | | | | |
| Goodwill and intangible assets | | (66,432) | | | (64,903) | |
| Operating lease right-of-use assets | | (14,337) | | | (16,364) | |
| Property, plant and equipment | | (7,299) | | | (8,242) | |
| Repatriation reserve | | (1,784) | | | (1,034) | |
| Other, net | | (2,148) | | | (1,986) | |
| Deferred tax liabilities | | (92,000) | | | (92,529) | |
| Net deferred tax liabilities | | $ | (61,683) | | | $ | (62,506) | |
As of both March 31, 2016,2023 and 2022, we had $0.2 million in tax effectedimmaterial net operating loss carryforwards.carryforwards, which were fully reserved through valuation allowances. Net operating loss carryforwards will expire in periods beyond the next five5 years. No provision
Deferred income tax has not been recognized on the basis difference that is
made for U.S. income and foreign withholding taxes applicable to undistributed earningspermanently invested outside the United States. This becomes taxable upon a repatriation of
certain foreign entities since these earnings are considered to be permanently reinvested.assets from the subsidiary or a sale or liquidation of the subsidiary. As of March 31, 2023, we have no basis differences that would result in material unrecognized deferred taxes.
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the beginning and ending amount of unrecognized tax benefits
(excluding interest and penalties) is as follows (in thousands):
| | | | |
Balance at March 31, 2015 | | $ | — | |
Increases related to prior year tax positions | | | 900 | |
| | | | |
Balance at March 31, 2016 | | $ | 900 | |
| | | | |
| | | | | | | | | | | | | | |
| | March 31, |
| | 2023 | | 2022 |
| Balance at beginning of year | | $ | 9,934 | | | $ | 10,212 | |
| | | | |
| Decreases related to prior year tax positions | | (690) | | | (314) | |
| Increases related to current year tax positions | | 2,540 | | | 36 | |
| | | | |
| Balance at end of year | | $ | 11,784 | | | $ | 9,934 | |
During the year ended March 31, 2023, we released a reserve of $1.6 million primarily as a result of the conclusion of TRUaire's Vietnam's audit for the tax periods from January 1, 2019 to March 31, 2022 (discussed below), including accrued interest of $0.4 million and accrued penalties of $0.5 million. We havealso recorded total tax contingency reserves of $2.8 million, including unrecognized tax benefit of $2.5 million, accrued interest and penalties on uncertain tax positionspenalty of $0.2$0.1 million and $0.2 million, respectively, forthrough purchase accounting in connection with the Falcon Stainless acquisition. For the year ended March 31, 2016. We did not recognize any2023, we recorded an additional net tax contingency reserve of less than $0.1 million, accrued interest of $0.7 million and accrued penalty of $0.6 million.
During the year ended March 31, 2022, we released a reserve of $1.4 million, including accrued interest of $0.6 million and accrued penalties of $0.5 million, related to positions taken on tax returns for uncertainwhich the statute had expired.
In connection with the Falcon acquisition closed in July 2023, the Company recognized a UTP of $2.8 million related to pre-acquisition tax positionsperiods. In addition, in accordance with the tax indemnification included in the purchase agreement, the sellers provided a contractual indemnification to the Company for up to $4.5 million related to UTPs taken in pre-acquisition years, and we recognized a tax indemnification asset of $2.8 million. This tax indemnification asset will either be settled or expire upon the closure of the tax statutes for the fiscalpre-acquisition periods.
In connection with the TRUaire acquisition closed in December 2020, the Company recognized a UTP of $17.3 million related to pre-acquisition tax periods. In addition, in accordance with the tax indemnification included in the purchase agreement, the sellers provided a contractual indemnification to the Company for up to $12.5 million related to UTPs taken in pre-acquisition years, and we recognized a tax indemnification asset of $12.5 million. This tax indemnification asset will either be settled or expire by December 2023. During the three months ended March 31, 2021, as a result of the audit closure of a pre-acquisition tax period for TRUaire, $5.0 million of the tax indemnification asset was released along with the relevant UTP of $5.3 million. During the three months ended December 31, 2022, TRUaire's Vietnam entity concluded its audit for the tax periods from January 1, 2019 to March 31, 2022 and received an audit closing letter from the tax authority. As a result, $1.5 million of the UTP accrual (including penalties and interests accrued post-acquisition) was released and recorded as an income tax benefit for the three months ended December 31, 2022. As of March 31, 2023, $7.5 million of the tax indemnification asset remains outstanding and is reported in our condensed consolidated balance sheets in prepaid expenses and other current assets. This tax indemnification asset will either be settled or expire by December 15, 2023.
Our federal income tax returns for the years ended March 31,
2015 or 2014. We are currently not under2022, 2021 and 2020 remain subject to examination. Our income tax returns for TRUaire's pre-acquisition periods including calendar years 2018, 2019 and 2020 remain subject to examinations. Our income tax returns in certain state income tax jurisdictions remain subject to examination for
any of our U.S. federal income taxes. For the fiscal year ended March 31, 2016, as a member of a controlled group, our subsidiaries were allocated certain federal tax brackets such that $10.0 million was taxed at 34%.13. | RELATED PARTY TRANSACTIONS |
We paid $0.2 million, $0.5 million and $0.5 million in management feesvarious periods for the fiscalperiod ended September 30, 2015 and subsequent years.
16. RELATED PARTY TRANSACTIONS
We had no related party transactions in the three years ended March 31,
2016, 20152023, 2022 and
2014 to a management company subsidiary of Capital Southwest for services renderedCSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
during each respective fiscal year. These amounts are presented in Selling, general and administrative expenses in the consolidated income statements, and payments ceased in connection with the Share Distribution.
We paid $0.3 million, $8.3 million and $8.7 million in dividends to Capital Southwest during the fiscal years ended March 31, 2016, 2015 and 2014, respectively, as Capital Southwest was our sole shareholder until the Share Distribution.
As of March 31, 2016, 907,748 shares of Capital Southwest stock were held under the ESOP and 52,570 shares of Capital Southwest stock were held in the Qualified Plan.
Tax Matters Agreement – We entered into a tax matters agreement with Capital Southwest (the “Tax Matters Agreement”). The Tax Matters Agreement generally governs our and Capital Southwest’s respective rights, responsibilities and obligations with respect to taxes in connection with the Share Distribution. The Tax Matters Agreement provides that we will be liable for taxes incurred by Capital Southwest as a result of our taking or failing to take certain actions that result in the Share Distribution failing to meet the requirements of a tax-free distribution under the Internal Revenue Code. The Tax Matters Agreement also restricts our and Capital Southwest’s ability to take actions that could cause the Share Distribution to fail to meet the requirements of a tax-free distribution under the Code. These restrictions may prevent us and Capital Southwest from entering into transactions that might be advantageous to us or our stockholders. The term of the Tax Matters Agreement is perpetual, unless the agreement is terminated by mutual consent of both parties.
Employee Matters Agreement – We entered into an employee matters agreement with Capital Southwest prior to the Distribution Date (the “Employee Matters Agreement”). The Employee Matters Agreement allocates liabilities and responsibilities between us and Capital Southwest relating to employee compensation and benefit plans and programs, including the treatment of certain employment agreements, outstanding annual and long-term incentive awards, and health and welfare benefit obligations and provide for the cooperation between us and Capital Southwest in the sharing of employee information.
In general, following the Share Distribution, we will be responsible for all employment and benefit-related obligations and liabilities related to those individuals employed by Capital Southwest or one of the contributed businesses prior to the Share Distribution and whose employment was transferred to us in connection with the Share Distribution. In general, Capital Southwest will be responsible for any employment and benefit-related obligations and liabilities of any employees who continue to be employees of Capital Southwest following the Share Distribution. The term of the Employee Matters Agreement is perpetual, unless the agreement is terminated by mutual consent of both parties.
2021.
17. CONTINGENCIES
From time to time, we are involved in various claims and legal actions which arise in the ordinary course of business. There are not any matters pending that we currently believe are reasonably possible of having a material impact
toon our business, consolidated financial position, results of operations or cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. | OTHER COMPREHENSIVE INCOME |
18. OTHER COMPREHENSIVE INCOME (LOSS)
The following table provides an analysis of the changes in accumulated other comprehensive
income (loss)loss (in thousands).
| | | | | | | | |
| | | Fiscal Years Ended
March 31, | |
| | | 2016 | | | 2015 | |
Currency translation adjustments: | | | | | | | | |
Balance at beginning of period | | $ | (3,877 | ) | | $ | 1,400 | |
Adjustments for foreign currency translation | | | (1,371 | ) | | | (5,277 | ) |
| | | | | | | | |
Balance at end of period | | $ | (5,248 | ) | | $ | (3,877 | ) |
| | | | | | | | |
Interest rate swaps: | | | | | | | | |
Balance at beginning of period | | $ | (1,206 | ) | | $ | — | |
Unrealized gains, net of taxes of $219 and $649, respectively | | | (407 | ) | | | (1,206 | ) |
Reclassification of losses included in interest expense, net, net of taxes of $(211) | | | 392 | | | | — | |
| | | | | | | | |
Other comprehensive income (loss) | | | (15 | ) | | | (1,206 | ) |
| | | | | | | | |
Balance at end of period | | $ | (1,221 | ) | | $ | (1,206 | ) |
| | | | | | | | |
Defined benefit plans: | | | | | | | | |
Balance at beginning of period | | $ | (5,210 | ) | | $ | 1,097 | |
Amortization of net prior service benefit, net of taxes of $11 and $16,
respectively (a) | | | (21 | ) | | | (30 | ) |
Amortization of net loss, net of taxes of $(11) and $(47), respectively (a) | | | 20 | | | | 88 | |
Net loss arising during the year, net of tax of $411 and $3,427, respectively | | | (764 | ) | | | (6,365 | ) |
Impact of Share Distribution, net of tax of $251 | | | (467 | ) | | | — | |
Curtailment, net of taxes of $(2,807) | | | 5,213 | | | | — | |
| | | | | | | | |
Other comprehensive income (loss) | | | 3,981 | | | | (6,307 | ) |
| | | | | | | | |
Balance at end of period | | $ | (1,229 | ) | | $ | (5,210 | ) |
| | | | | | | | |
| | | | | | | | | | | | | | |
| | | March 31, |
| | | 2023 | | 2022 |
| Currency translation adjustments: | | | | |
| Balance at beginning of period | | $ | (4,438) | | | $ | (4,394) | |
| Foreign currency translation adjustments | | (3,752) | | | (44) | |
| Balance at end of period | | $ | (8,190) | | | $ | (4,438) | |
| Interest rate swaps: | | | | |
| Balance at beginning of period | | $ | (270) | | | $ | (803) | |
Unrealized gain, net of taxes of $(60) and $(82), respectively (a) | | 225 | | | 309 | |
| Reclassification of losses (gains) included in interest expense, net of taxes of $18 and $(60), respectively | | (69) | | | 224 | |
| | | | |
| Other comprehensive income | | 156 | | | 533 | |
| Balance at end of period | | $ | (114) | | | $ | (270) | |
| Defined benefit plans: | | | | |
| Balance at beginning of period | | $ | (366) | | | $ | (799) | |
Amortization of net prior service benefit, net of taxes of $0 and $1, respectively (b) | | — | | | (5) | |
Amortization of net loss, net of taxes of $(9) and $(16), respectively (b) | | 33 | | | 59 | |
Net gain arising during the year, net of taxes of $(24) and $(41), respectively (b) | | 92 | | | 154 | |
| Curtailment impact, net of taxes of $0 and $(83), respectively | | — | | | 311 | |
| Pension termination, net of taxes of $(34) and $0, respectively | | 127 | | | — | |
| Currency translation impact | | 9 | | | (86) | |
| Other comprehensive income | | 261 | | | 433 | |
| Balance at end of period | | $ | (105) | | | $ | (366) | |
(a) Unrealized gains are reclassified to earnings as underlying cash interest payments are made. We expect to recognize a gain of $0.7 million, net of deferred taxes, over the next twelve months related to a designated cash flow hedge based on its fair value as of March 31, 2023.
(b) Amortization of prior service costs and actuarial losses out of accumulated other comprehensive loss are included in the computation of net periodic pension expense. See Note 14 for additional information.
19. REVENUE RECOGNITION
We conduct our operations in three reportable segments: Contractor Solutions, Engineered Building Solutions and Specialized Reliability Solutions. With the adoption of ASC Topic 606, we have concluded that the disaggregation of revenues that would be most useful in understanding the nature, timing and extent of revenue recognition is the breakout of build-to-order and book-and-ship, as defined below:
Build-to-order products are architecturally-specified building products generally sold into the construction industry. Revenue generated from sales of products under build-to-order transactions are currently reflected in the results of our Engineered Building Solutions segment. Occasionally, our built-to-order business lines enter into arrangements for the delivery of a customer-specified product and the provision of installation services. These orders are generally negotiated as a package and are commonly subject to retainage by the customer, which means the final 10% of the transaction price, when applicable, is not collectible until the overall construction project into which our products are incorporated is complete. The lead times for transfer to the customer can be up to 12 weeks. Revenue for goods is recognized at a point in time, but installation services are recognized over time as those services are performed. Installation services represented approximately 2% of total consolidated revenue for the year ended March 31, 2023.
Book-and-ship products are sold across all of our end markets. Revenue generated from sales of products under book-and-ship transactions have historically been presented in the Contractor Solutions, Engineered Building Solutions and
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Specialized Reliability Solutions segments. These sales are typically priced on a product-by-product basis using price lists provided to our customers. The lead times for transfer to the customer is usually one week or less as these items are generally built to stock. Revenue for products sold under these arrangements is recognized at a point in time.
Disaggregation of revenues reconciled to our reportable segments is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2023 |
| | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Total |
| Build-to-order | | $ | — | | | $ | 89,964 | | | $ | — | | | $ | 89,964 | |
| Book-and-ship | | 506,634 | | | 14,005 | | | 147,301 | | | 667,940 | |
| Net revenues | | $ | 506,634 | | | $ | 103,969 | | | $ | 147,301 | | | $ | 757,904 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2022 |
| | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Total |
| Build-to-order | | $ | — | | | $ | 88,690 | | | $ | — | | | $ | 88,690 | |
| Book-and-ship | | 413,207 | | | 8,606 | | | 115,932 | | | 537,745 | |
| Net revenues | | $ | 413,207 | | | $ | 97,296 | | | $ | 115,932 | | | $ | 626,435 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2021 |
| | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Total |
| Build-to-order | | $ | — | | | $ | 87,057 | | | $ | — | | | $ | 87,057 | |
| Book-and-ship | | 245,232 | | | 8,615 | | | 78,301 | | | 332,148 | |
| Net revenues | | $ | 245,232 | | | $ | 95,672 | | | $ | 78,301 | | | $ | 419,205 | |
Contract liabilities, which are included in accrued and other current liabilities in our consolidated balance sheets were as follows (in thousands):
(a) | Amortization of prior service costs | | | | | | | |
| Balance at April 1, 2022 | | $ | 1,026 | |
| Revenue recognized | | (953) | |
| | |
New contracts and actuarial losses out of accumulated other comprehensive loss are included in the computation of net periodic pension expenses. See Note 11 for additional information.revenue added to existing contracts | | 564 | |
| Balance at March 31, 2023 | | $ | 637 | |
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SEGMENTS
As described in Note 1, we conduct our operations through three
businessreportable segments:
Industrial Products;•Contractor Solutions
Coatings, Sealants & Adhesives;•Engineered Building Solutions and
Specialty Chemicals.•Specialized Reliability Solutions
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the financial information of our reporting segments reconciled to the amounts reported in the consolidated financial
statements.Year ended March 31, 2016
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Industrial
Products | | | Coatings,
Sealants and
Adhesives | | | Specialty
Chemicals | | | Subtotal –
Reportable
Segments | | | Eliminations
and Other | | | Total | |
Revenues, net | | $ | 138,594 | | | $ | 106,035 | | | $ | 74,930 | | | $ | 319,559 | | | $ | 272 | | | $ | 319,831 | |
Operating income | | | 31,075 | | | | 10,911 | | | | 12,490 | | | | 54,476 | | | | (6,990 | ) | | | 47,486 | |
Year ended March 31, 2015
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Industrial
Products | | | Coatings,
Sealants and
Adhesives | | | Specialty
Chemicals | | | Subtotal –
Reportable
Segments | | | Eliminations
and Other | | | Total | |
Revenues, net | | $ | 118,422 | | | $ | 52,119 | | | $ | 89,738 | | | $ | 260,279 | | | $ | 1,555 | | | $ | 261,834 | |
Operating income | | | 19,711 | | | | 11,420 | | | | 13,016 | | | | 44,147 | | | | (113 | ) | | | 44,034 | |
Year ended March 31, 2014
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Industrial
Products | | | Coatings,
Sealants and
Adhesives | | | Specialty
Chemicals | | | Subtotal –
Reportable
Segments | | | Eliminations
and Other | | | Total | |
Revenues, net | | $ | 93,043 | | | $ | 46,950 | | | $ | 90,744 | | | $ | 230,737 | | | $ | 976 | | | $ | 231,713 | |
Operating income | | | 12,593 | | | | 9,360 | | | | 15,877 | | | | 37,830 | | | | 83 | | | | 37,913 | |
Total Assets
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Industrial
Products | | | Coatings,
Sealants and
Adhesives | | | Specialty
Chemicals | | | Subtotal –
Reportable
Segments | | | Eliminations
and Other | | | Total | |
March 31, 2016 | | $ | 154,583 | | | $ | 128,886 | | | $ | 97,539 | | | $ | 381,008 | | | $ | 11,252 | | | $ | 392,260 | |
March 31, 2015 | | | 137,148 | | | | 42,010 | | | | 95,389 | | | | 274,547 | | | | 11,974 | | | | 286,521 | |
March 31, 2014 | | | 121,925 | | | | 40,986 | | | | 90,213 | | | | 253,124 | | | | 24,696 | | | | 277,820 | |
statements (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2023 | | | | | | | | |
| (in thousands) | | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
| Revenues, net to external customers | | $ | 506,634 | | | $ | 103,969 | | | $ | 147,301 | | | $ | 757,904 | | | $ | — | | | $ | 757,904 | |
| Intersegment revenue | | 7,142 | | | — | | | 145 | | | 7,287 | | | (7,287) | | | — | |
| Operating income | | 126,204 | | | 12,889 | | | 20,176 | | | 159,269 | | | (20,203) | | | 139,066 | |
| Depreciation and amortization | | 26,951 | | | 1,771 | | | 6,035 | | | 34,757 | | | 200 | | | 34,957 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2022 | | | | | | | | |
| (in thousands) | | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
| Revenues, net to external customers | | $ | 413,207 | | | $ | 97,296 | | | $ | 115,932 | | | $ | 626,435 | | | $ | — | | | $ | 626,435 | |
| Intersegment revenue | | 3,280 | | | — | | | 110 | | | 3,390 | | | (3,390) | | | — | |
| Operating income | | 96,115 | | | 11,101 | | | 9,007 | | | 116,223 | | | (18,843) | | | 97,380 | |
| Depreciation and amortization | | 27,879 | | | 2,063 | | | 6,016 | | | 35,958 | | | 450 | | | 36,408 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2021 | | | | | | | | | | |
| (in thousands) | | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
| Revenues, net to external customers | | $ | 245,232 | | | $ | 95,672 | | | $ | 78,301 | | | $ | 419,205 | | | $ | — | | | $ | 419,205 | |
| Intersegment revenue | | 296 | | | — | | | 64 | | | 360 | | | (360) | | | — | |
| Operating income | | 59,007 | | | 14,066 | | | 581 | | | 73,654 | | | (14,434) | | | 59,220 | |
| Depreciation and amortization | | 14,415 | | | 2,014 | | | 5,744 | | | 22,173 | | | 545 | | | 22,718 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL ASSETS | | | | | | | | | | | | |
| (Amounts in thousands) | | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
| March 31, 2023 | | $ | 823,750 | | | $ | 71,429 | | | $ | 136,248 | | | $ | 1,031,427 | | | $ | 12,026 | | | $ | 1,043,453 | |
| March 31, 2022 | | 782,267 | | | 74,397 | | | 126,380 | | | 983,044 | | | 12,316 | | | 995,360 | |
| March 31, 2021 | | 687,508 | | | 67,281 | | | 111,493 | | | 866,282 | | | 13,240 | | | 879,522 | |
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Geographic information – We attribute salesrevenues to different geographic areas based on the destination of the product or service delivery. Long-lived assets are classified based on the geographic area in which the assets are located and exclude deferred taxes. No individual country, except for the U.S., accounted for more than 10% of consolidated net revenues or total long-lived assets.Sales
Revenues and long-lived assets by geographic area are as follows (in thousands, except percent data):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended March 31, | |
| | | 2016 | | | | | | 2015 | | | | | | 2014 | | | | |
U.S. | | $ | 257,941 | | | | 80.6 | % | | $ | 197,944 | | | | 75.6 | % | | $ | 168,473 | | | | 72.7 | % |
Non-U.S. (a) | | | 61,890 | | | | 19.4 | % | | | 63,890 | | | | 24.4 | % | | | 63,240 | | | | 27.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenues, net | | $ | 319,831 | | | | 100.0 | % | | $ | 261,834 | | | | 100.0 | % | | $ | 231,713 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) | No individual country within this group represents 10% or more of consolidated totals for any period presented. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of March 31, | |
| | | 2016 | | | | | | 2015 | | | | | | 2014 | | | | |
U.S. | | $ | 220,878 | | | | 94.4 | % | | $ | 134,117 | | | | 90.3 | % | | $ | 135,296 | | | | 90.9 | % |
Non-U.S. | | | 12,990 | | | | 5.6 | % | | | 14,457 | | | | 9.7 | % | | | 13,572 | | | | 9.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Long-lived assets (a) | | $ | 233,868 | | | | 100.0 | % | | $ | 148,574 | | | | 100.0 | % | | $ | 148,868 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
(a) | Long-lived assets consists primarily of property, plant and equipment, intangible assets, goodwill and other assets, net of deferred taxes. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | | | 2022 | | | | 2021 | | |
| U.S. | | $ | 678,126 | | | 89.5 | % | | $ | 559,296 | | | 89.3 | % | | $ | 367,169 | | | 87.6 | % |
| Non-U.S. (a) | | 79,778 | | | 10.5 | % | | 67,139 | | | 10.7 | % | | 52,036 | | | 12.4 | % |
| Revenues, net | | $ | 757,904 | | | 100.0 | % | | $ | 626,435 | | | 100.0 | % | | $ | 419,205 | | | 100.0 | % |
(a) No individual country within this group represents 10% or more of consolidated totals for any period presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | | | 2022 | | | | 2021 | | |
| U.S. | | $ | 679,731 | | | 94.4 | % | | $ | 651,477 | | | 93.7 | % | | $ | 617,258 | | | 93.5 | % |
| Non-U.S. | | 40,665 | | | 5.6 | % | | 43,736 | | | 6.3 | % | | 43,146 | | | 6.5 | % |
| Long-lived assets (a) | | $ | 720,396 | | | 100.0 | % | | $ | 695,213 | | | 100.0 | % | | $ | 660,404 | | | 100.0 | % |
(a) Long-lived assets consist primarily of property, plant and equipment, intangible assets, goodwill and other assets.
Major customer information – We have a large number of customers across our locations and we do not believe that we have sales to any individual customer that representrepresented 10% or more of consolidated net revenues for any of the fiscal years presented.17. | QUARTERLY FINANCIAL DATA (UNAUDITED) |
The following presents a summary
Table of the unaudited quarterly data for the fiscal years ending March 31, 2016 and 2015 (amounts in millions, except per share data): | | | | | | | | | | | | | | | | |
| | | Fiscal Year ended March 31, 2016 | |
Quarter | | 4th | | | 3rd | | | 2nd | | | 1st | |
Revenues, net | | $ | 76.3 | | | $ | 70.9 | | | $ | 83.7 | | | $ | 88.9 | |
Gross profit | | | 34.6 | | | | 32.1 | | | | 40.8 | | | | 40.4 | |
Income before income taxes | | | 6.0 | | | | 4.8 | | | | 19.8 | | | | 13.6 | |
Net income | | | 1.8 | | | | 2.0 | | | | 13.0 | | | | 8.7 | |
Net earnings per common share (a)(b): | | | | | | | | | | | | | | | | |
Basic | | $ | 0.12 | | | $ | 0.13 | | | $ | 0.83 | | | $ | 0.56 | |
Diluted | | | 0.12 | | | | 0.13 | | | | 0.83 | | | | 0.55 | |
| | | | | | | | | | | | | | | | |
| | | Fiscal Year ended March 31, 2015 | |
Quarter | | 4th | | | 3rd | | | 2nd | | | 1st | |
Revenues, net | | $ | 64.0 | | | $ | 60.9 | | | $ | 68.1 | | | $ | 68.8 | |
Gross profit | | | 30.7 | | | | 28.7 | | | | 33.2 | | | | 33.8 | |
Income before income taxes | | | 8.0 | | | | 9.8 | | | | 12.6 | | | | 14.5 | |
Net income | | | 5.4 | | | | 6.4 | | | | 8.2 | | | | 9.7 | |
Net earnings per common share (a)(b): | | | | | | | | | | | | | | | | |
Basic | | $ | 0.34 | | | $ | 0.41 | | | $ | 0.53 | | | $ | 0.63 | |
Diluted | | | 0.34 | | | | 0.41 | | | | 0.52 | | | | 0.62 | |
(a) | On September 30, 2015, 15.6 million CSWI common shares were distributed to Capital Southwest shareholders in connection with the Share Distribution. For comparative purposes, and to provide a more meaningful calculation for weighted average shares, this amount was assumed to be outstanding throughout all periods presented up to and including September 30, 2015 in the calculation of basic weighted average shares. In addition, for the dilutive weighted average share calculations, the dilutive securities outstanding at September 30, 2015 were also assumed to be outstanding throughout all periods presented up to and including September 30, 2015. |
(b) | Net earnings per common share is computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in weighted average quarterly shares outstanding. |
Contents ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM
9A:9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation,
Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) are designed to ensure that the information, which we are required to disclose in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
In connection with the preparation of this Annual Report on Form 10-K for the year ended March 31, 2023, our management, under the supervision and with the participation of our principal executive officerPrincipal Executive Officer and principal financial officer,our Principal Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined inas of March 31, 2023 as required by Rule 13a-15(e) of13a-15(b) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K for the year ended March 31, 2016 (“Annual Report”).Act. Based on this evaluation, our principal executive officerPrincipal Executive Officer and principal financial officerPrincipal Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2023.
Management’s Report on Internal Control Over Financial Reporting
Our management, under the
endsupervision and with the participation of
our Principal Executive Officer and Principal Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
period covered by this Annual Report.Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Internal control over financial reporting includes policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because
Under the supervision and with the participation of
its inherent limitations, disclosure controlsour Principal Executive Officer and
procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurancePrincipal Financial Officer, our management conducted an assessment of
achieving their control objectives.Management’s Report on Internal Control Over Financial Reporting
This Annual Report does not include a report of management’s assessment regardingour internal control over financial reporting (as definedas of March 31, 2023, based on the criteria established in Rule 13a-l5(f)Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Exchange Act) or an attestation reportTreadway Commission. Based on this assessment, our management has concluded that as of March 31, 2023, our internal control over financial reporting was effective based on those criteria.
The effectiveness of our internal control over financial reporting as of March 31, 2023, has been audited by Grant Thornton LLP, our independent registered public accounting firm,
due to a transition period established by the rules of the Securities and Exchange Commission (“SEC”) for newly public companies.as stated in their report, which is included herein.
Changes in Internal Control
overOver Financial Reporting
There
have beenwere no changes in our internal control over financial reporting
that occurred during
our most recent fiscalthe quarter
ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
CSW Industrials, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of CSW Industrials, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of March 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended March 31, 2023, and our report dated May 25, 2023 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Dallas, Texas
May 25, 2023
ITEM 9B: OTHER INFORMATION
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement for the 20162023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2016.2023.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement for the 20162023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2016.2023.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement for the 20162023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2016.2023.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement for the 20162023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2016.2023.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for the
20162023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31,
2016.2023.
PART IV
ITEM 15: EXHIBITS,
AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Annual Report on Form 10-K:
| | | | | |
(1) Consolidated Financial Statements | | | | |
| |
| | | 45 | |
| |
CSW Industrials, Inc. Consolidated Financial Statements: | | | | |
| |
| | | 46 | |
| |
For each of the three years in the period ended March 31, 2016: | | | 2023: | |
| |
| | | 47 | |
| |
| | | 47 | |
| |
| | | 48 | |
| |
| | | 49 | |
| |
| | | 50 | |
| (2) | Financial Statement Schedules | |
| None. | |
(3) Exhibits | |
None.
The exhibits listed on the accompanying
Exhibit Index are filed or incorporated by reference as part of this Annual Report on Form 10-K.SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated:
| | | | | | |
Date: June 8, 2016
EXHIBIT
NUMBER | | | CSW INDUSTRIALS, INC.DESCRIPTION |
| 3.1 | | |
| | | By: | | | /s/ Joseph B. Armes
|
| | | | | | Joseph B. Armes |
| | | | | | Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated:
| | | | |
Name
| | Title
| | Date
|
| | |
/s/ Joseph B. Armes
Joseph B. Armes
| | Chairman and Chief Executive Officer
(Principal Executive Officer)
| | June 8, 2016
|
| | |
/s/ Kelly Tacke
Kelly Tacke
| | Chief Financial Officer
(Principal Financial and Accounting Officer)
| | June 8, 2016
|
| | |
/s/ Michael R. Gambrell
Michael R. Gambrell
| | Director
| | June 8, 2016
|
| | |
/s/ Linda A. Livingstone
Linda A. Livingstone, Ph.D.
| | Director
| | June 8, 2016
|
| | |
/s/ William F. Quinn
William F. Quinn
| | Director
| | June 8, 2016
|
| | |
/s/ Robert M. Swartz
Robert M. Swartz
| | Director
| | June 8, 2016
|
Exhibit Index
| | |
EXHIBIT
NUMBER | | DESCRIPTION |
| |
2.1 | | Distribution Agreement (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form 10, filed on September 9, 2015) |
| |
2.2 | | Asset Purchase Agreement by and among Strathmore Holdings, LLC, Strathmore Products, Inc., Strathmore Products of Longview, LLC, Strathmore Products of Houston, LLC, SP Waller, LLC, Eric T. Burr and William M. Udovich and the Whitmore Manufacturing Company, effective as of April 1, 2015 (incorporated by reference to Exhibit 2.2 to the Company’s Registration Statement on Form 10, filed on July 21, 2015) |
| |
3.1 | | |
| 3.2 | |
3.2 | | |
| 4.1 | |
| 10.1 | | Tax MattersSecond Amended and Restated Credit Facility Agreement, dated May 18, 2021, by and among CSW Industrials Holdings, LLC, CSW Industrials, Inc., the other Loan Parties party thereto, the other lenders party thereto, and JPMorgan Chase Bank, N.A., individually and in its capacity as of September 8, 2015the Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form 10, filed on September 9, 2015) |
| |
10.2 | | Amended and Restated Employment Matters Agreement, dated as of September 14, 2015, by and between Capital Southwest Corporation and CSW Industrials, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, filed on November 16, 2015)August 4, 2021) |
| 10.2 | |
10.3 | | Incremental Assumption Agreement No. 1 and Amendment No. 2 to the Second Credit Agreement, datedby and among the Company, the Borrower, the other loan parties party thereto, JPMorgan Chase Bank, N.A., as of December 11, 2015, among CSW Industrials, Inc., CSW Industrials Holdings, Inc.administrative agent, collateral agent, swingline lender and The Whitmore Manufacturing Companyissuing bank, and the lenders identified therein.each other lender and issuing bank party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on December 17, 2015)20, 2022). |
| 10.3 | |
10.4 | | |
| 10.4 | |
10.5 | | |
| 10.5 | |
10.6 | | |
| 10.6 | |
10.7 | | |
| 10.7 | |
| 10.8 | |
10.8 | | |
| 10.9 | |
| 10.10 | |
10.9 | | Form of Non-Employee Director Restricted Stock Award (time vesting) (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, filed on February 16, 2016) + |
| |
10.10 | | Form of Incentive Stock Option Right Award Agreement (replacement award agreement) (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q, filed on February 16, 2016) + |
| |
10.11 | | Form of Non-Qualified Stock Option Right Award Agreement (replacement award agreement) (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q, filed on February 16, 2016) + |
| | |
EXHIBIT
NUMBER | | DESCRIPTION |
| |
10.12 | | Form of Restricted Share Award Agreement (replacement award agreement) (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q, filed on February 16, 2016) + |
| |
10.13 | | |
| 10.11 | |
10.14 | | Form of Restricted Share Award Agreement (executive compensation plan – replacement award agreement) |
| 21.1* | |
10.15* | | Consulting Agreement between CSW Industrials, Inc. and GamCo, LLC. + |
| |
10.16* | | Form of Executive Officer Severance Agreement + |
| |
21.1* | | |
| 23.1* | |
23.1* | | |
| 31.1* | |
31.1* | | |
| 31.2* | |
31.2* | | |
| 32.1** | |
32.1** | | |
| 32.2** | |
32.2** | | |
| 101.INS | |
101.INS | | XBRL Instance Document |
| 101.SCH | |
101.SCH | | XBRL Taxonomy Extension Schema |
| 101.CAL | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| + | Management contracts and compensatory plans required to be filed as exhibits to this Annual Report on Form 10-K. |
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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:
| | | | | | | | | | | | | | | | | | | | |
| Date: May 25, 2023 | | | CSW INDUSTRIALS, INC. |
| | |
| | | By: | | | /s/ Joseph B. Armes |
| | | | | | Joseph B. Armes |
| | | | | | Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| | | | | | | | | | | |
| Name | | Title | Date |
| | | |
| /s/ Joseph B. Armes | | Chief Executive Officer | May 25, 2023 |
| Joseph B. Armes | | (Principal Executive Officer) | |
| | | |
| /s/ James E. Perry | | Chief Financial Officer | May 25, 2023 |
| James E. Perry | | (Principal Financial and Accounting Officer) | |
| | | |
| /s/ Michael R. Gambrell | | Director | May 25, 2023 |
| Michael R. Gambrell | | | |
| | | |
| /s/ Bobby Griffin | | Director | May 25, 2023 |
| Bobby Griffin | | | |
| | | |
| /s/ Terry L. Johnston | | Director | May 25, 2023 |
| Terry L. Johnston | | | |
| | | |
| /s/ Linda A. Livingstone | | Director | May 25, 2023 |
| Linda A. Livingstone, Ph.D. | | | |
| | | |
| /s/ Anne B. Motsenbocker | | Director | May 25, 2023 |
| Anne B. Motsenbocker | | | |
| | | |
| /s/ Robert M. Swartz | | Director | May 25, 2023 |
| Robert M. Swartz | | | |
| | | |
| /s/ J. Kent Sweezey | | Director | May 25, 2023 |
| J. Kent Sweezey | | | |