CSW INDUSTRIALS INC

Previous wording

CSW Industrials, Inc. (“CSWI,” “we,” “our” or “us”) is a diversified industrial growth company with a strategic focus on providing niche, value-added products in the end markets we serve. We operate in three business segments: Contractor Solutions, Specialized Reliability Solutions and Engineered Building Solutions. Our products include mechanical products for heating, ventilation, air conditioning and refrigeration (“HVAC/R”), plumbing products, grilles, registers and diffusers (“GRD”), building safety solutions and high-performance specialty lubricants and sealants. End markets that we serve include HVAC/R, architecturally-specified building products, plumbing, general industrial, 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.

Current wording

CSW Industrials, Inc. (“CSWI,” “we,” “our” or “us”) is a diversified industrial growth company with a strategic focus on providing niche, value-added products in the end markets we serve. We operate in three business segments: Contractor Solutions, Specialized Reliability Solutions and Engineered Building Solutions. Our products include mechanical products for heating, ventilation, air conditioning and refrigeration (“HVAC/R”), plumbing products, grilles, registers and diffusers (“GRD”), building safety solutions and high-performance specialty lubricants and sealants. End markets that we serve include HVAC/R, architecturally-specified building products, plumbing, electrical, general industrial, 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.

Previous wording

We expect to maintain a strong balance sheet in fiscal year 2025, 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 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.

Current wording

We expect to maintain a strong balance sheet in fiscal year 2025, which provides us with access to capital through our cash on hand, internally-generated cash flow, availability under our Revolving Credit Facility and proceeds from our recent follow-on equity offering. 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 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.

Previous wording

All acquisitions are described in Note 2 to our consolidated financial statements included in this Quarterly Report. Dust Free, LP. ("Dust Free") activity has been included in our results within our Contractor Solutions segment since the February 6, 2024 acquisition date.

Current wording

All acquisitions are described in Note 2 to our consolidated financial statements included in this Quarterly Report. PSP Products, Inc. (“PSP”) activity has been included in our results within our Contractor Solutions segment since the August 1, 2024 acquisition date. Dust Free, LP. (“Dust Free”) activity has been included in our results within our Contractor Solutions segment since the February 6, 2024 acquisition date.

Previous wording

Net revenues for the three months ended June 30, 2024 increased $22.8 million, or 11.2%, as compared with the three months ended June 30, 2023. The increase was due to organic sales growth of $15.6 million, or 7.7%, from the prior year period, driven primarily by increased unit volumes and pricing actions, as well as growth from the Dust Free acquisition of $7.2 million, or 3.5%. Net revenue increased in the HVAC/R, architecturally-specified building products, general industrial, plumbing and rail transportation end markets and decreased in the mining and energy end markets.

Current wording

Net revenues for the six months ended September 30, 2024 increased $47.1 million, or 11.6%, as compared with the six months ended September 30, 2023. The increase was partially due to the acquisitions of PSP and Dust Free ($18.8 million or 4.6%). Excluding the impact of the acquisitions, organic sales increased $28.3 million, or 7.0%, from the prior year due to increased unit volumes and a slight increase from pricing actions. Net revenue increased in the HVAC/R, architecturally-specified building products, electrical, plumbing, and rail transportation end markets and decreased in the mining end market.

Previous wording

Gross profit for the three months ended June 30, 2024 increased $15.3 million, or 16.6%, as compared with the three months ended June 30, 2023. The increase was primarily a result of the increased net revenue and increased operating leverage from the additional volume. Gross profit margin of 47.5% for the three months ended June 30, 2024 increased as compared to 45.3% for the three months ended June 30, 2023. The increase was driven by a favorable product mix, improved leverage from volume increase and pricing actions, which offset an increase in ocean freight.

Current wording

Gross profit for the three months ended September 30, 2024 increased $12.9 million, or 14.2%, as compared with the three months ended September 30, 2023. The increase was primarily a result of the increased net revenue and the inclusion of recent acquisitions of Dust Free and PSP. Gross profit margin of 45.6% for the three months ended September 30, 2024 increased as compared to 44.7% for the three months ended September 30, 2023. The increase was driven primarily by improved leverage from volume increase and pricing actions.

Previous wording

Operating expenses for the three months ended June 30, 2024 increased $5.4 million, or 11.5%, as compared with the three months ended June 30, 2023. The increase was due to the inclusion of Dust Free and increased expenses related to employee compensation, business integrations, and strategic development activities. Operating expenses as a percentage of revenues increased slightly to 23.2% for the three months ended June 30, 2024 as compared to 23.1% for the three months ended June 30, 2023.

Current wording

Operating expenses for the three months ended September 30, 2024 increased $3.4 million, or 6.9%, as compared with the three months ended September 30, 2023. The increase was primarily due to added expenses related to the inclusion of Dust Free and PSP in the current period, including increased amortization of intangible assets, as well as increased expenses related to business integrations, strategic development activities, and employee compensation. The decrease in operating expenses as a percentage of revenues was attributable to revenue increasing by a greater percentage than the increase in operating expenses.

Previous wording

Operating income for the three months ended June 30, 2024 increased $9.9 million, or 21.8%, as compared with the three months ended June 30, 2023, as a result of the increase in gross profit, partially offset by the increase in operating expenses, as discussed above.

Current wording

Operating income for the three months ended September 30, 2024 increased $9.6 million, or 22.8%, as compared with the three months ended September 30, 2023, as a result of the increase in gross profit, partially offset by the increase in operating expenses, as discussed above.

Previous wording

Net interest expense of $2.5 million for the three months ended June 30, 2024 decreased $1.5 million as compared to the three months ended June 30, 2023. The decrease was due to reduced borrowing under our Revolving Credit Facility as a result of strong operating cash flows generated.

Current wording

Net interest expense of $1.3 million for the three months ended September 30, 2024 decreased $2.0 million as compared to the three months ended September 30, 2023. Net interest expense of $3.9 million for the six months ended September 30, 2024 decreased $3.4 million as compared to the six months ended September 30, 2023. The decrease in the three and six months ended September 30, 2024 was due to reduced average borrowing under our Revolving Credit Facility as a result of strong operating cash flows generated and the repayment of the outstanding balance under our Revolving Credit Facility, as discussed in Note 7. The interest income generated by our cash equivalents invested in money market funds also contributed to the net interest expense decrease.

Previous wording

For the three months ended June 30, 2024, we earned $52.8 million from operations before taxes and provided for income taxes of $13.9 million, resulting in an effective tax rate of 26.4%. The provision for income taxes differed from the statutory rate for the three months ended June 30, 2024 primarily due to state income tax (net of federal benefit), provision for global intangible low-taxed income ("GILTI"), executive compensation limitations, and increases to penalties and interest on uncertain tax positions ("UTP"); offset by foreign tax credits and excess tax deductions related to equity compensation and foreign-derived intangible income ("FDII").

Current wording

For the three months ended September 30, 2024, we earned $49.5 million from operations before taxes and provided for income taxes of $12.9 million, resulting in an effective tax rate of 26.1%. For the six months ended September 30, 2024, we earned $102.3 million from operations before taxes and provided for income taxes of $26.9 million, resulting in an effective tax rate of 26.2%. The provision for income taxes differed from the statutory rate for the three and six months ended September 30, 2024 primarily due to state income tax (net of federal benefit), provision for global intangible low-taxed income (“GILTI”), executive compensation limitations, and increases to penalties and interest on uncertain tax positions (“UTP”); offset by foreign tax credits and excess tax deductions related to equity compensation and foreign-derived intangible income (“FDII”).

Previous wording

For the three months ended June 30, 2023, we earned $41.5 million from operations before taxes and provided for income taxes of $10.5 million, resulting in an effective tax rate of 25.2%. The provision for income taxes differed from the statutory rate for the three months ended June 30, 2023 primarily due to state income tax (net of federal benefit), executive compensation limitations, stock-based compensation deferred tax asset ("DTA") write-offs, and GILTI; offset by excess tax deductions related to FDII, non-controlling interest, foreign tax credits and R&D credits.

Current wording

For the three months ended September 30, 2023, we earned $40.6 million from operations before taxes and provided for income taxes of $10.4 million, resulting in an effective tax rate of 25.7%. For the six months ended September 30, 2023, we earned $82.1 million from operations before taxes and provided for income taxes of $20.9 million, resulting in an effective tax rate of 25.4%. The provision for income taxes differed from the statutory rate for the three and six months ended September 30, 2023 primarily due to state income tax (net of federal benefit), executive compensation limitations, provision for GILTI and increase in the reserves of UTP; offset by excess tax deductions related to FDII, non-controlling interest and excess deductions related to stock-based compensation, net of limitations

Previous wording

The Organization for Economic Cooperation and Development introduced a framework under Pillar Two which includes a global minimum tax rate of 15%. Many jurisdictions in which we do business have started to enact laws implementing Pillar Two. We are monitoring these developments and currently do not believe these rules will have a material impact on our financial condition and/or consolidated results.

Current wording

The Organization for Economic Cooperation and Development introduced a framework under Pillar Two, which includes a global minimum tax rate of 15% that applies to fiscal year starting on or after January 1, 2024, with certain remaining provisions to be effective in 2025. Certain jurisdictions in which we do business have enacted laws implementing Pillar Two. Based on our current forecast, we do not expect the Pillar Two rules to apply to the Company in the near term. We are monitoring these developments and do not believe these rules will have a material impact on our financial condition and/or consolidated results.

Previous wording

The Contractor Solutions segment manufactures efficiency and performance enhancing products predominantly for residential and commercial HVAC/R and plumbing applications, which are designed primarily for professional end-use customers.

Current wording

The Contractor Solutions segment manufactures efficiency and performance enhancing products predominantly for residential and commercial HVAC/R, plumbing and electrical applications, which are designed primarily for professional end-use customers.

Previous wording

Operating income for the three months ended June 30, 2024 increased $10.2 million, or 25.8%, as compared with the three months ended June 30, 2023. The increase was driven by increased net revenue, partially offset by increases in operating expenses and ocean freight. Operating margin of 31.1% for the three months ended June 30, 2024 increased as compared to 28.3% for the three months ended June 30, 2023. This increase was due to gross margin improvement driven primarily by a favorable product mix and increased operating leverage from the additional volume, combined with the management of operating expenses.

Current wording

Operating income for the six months ended September 30, 2024 increased $17.4 million, or 22.2%, as compared with the six months ended September 30, 2023. The increase was due to the increased net revenue, the inclusion of recent acquisitions of Dust Free and PSP and favorable product mix. Operating income margin of 30.1% for the six months ended September 30, 2024 increased as compared to 28.1% for the six months ended September 30, 2023. This increase was primarily due to gross margin improvement driven primarily by increased operating leverage from additional volume, favorable product mix and pricing actions, combined with the management of operating expenses.

Previous wording

The Specialized Reliability Solutions segment provides products for increasing reliability, efficiency, performance and lifespan of industrial assets and solving equipment maintenance challenges.

Current wording

Specialized Reliability Solutions segment provides products for increasing reliability, efficiency, performance and lifespan of industrial assets and solving equipment maintenance challenges.

Previous wording

Operating income for the three months ended June 30, 2024 increased $0.2 million, or 2.7%, as compared with the three months ended June 30, 2023. The slight increase was driven by an immaterial inventory adjustment. Operating margin of 19.4% for the three months ended June 30, 2024 increased as compared to 18.5% for the three months ended June 30, 2023. This increase was primarily due to the aforementioned inventory adjustment.

Current wording

Operating income for the six months ended September 30, 2024 increased $1.2 million or 10.0% as compared to the six months ended September 30, 2023. The increase was primarily driven by an immaterial inventory adjustment and the increased net revenue. Operating income margin of 17.2% for the six months ended September 30, 2024 increased as compared to 15.9% for the six months ended September 30, 2023. This increase was primarily due to the aforementioned inventory adjustment.

Previous wording

Net revenues for the three months ended June 30, 2024 increased $3.3 million, or 12.0%, as compared with the three months ended June 30, 2023 driven by the continued conversion of strong project bookings into revenue, market expansion through innovative products and focused efforts on high-growth markets.

Current wording

Net revenues for the three months ended September 30, 2024 increased $3.5 million or 11.9% as compared to the three months ended September 30, 2023 driven by strength in the backlog converting to revenue and market expansion through innovative products and focused efforts on high-growth markets.

Previous wording

Operating income for the three months ended June 30, 2024 increased $1.5 million or 34.4% as compared to the three months ended June 30, 2023. The increase was driven by the increased net revenue and improved operating leverage. Operating margin of 18.5% for the three months ended June 30, 2024 increased as compared to 15.4% for the three months ended June 30, 2023. This increase was primarily due to gross margin improvement resulting from improved operating leverage, manufacturing optimization and materials sourcing strategies, as well as reduced operating expense as a percentage of revenue.

Current wording

Operating income for the three months ended September 30, 2024 increased $0.8 million, or 16.2%, as compared with the three months ended September 30, 2023. The increase was driven by the increased net revenue and improved operating leverage. Operating income margin of 18.6% for the three months ended September 30, 2024 increased as compared to 17.9% for the three months ended September 30, 2023. This increase was primarily due to effective management of operating expenses.

Previous wording

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. Additionally, we use our Revolver Borrowings to support our working capital requirements, capital expenditures and strategic acquisitions. We seek to maintain adequate liquidity to meet working capital requirements, fund capital expenditures, make scheduled interest payments on debt and meet our contingent consideration obligations. Absent deterioration of market conditions, we believe that cash flows from operating and financing activities, primarily Revolver Borrowings, will provide adequate resources to satisfy our working capital, scheduled interest payments on debt, anticipated dividend payments, periodic share repurchases, contingent consideration obligations and anticipated capital expenditure requirements for both our short-term and long-term capital needs.

Current wording

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. Additionally, we use our Revolver Borrowings and proceeds from the recent follow-on equity offering to support our working capital requirements, capital expenditures and strategic acquisitions. We seek to maintain adequate liquidity to meet working capital requirements, fund capital expenditures, make scheduled interest payments on debt and meet our contingent consideration obligations. Absent deterioration of market conditions, we believe that cash flows from operating and financing activities, primarily Revolver Borrowings, will provide adequate resources to satisfy our working capital, scheduled interest payments on debt, anticipated dividend payments, periodic share repurchases, contingent consideration obligations and anticipated capital expenditure requirements for both our short-term and long-term capital needs.

Previous wording

Our cash balance (including cash and cash equivalents) as of June 30, 2024 was $18.9 million, as compared with $22.2 million at March 31, 2024.

Current wording

Our cash balance (including cash and cash equivalents) at September 30, 2024 was $273.2 million, as compared with $22.2 million at March 31, 2024.

Previous wording

For the three months ended June 30, 2024, our cash provided by operating activities was $62.7 million, as compared with $50.3 million for three months ended June 30, 2023.

Current wording

For the six months ended September 30, 2024, our cash provided by operating activities from operations was $129.5 million, as compared with $94.9 million for six months ended September 30, 2023.

Previous wording

•Working capital provided cash for the three months ended June 30, 2023 due to higher accounts payable and other current liabilities ($3.2 million), lower prepaid expenses and other current assets ($2.4 million), and lower inventories ($2.1 million), partially offset by higher accounts receivable ($4.3 million).

Current wording

•Working capital provided cash for the six months ended September 30, 2024 due to higher accounts payable and other current liabilities ($39.6 million) and lower accounts receivable ($11.3 million), partially offset by higher inventories ($25.3 million), higher prepaid expenses and other current assets ($2.1 million).

Previous wording

•Working capital provided cash for the three months ended June 30, 2024 due to higher accounts payable and other current liabilities ($10.9 million) and lower prepaid expenses and other current assets ($3.4 million), partially offset by higher inventories ($6.8 million) and higher accounts receivable ($1.0 million).

Current wording

•Working capital provided cash for the six months ended September 30, 2023 due to higher accounts payable and other current liabilities ($9.0 million), lower inventories ($7.7 million) and higher other liabilities ($1.1 million), partially offset by higher prepaid and other current assets ($5.5 million) and higher accounts receivable ($3.9 million).

Previous wording

Cash flows used in investing activities during the three months ended June 30, 2024 were $3.3 million, as compared with $5.1 million used in investing activities for the three months ended June 30, 2023.

Current wording

Cash flows used in investing activities from operations during the six months ended September 30, 2024 were $41.3 million, as compared with $8.7 million used in investing activities for the six months ended September 30, 2023.

Previous wording

•Capital expenditures during the three months ended June 30, 2024 and 2023 were $3.1 million and $5.0 million, respectively. Our capital expenditures (including $0.2 million and $1.9 million during the current and prior year periods, respectively, for the Whitmore JV) have been focused on capacity expansion, new product introductions, continuous improvement and automation of manufacturing facilities.

Current wording

•Capital expenditures during the six months ended September 30, 2024 and 2023 were $8.6 million and $7.8 million, respectively. Our capital expenditures have been focused on capacity expansion (including $0.4 million and $2.1 million during the current and prior year periods for the Whitmore JV), enterprise resource planning systems, new product introductions, continuous improvement and automation of manufacturing facilities.

Previous wording

•During the three months ended June 30, 2024, $0.5 million was paid to acquire a long-term investment.

Current wording

•During the six months ended September 30, 2024, $0.5 million was paid to acquire a long-term investment.

Previous wording

Cash flows used in financing activities during the three months ended June 30, 2024 and 2023 were $62.2 million and $48.8 million, respectively. Cash outflows resulted from:

Current wording

Cash flows provided by (used in) financing activities during the six months ended September 30, 2024 and 2023 were $162.6 million and $(89.8) million, respectively.

Previous wording

•Net repayments on our Revolving Credit Facility (as discussed in Note 7 to our consolidated financial statements included in this Quarterly Report) of $51.0 million and $43.0 million during the three months ended June 30, 2024 and 2023, respectively.

Current wording

•Net repayments on our Revolving Credit Facility (as discussed in Note 7 to our consolidated financial statements included in this Quarterly Report) of $166.0 million and $80.0 million during the six months ended September 30, 2024 and 2023, respectively.

Previous wording

•As discussed in Note 11 to our consolidated financial statements included in this Quarterly Report, repurchases of shares under our share repurchase program of $4.6 million and $0.0 million during the three months ended June 30, 2024 and 2023, respectively. In connection with the vesting of share awards, $3.3 million and $2.9 million were tendered by employees to satisfy minimum tax withholding requirements during the three months ended June 30, 2024 and 2023, respectively.

Current wording

•As discussed in Note 11 to our consolidated financial statements included in this Quarterly Report, repurchases of shares under our share repurchase program of $8.9 million and $1.1 million during the six months ended September 30, 2024 and 2023, respectively.

Previous wording

Management’s discussion and analysis of financial condition and results of operations are based on our consolidated financial statements and related footnotes contained within this Quarterly Report. Our critical accounting policies used in the preparation of our consolidated financial statements were discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report. No significant changes to these policies, as described in our Annual Report, have occurred in the three months ended June 30, 2024.

Current wording

Management’s discussion and analysis of financial condition and results of operations are based on our consolidated financial statements and related footnotes contained within this Quarterly Report. Our critical accounting policies used in the preparation of our consolidated financial statements were discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report. No significant changes to these policies, as described in our Annual Report, have occurred in the six months ended September 30, 2024.

Previous wording

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

Current wording

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