UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20202021
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No. 001-37454
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CSW INDUSTRIALS, INC. (Exact name of registrant as specified in its charter) |
| | | | | | | | |
Delaware | | 47-2266942 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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5420 Lyndon B. Johnson Freeway, Suite 500, Dallas, Texas | | 75240 |
(Address of principal executive offices) | | (Zip Code) |
(214) 884-3777
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading symbol (s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | CSWI | | Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer☐☒ | Accelerated filer ☒☐ | Non-accelerated filer ☐ (Do not check if smaller reporting company)
| Smaller reporting company ☐ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of October 26, 2020,July 30, 2021, there were 14,803,92915,734,200 shares of the issuer’s common stock outstanding.
CSW INDUSTRIALS, INC.
FORM 10-Q
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
SIGNATURES | |
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
CSW INDUSTRIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | | | Three Months Ended September 30, | | Six Months Ended September 30, | | | Three Months Ended June 30, | | |
(Amounts in thousands, except per share amounts) | (Amounts in thousands, except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 | | (Amounts in thousands, except per share amounts) | | 2021 | | 2020 | | |
Revenues, net | Revenues, net | | $ | 104,940 | | | $ | 101,324 | | | $ | 195,904 | | | $ | 203,657 | | | Revenues, net | | $ | 161,266 | | | $ | 90,964 | | | |
Cost of revenues | Cost of revenues | | (56,204) | | | (53,920) | | | (104,416) | | | (109,018) | | | Cost of revenues | | (92,668) | | | (48,212) | | | |
Gross profit | Gross profit | | 48,736 | | | 47,404 | | | 91,488 | | | 94,639 | | | Gross profit | | 68,598 | | | 42,752 | | | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | (26,556) | | | (27,282) | | | (53,056) | | | (54,195) | | | Selling, general and administrative expenses | | (40,124) | | | (26,499) | | | |
| Operating income | Operating income | | 22,180 | | | 20,122 | | | 38,432 | | | 40,444 | | | Operating income | | 28,474 | | | 16,253 | | | |
Interest expense, net | Interest expense, net | | (284) | | | (299) | | | (602) | | | (800) | | | Interest expense, net | | (1,538) | | | (318) | | | |
Other expense, net | Other expense, net | | (360) | | | (7,367) | | | (667) | | | (7,454) | | | Other expense, net | | (172) | | | (307) | | | |
Income before income taxes | Income before income taxes | | 21,536 | | | 12,456 | | | 37,163 | | | 32,190 | | | Income before income taxes | | 26,764 | | | 15,628 | | | |
Provision for income taxes | Provision for income taxes | | (5,182) | | | (3,638) | | | (8,851) | | | (8,027) | | | Provision for income taxes | | (6,401) | | | (3,668) | | | |
Income from continuing operations | | 16,354 | | | 8,818 | | | 28,312 | | | 24,163 | | | |
Loss from discontinued operations, net of tax | | 0 | | | (35) | | | 0 | | | (174) | | | |
Net income | Net income | | $ | 16,354 | | | $ | 8,783 | | | $ | 28,312 | | | $ | 23,989 | | | Net income | | 20,363 | | | 11,960 | | | |
Less: Income attributable to redeemable noncontrolling interest | | Less: Income attributable to redeemable noncontrolling interest | | (315) | | | 0 | | | |
| Net income attributable to CSW Industrials, Inc. | | Net income attributable to CSW Industrials, Inc. | | $ | 20,048 | | | $ | 11,960 | | | |
| | Basic earnings (loss) per common share: | | | |
Continuing operations | | $ | 1.11 | | | $ | 0.59 | | | $ | 1.92 | | | $ | 1.61 | | | |
Discontinued operations | | 0 | | | (0.01) | | | 0 | | | (0.01) | | | |
Net income | | $ | 1.11 | | | $ | 0.58 | | | $ | 1.92 | | | $ | 1.60 | | | |
| Diluted earnings (loss) per common share: | | | |
Continuing operations | | $ | 1.10 | | | $ | 0.58 | | | $ | 1.91 | | | $ | 1.59 | | | |
Discontinued operations | | 0 | | | 0 | | | 0 | | | (0.01) | | | |
Net income | | $ | 1.10 | | | $ | 0.58 | | | $ | 1.91 | | | $ | 1.58 | | | |
Net income per share attributable to CSW Industrials, Inc. | | Net income per share attributable to CSW Industrials, Inc. | | | |
Basic | | Basic | | $ | 1.28 | | | $ | 0.81 | | | |
Diluted | | Diluted | | $ | 1.27 | | | $ | 0.81 | | | |
See accompanying notes to condensed consolidated financial statements.
CSW INDUSTRIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | Three Months Ended September 30, | | Six Months Ended September 30, | | | Three Months Ended June 30, | | |
(Amounts in thousands) | (Amounts in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | (Amounts in thousands) | | 2021 | | 2020 | | |
Net income | Net income | | $ | 16,354 | | | $ | 8,783 | | | $ | 28,312 | | | $ | 23,989 | | | Net income | | $ | 20,363 | | | $ | 11,960 | | | |
Other comprehensive income (loss): | Other comprehensive income (loss): | | | Other comprehensive income (loss): | | | |
Foreign currency translation adjustments | Foreign currency translation adjustments | | 1,052 | | | (669) | | | 2,390 | | | (411) | | | Foreign currency translation adjustments | | 489 | | | 1,338 | | | |
Cash flow hedging activity, net of taxes of $(16), $58, $(1) and $137 respectively | | 60 | | | (217) | | | 5 | | | (514) | | | |
Pension and other postretirement effects, net of taxes of $(1), $(673), $0 and $(673), respectively | | 4 | | | 2,534 | | | 0 | | | 2,530 | | | |
Cash flow hedging activity, net of taxes of $29 and $15, respectively | | Cash flow hedging activity, net of taxes of $29 and $15, respectively | | (109) | | | (55) | | | |
Pension and other postretirement effects, net of taxes of $(2) and $1, respectively | | Pension and other postretirement effects, net of taxes of $(2) and $1, respectively | | 7 | | | (4) | | | |
Other comprehensive income | Other comprehensive income | | 1,116�� | | | 1,648 | | | 2,395 | | | 1,605 | | | Other comprehensive income | | 387 | | | 1,279 | | | |
Comprehensive income | Comprehensive income | | $ | 17,470 | | | $ | 10,431 | | | $ | 30,707 | | | $ | 25,594 | | | Comprehensive income | | $ | 20,750 | | | $ | 13,239 | | | |
Less: Comprehensive income attributable to redeemable noncontrolling interest | | Less: Comprehensive income attributable to redeemable noncontrolling interest | | (315) | | | 0 | | | |
Comprehensive income attributable to CSW Industrials, Inc. | | Comprehensive income attributable to CSW Industrials, Inc. | | $ | 20,435 | | | $ | 13,239 | | | |
See accompanying notes to condensed consolidated financial statements.
CSW INDUSTRIALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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(Amounts in thousands, except per share amounts) | | September 30, 2020 | | March 31, 2020 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 47,299 | | | $ | 18,338 | |
Accounts receivable, net of allowance for expected credit losses of $576 and $1,170, respectively | | 70,092 | | | 74,880 | |
Inventories, net | | 52,090 | | | 53,753 | |
Prepaid expenses and other current assets | | 5,377 | | | 3,074 | |
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Total current assets | | 174,858 | | | 150,045 | |
Property, plant and equipment, net of accumulated depreciation of $75,235 and $71,355, respectively | | 57,734 | | | 57,178 | |
Goodwill | | 92,419 | | | 91,686 | |
Intangible assets, net | | 43,368 | | | 46,185 | |
Other assets | | 23,288 | | | 24,151 | |
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Total assets | | $ | 391,667 | | | $ | 369,245 | |
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LIABILITIES AND EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 20,736 | | | $ | 21,978 | |
Accrued and other current liabilities | | 36,113 | | | 36,607 | |
Current portion of long-term debt | | 561 | | | 561 | |
| | | | |
Total current liabilities | | 57,410 | | | 59,146 | |
Long-term debt | | 10,056 | | | 10,337 | |
Retirement benefits payable | | 1,853 | | | 1,879 | |
Other long-term liabilities | | 20,307 | | | 21,142 | |
| | | | |
Total liabilities | | 89,626 | | | 92,504 | |
Equity: | | | | |
Common shares, $0.01 par value | | 160 | | | 159 | |
Shares authorized – 50,000 | | | | |
Shares issued – 16,115 and 16,055, respectively | | | | |
Preferred shares, $0.01 par value | | 0 | | | 0 | |
Shares authorized (10,000) and issued (0) | | | | |
Additional paid-in capital | | 50,936 | | | 48,327 | |
Treasury shares, at cost (1,346 and 1,311 shares, respectively) | | (79,401) | | | (75,377) | |
Retained earnings | | 339,397 | | | 315,078 | |
Accumulated other comprehensive loss | | (9,051) | | | (11,446) | |
Total equity | | 302,041 | | | 276,741 | |
Total liabilities and equity | | $ | 391,667 | | | $ | 369,245 | |
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(Amounts in thousands, except per share amounts) | | June 30, 2021 | | March 31, 2021 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 15,677 | | | $ | 10,088 | |
Accounts receivable, net of allowance for expected credit losses of $978 and $915, respectively | | 111,940 | | | 96,695 | |
Inventories, net | | 105,005 | | | 98,086 | |
Prepaid expenses and other current assets | | 10,050 | | | 9,684 | |
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Total current assets | | 242,672 | | | 214,553 | |
Property, plant and equipment, net of accumulated depreciation of $73,177 and $72,944, respectively | | 80,664 | | | 82,554 | |
Goodwill | | 218,927 | | | 218,795 | |
Intangible assets, net | | 286,060 | | | 283,060 | |
Other assets | | 75,919 | | | 75,995 | |
| | | | |
Total assets | | $ | 904,242 | | | $ | 874,957 | |
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LIABILITIES AND EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 43,227 | | | $ | 32,444 | |
Accrued and other current liabilities | | 47,939 | | | 49,743 | |
Current portion of long-term debt | | 561 | | | 561 | |
| | | | |
Total current liabilities | | 91,727 | | | 82,748 | |
Long-term debt | | 230,635 | | | 241,776 | |
Retirement benefits payable | | 1,674 | | | 1,695 | |
Other long-term liabilities | | 135,380 | | | 136,725 | |
| | | | |
Total liabilities | | 459,416 | | | 462,944 | |
Redeemable noncontrolling interest | | 13,706 | | | 0 | |
Equity: | | | | |
Common shares, $0.01 par value | | 161 | | | 161 | |
Shares authorized – 50,000 | | | | |
Shares issued – 16,250 and 16,162, respectively | | | | |
Preferred shares, $0.01 par value | | 0 | | | 0 | |
Shares authorized (10,000) and issued (0) | | | | |
Additional paid-in capital | | 107,531 | | | 104,689 | |
Treasury shares, at cost (516 and 511 shares, respectively) | | (35,868) | | | (34,075) | |
Retained earnings | | 364,905 | | | 347,234 | |
Accumulated other comprehensive loss | | (5,609) | | | (5,996) | |
Total equity | | 431,120 | | | 412,013 | |
Total liabilities, redeemable noncontrolling interest and equity | | $ | 904,242 | | | $ | 874,957 | |
See accompanying notes to condensed consolidated financial statements.
CSW INDUSTRIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| (Amounts in thousands) | (Amounts in thousands) | | Common Stock | | Treasury Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Equity | (Amounts in thousands) | | Common Stock | | Treasury Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
Balance at March 31, 2020 | | $ | 159 | | | $ | (75,377) | | | $ | 48,327 | | | $ | 315,078 | | | $ | (11,446) | | | $ | 276,741 | | |
Balance at March 31, 2021 | | Balance at March 31, 2021 | | $ | 161 | | | $ | (34,075) | | | $ | 104,689 | | | $ | 347,234 | | | $ | (5,996) | | | $ | 412,013 | |
Share-based compensation | Share-based compensation | | — | | | — | | | 1,328 | | | — | | | — | | | 1,328 | | Share-based compensation | | — | | | — | | | 1,888 | | | — | | | — | | | 1,888 | |
Stock activity under stock plans | Stock activity under stock plans | | 1 | | | (1,670) | | | (1) | | | — | | | — | | | (1,670) | | Stock activity under stock plans | | — | | | (3,168) | | | (1) | | | — | | | — | | | (3,169) | |
Repurchase of common shares | | — | | | (7,291) | | | — | | | — | | | — | | | (7,291) | | |
Reissuance of treasury shares | Reissuance of treasury shares | | — | | | 3,131 | | | 516 | | | — | | | — | | | 3,647 | | Reissuance of treasury shares | | — | | | 1,375 | | | 936 | | | — | | | — | | | 2,311 | |
Net income | Net income | | — | | | — | | | — | | | 11,960 | | | — | | | 11,960 | | Net income | | — | | | — | | | — | | | 20,048 | | | — | | | 20,048 | |
Dividends | Dividends | | — | | | — | | | 12 | | | (1,996) | | | — | | | (1,984) | | Dividends | | — | | | — | | | 19 | | | (2,377) | | | — | | | (2,358) | |
Other comprehensive income, net of tax | Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 1,279 | | | 1,279 | | Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 387 | | | 387 | |
Balance at June 30, 2020 | | $ | 160 | | | $ | (81,207) | | | $ | 50,182 | | | $ | 325,042 | | | $ | (10,167) | | | $ | 284,010 | | |
Share-based compensation | | — | | | — | | | 1,222 | | | — | | | — | | | 1,222 | | |
Stock activity under stock plans | | — | | | (6) | | | — | | | — | | | — | | | (6) | | |
| Reissuance of treasury shares | | — | | | 1,812 | | | (479) | | | — | | | — | | | 1,333 | | |
Net income | | — | | | — | | | — | | | 16,354 | | | — | | | 16,354 | | |
Dividends | | — | | | — | | | 11 | | | (1,999) | | | — | | | (1,988) | | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 1,116 | | | 1,116 | | |
Balance at September 30, 2020 | | $ | 160 | | | $ | (79,401) | | | $ | 50,936 | | | $ | 339,397 | | | $ | (9,051) | | | $ | 302,041 | | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | | $ | 161 | | | $ | (35,868) | | | $ | 107,531 | | | $ | 364,905 | | | $ | (5,609) | | | $ | 431,120 | |
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| (Amounts in thousands) | (Amounts in thousands) | | Common Stock | | Treasury Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Equity | (Amounts in thousands) | | Common Stock | | Treasury Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
Balance at March 31, 2019 | | $ | 158 | | | $ | (49,964) | | | $ | 46,633 | | | $ | 277,588 | | | $ | (10,729) | | | $ | 263,686 | | |
Balance at March 31, 2020 | | Balance at March 31, 2020 | | $ | 159 | | | $ | (75,377) | | | $ | 48,327 | | | $ | 315,078 | | | $ | (11,446) | | | $ | 276,741 | |
Share-based compensation | Share-based compensation | | — | | | — | | | 1,213 | | | — | | | — | | | 1,213 | | Share-based compensation | | — | | | — | | | 1,328 | | | — | | | — | | | 1,328 | |
Stock activity under stock plans | Stock activity under stock plans | | 1 | | | (793) | | | — | | | — | | | — | | | (792) | | Stock activity under stock plans | | 1 | | | (1,670) | | | (1) | | | — | | | — | | | (1,670) | |
Adoption of ASC 842 Leases | | — | | | — | | | — | | | (400) | | | — | | | (400) | | |
Net income | | — | | | — | | | — | | | 15,204 | | | — | | | 15,204 | | |
Dividends | | — | | | — | | | — | | | (2,041) | | | — | | | (2,041) | | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | (43) | | | (43) | | |
Balance at June 30, 2019 | | $ | 159 | | | $ | (50,757) | | | $ | 47,846 | | | $ | 290,351 | | | $ | (10,772) | | | $ | 276,827 | | |
Share-based compensation | | — | | | — | | | 1,196 | | | — | | | — | | | 1,196 | | |
| Repurchase of common shares | | Repurchase of common shares | | — | | | (7,291) | | | — | | | — | | | — | | | (7,291) | |
Reissuance of treasury shares | | Reissuance of treasury shares | | — | | | 3,131 | | | 516 | | | — | | | — | | | 3,647 | |
Net income | Net income | | — | | | — | | | — | | | 8,783 | | | — | | | 8,783 | | Net income | | — | | | — | | | — | | | 11,960 | | | — | | | 11,960 | |
Dividends | Dividends | | — | | | — | | | 25 | | | (2,040) | | | — | | | (2,015) | | Dividends | | — | | | — | | | 12 | | | (1,996) | | | — | | | (1,984) | |
Other comprehensive income, net of tax | Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 1,648 | | | 1,648 | | Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 1,279 | | | 1,279 | |
Balance at September 30, 2019 | | $ | 159 | | | $ | (50,757) | | | $ | 49,067 | | | $ | 297,094 | | | $ | (9,124) | | | $ | 286,439 | | |
Balance at June 30, 2020 | | Balance at June 30, 2020 | | $ | 160 | | | $ | (81,207) | | | $ | 50,182 | | | $ | 325,042 | | | $ | (10,167) | | | $ | 284,010 | |
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See accompanying notes to condensed consolidated financial statements.
CSW INDUSTRIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | | | |
| | Six Months Ended September 30, |
(Amounts in thousands) | | 2020 | | 2019 |
Cash flows from operating activities: | | | | |
Net income | | $ | 28,312 | | | $ | 23,989 | |
Less: Loss from discontinued operations | | 0 | | | (174) | |
Income from continuing operations | | 28,312 | | | 24,163 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation | | 3,776 | | | 4,162 | |
Amortization of intangible and other assets | | 3,454 | | | 3,503 | |
Provision for inventory reserves | | 953 | | | 229 | |
Provision for doubtful accounts | | 274 | | | 547 | |
Share-based and other executive compensation | | 2,550 | | | 2,434 | |
| | | | |
Net gain on disposals of property, plant and equipment | | (13) | | | (744) | |
Pension plan curtailment benefit | | 0 | | | 6,559 | |
Net pension benefit | | 81 | | | (198) | |
| | | | |
Net deferred taxes | | 111 | | | (875) | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | | 5,028 | | | (1,101) | |
Inventories | | 880 | | | (899) | |
Prepaid expenses and other current assets | | (2,380) | | | 3,021 | |
Other assets | | (165) | | | 20 | |
Accounts payable and other current liabilities | | 1,989 | | | (3,110) | |
Retirement benefits payable and other liabilities | | (67) | | | (215) | |
Net cash provided by operating activities, continuing operations | | 44,783 | | | 37,496 | |
Net cash used in operating activities, discontinued operations | | 0 | | | (389) | |
Net cash provided by operating activities | | 44,783 | | | 37,107 | |
Cash flows from investing activities: | | | | |
Capital expenditures | | (4,357) | | | (4,571) | |
| | | | |
Proceeds from sale of assets | | 6 | | | 1,089 | |
Cash paid for acquisitions | | 0 | | | (11,837) | |
Net cash used in investing activities, continuing operations | | (4,351) | | | (15,319) | |
Net cash provided by investing activities, discontinued operations | | 0 | | | 0 | |
Net cash used in investing activities | | (4,351) | | | (15,319) | |
Cash flows from financing activities: | | | | |
Borrowings on line of credit | | 10,000 | | | 7,500 | |
Repayments of line of credit and term loan | | (10,281) | | | (27,781) | |
Purchase of treasury shares | | (9,352) | | | (793) | |
| | | | |
Proceeds from stock option activity | | 1,331 | | | 0 | |
Dividends | | (3,972) | | | (4,081) | |
Net cash used in financing activities | | (12,274) | | | (25,155) | |
Effect of exchange rate changes on cash and equivalents | | 803 | | | 393 | |
Net change in cash and cash equivalents | | 28,961 | | | (2,974) | |
Cash and cash equivalents, beginning of period | | 18,338 | | | 26,651 | |
Cash and cash equivalents, end of period | | $ | 47,299 | | | $ | 23,677 | |
| | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
(Amounts in thousands) | | 2021 | | 2020 |
Cash flows from operating activities: | | | | |
Net income | | $ | 20,363 | | | $ | 11,960 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation | | 3,059 | | | 1,877 | |
Amortization of intangible and other assets | | 9,235 | | | 1,711 | |
Provision for inventory reserves | | 247 | | | 854 | |
Provision for doubtful accounts | | 202 | | | 312 | |
Share-based and other executive compensation | | 1,888 | | | 1,328 | |
| | | | |
Net gain on disposals of property, plant and equipment | | 1 | | | 0 | |
| | | | |
Net pension benefit | | 36 | | | 40 | |
| | | | |
Net deferred taxes | | 81 | | | 422 | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | | (16,164) | | | 3,315 | |
Inventories | | (11,036) | | | (6,458) | |
Prepaid expenses and other current assets | | (344) | | | 471 | |
Other assets | | 270 | | | (149) | |
Accounts payable and other current liabilities | | 10,865 | | | (1,515) | |
Retirement benefits payable and other liabilities | | 226 | | | (22) | |
Net cash provided by operating activities | | 18,929 | | | 14,146 | |
Cash flows from investing activities: | | | | |
Capital expenditures | | (1,079) | | | (1,837) | |
| | | | |
Proceeds from sale of assets | | 8 | | | 0 | |
Proceeds from acquisitions true-up | | 1,375 | | | 0 | |
Net cash provided by (used in) investing activities | | 304 | | | (1,837) | |
Cash flows from financing activities: | | | | |
Borrowings on line of credit | | 12,000 | | | 10,000 | |
Repayments of line of credit and term loan | | (23,140) | | | (10,140) | |
Payments of deferred loan costs | | (2,328) | | | 0 | |
Purchase of treasury shares | | (3,168) | | | (9,346) | |
| | | | |
Proceeds from acquisition of redeemable noncontrolling interest shareholder | | 5,293 | | | 0 | |
Dividends | | (2,358) | | | (1,985) | |
Net cash used in financing activities | | (13,701) | | | (11,471) | |
Effect of exchange rate changes on cash and equivalents | | 57 | | | 511 | |
Net change in cash and cash equivalents | | 5,589 | | | 1,349 | |
Cash and cash equivalents, beginning of period | | 10,088 | | | 18,338 | |
Cash and cash equivalents, end of period | | $ | 15,677 | | | $ | 19,687 | |
See accompanying notes to condensed consolidated financial statements.
CSW INDUSTRIALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.ORGANIZATION AND OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
CSW Industrials, Inc. (“CSWI,” “we,” “our” or “us”) is a growth-oriented, diversified industrial growth company with well-established, scalable platforms and domain expertise across 2 business segments: Industrial Products and Specialty Chemicals.a strategic focus on providing niche, value-added products in the end markets we serve. Our broad portfolio of leading products provides performance optimizing and life safety solutions to our customers. Our products include mechanical products for heating, ventilation, air conditioning and refrigeration (“HVAC/R”), grilles, registers and diffusers, engineered building products and high-performance specialty lubricants and sealants. Drawing on our innovative and proven technologies, we seek to deliver solutions primarily to our professional end-use customers that place a premium on superior performance and reliability. Our diverse product portfolio includes more than 100 highly respected industrial brands including No. 5®, KOPR-KOTE®, Kats Coatings®, Safe-T-Switch®, Air Sentry®, Deacon®, Leak Freeze®, Greco® and Greco®TRUaire®.
Our products are well-known in the specific industries we serve and have a reputation for high quality and reliability. Markets that we serve include HVAC/R, architecturally-specified building products, plumbing, energy, rail, mining and general industrial markets.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus ("COVID-19") a pandemic. COVID-19 continues to spread throughout the world and has led certain countries or jurisdictions within them to restrict travel, social gatherings and certain types of business activity deemed to be "non-essential," which has created a recessionary environment in the U.S. and around the globe and has led to a decline in demand in some end markets, including several that we serve. Also, in March 2020, as a result of the weakened demand for crude oil resulting from theThe COVID-19 pandemic and magnified by political tensions between several large crude oil-producing countries, there was aits resulting impacts, including the substantial decline in crude oil prices magnified by significant volatility that has continued to date. Both factorsbegan in March 2020, had aan overall negative impact on our revenuesfinancial results in the three and six months ended SeptemberJune 30, 2020, as compared with2020. During the same periodsthree months ended June 30, 2021, the COVID-19 pandemic continues to have an impact on human health, the global economy and society at large. While the COVID-19 pandemic has contributed to increased demand in fiscal 2020,certain parts of our business, including the HVAC/R end market, we expect customer demand levels and are expected to negatively impact our results in the balance of fiscal year 2021.
We expect ouroverall results of operations and financial condition to continue to be adversely impacted as compared with the prior yearhave some level of volatility through the duration of the pandemic duewhen compared to its effects onpre-pandemic periods. In addition, the economycountermeasures taken by federal, state and/or local governments and the Federal Reserve in response to the COVID-19 pandemic, as well as the recovering demand foras jurisdictions relax COVID-19 protocols, have had business impacts, including increased material cost inflation and logistics costs increases. Beginning in the three months ended March 31, 2021, we began implementing pricing initiatives to mitigate the impact of rising costs, which initiatives have continued and increased during the three months ended June 30, 2021.
Despite strong demand in certain of our productsend markets and services. However,signs of recovery in others, we cannot reasonably estimate the magnitude or length of the pandemic’s adverse impact, including the effects of any vaccine or its ultimate impact on our business or financial condition, due to continued uncertainty regarding (1) the duration and severity of the COVID-19 pandemic and (2) the extent of thecontinued potential for short and long-term impactimpacts on our facilities and employees, customer demand and availability of materials through supply channels.chain.
Basis of Presentation
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the quarterly period ended SeptemberJune 30, 20202021 (“Quarterly Report”), include all revenues, costs, assets and liabilities directly attributable to CSWI and have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The condensed consolidated financial statements are for us and our 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 primary beneficiary and therefore have consolidated into our financial statements. All significant intercompany transactions have been eliminated in consolidation.
The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of CSWI’s financial position as of SeptemberJune 30, 2020,2021, and the results of operations for the three and sixmonththree-month periods ended SeptemberJune 30, 20202021 and 2019.2020. All adjustments are of a normal, recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation.
The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in CSWI’s Annual Report on Form 10-K for the fiscal year ended March 31, 20202021 (the “Annual Report”).
Whitmore Joint Venture ("Whitmore JV")
On April 1, 2021, Whitmore Manufacturing, LLC (the “Whitmore”), a wholly-owned subsidiary of CSWI, completed the formation of the previously announced joint venture ("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 Shell in the form of cash and intangible assets. The Whitmore JV is deemed to be a variable interest entity ("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. 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. Refer to Note 3 for further information on the Whitmore JV.
Segment Realignment
Beginning with the quarter ended June 30, 2021, we revised our segment structure to align with how our chief operating decision maker (who was determined to be our Chief Executive Officer) views our business, assesses performance and allocates resources to our business components. Effective April 1, 2021, following the completion of various strategic transactions including the acquisition of T.A. Industries, Inc. and the formation of the Whitmore JV, our business is now organized into three reportable segments:
1.Contractor Solutions manufactures and supplies products predominantly for residential and commercial HVAC/R and plumbing applications, which are designed primarily for professional tradespeople. This segment is comprised primarily of RectorSeal and TRUaire operating companies.
2.Engineered Building Solutions 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. This segment is comprised primarily of Balco, Greco and Smoke Guard operating companies.
3.Specialized Reliability Solutions provides products for increasing the reliability, performance and lifespan of industrial assets and solving equipment maintenance challenges. This segment is comprised primarily of Whitmore and the Whitmore JV operating companies.
As a result, reclassification of certain prior year financial information has been made to conform with the current period's presentation. None of the changes impact the Company's previously reported consolidated net revenue, operating income, net income or net income per share. Refer to Note 18 for further information on the Company's segment realignment.
Accounting Policies
We have consistently applied the accounting policies described in our Annual Report in preparing these condensed consolidated financial statements. We have not made any changes in significantUpdates and supplements to those accounting policies disclosed in the Annual Report,associated with the exceptionsegment realignment and formation of the expected credit loss accounting policy described below as a result of adopting the new expected credit loss standard.Whitmore JV are discussed below:
Segments - As discussed above, we conduct our operations through three business segments based on how we manage the business. Our Chief Executive Officer views our business, assesses performance and allocates resources using financial information generated and reported at the reportable segment level. We evaluate segment performance and allocate resources based on each reportable segment's operating income. Our reportable segments are as follows:
1.Contractor Solutions manufactures and supplies products predominantly for residential and commercial HVAC/R and plumbing applications, which are designed primarily for professional tradespeople. This segment is comprised primarily of RectorSeal and TRUaire operating companies.
2.Engineered Building Solutions 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. This segment is comprised primarily of Balco, Greco and Smoke Guard operating companies.
3.Specialized Reliability Solutions provides products for increasing the reliability, performance and lifespan of industrial assets and solving equipment maintenance challenges. This segment is comprised primarily of Whitmore and the Whitmore JV operating companies.
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
Current Expected Credit Losses ("CECL") - We record an allowance for credit losses on trade receivables that, when deducted fromdirect the gross trade receivables balance, presents the net amount expected to be collected. We estimate the allowance based on an aging schedule and according to historical losses as determined from our billings and collections history. This may be adjusted after consideration of customer-specific factors such as financial difficulties, liquidity issues or insolvency, as well as both current and forecasted macroeconomic conditions asactivities of the reporting date.VIE that most significantly impact the VIE’s economic performance, the obligation to absorb the expected losses and/or 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 the Company having the power to direct the manufacturing activities, which are considered the most significant activities for the Whitmore JV.
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 allowanceredeemable 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 recognize credit lossesare 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 statement each period. Trade receivables(loss) attributable to the redeemable noncontrolling interests 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 reflectedpresented as a reductionseparate line on the consolidated statements of operations which is necessary to periodic credit lossesidentify 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 fiscal quarter of fiscal 2022.
When calculating earnings per share attributable to CSWI, we adjust net income statement. Our allowanceattributable to CSWI for expected credit lossesthe measurement period adjustment to the extent the redemption value exceeds the carrying value of the redeemable noncontrolling interest on a cumulative basis. Refer to Note 3 for short-term receivables as of September 30, 2020 was $0.6 million, compared to $1.2 million as of March 31, 2020. The six months activity included $0.3 million for current period adjustments.further information regarding the redeemable noncontrolling interest.
Accounting Developments
Pronouncements Implemented
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." The ASU requires, among other things, the use of a new current expected credit loss model in order to determine an allowance for credit losses with respect to financial assets and instruments held. The CECL model requires that we estimate the lifetime of an expected credit loss for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. On April 1, 2020 we adopted the ASU on a prospective basis to determine our allowance for credit losses in accordance with the requirements of Topic 326, and we modified our accounting policy and processes to facilitate this approach. Our primary exposure to financial assets that are within the scope of CECL are trade receivables. Our adoption of ASU No. 2016-13 effective April 1, 2020 did not have a material impact on our condensed consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement." The amendments of the ASU modify the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosure requirements for assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to the financial statements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures were adopted on a retrospective basis and the new disclosures were adopted on a prospective basis. Our adoption of ASU No. 2018-13 effective April 1, 2020 did not impact our disclosures.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The ASU addresses how entities should account for costs associated with implementing a cloud computing arrangement that is considered a service contract. Per the amendments of the ASU, implementation costs incurred in a cloud computing arrangement that is a service contract should be accounted for in the same manner as implementation costs incurred to develop or obtain software for internal use as prescribed by guidance in ASC 350-40. The ASU requires that implementation costs incurred in a cloud computing arrangement be capitalized rather than expensed. Further, the ASU specifies the method for the amortization of costs incurred during implementation, and the manner in which the unamortized portion of these capitalized implementation costs should be evaluated for impairment. The ASU also provides guidance on how to present such implementation costs in the financial statements and also creates additional disclosure requirements. The amendments are effective for fiscal years beginning after December 15, 2019. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Our adoption of ASU No. 2018-15 effective April 1, 2020 did not have an impact on our condensed consolidated financial condition and results of operations.
Pronouncements not yet implemented
In August 2018, the FASB issued ASU No. 2018-14, "Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans," which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. The amendments are effective for fiscal years ending after December 15, 2020 and the amendments should be applied retrospectively to all periods presented. We
are currently evaluating the impact of ASU No. 2018-14 and we anticipate that our adoption of this ASU will not have a material impact on our disclosures due to the termination of our U.S. pension plan in the prior year.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes: Simplifying the Accounting for Income Taxes."The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions and adding some requirements regarding franchise (or similar) tax, step-ups in a business combination, treatment of entities not subject to tax and when to apply enacted changes in tax laws.This ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis.Early adoption is permitted.Our initial assessmentadoption of this ASU indicates it willNo. 2019-12 effective April 1, 2021 did not have a material impact on our condensed consolidated financial conditionconditions and results of operations, but our assessment has not been completed.operations.
Pronouncements not yet implemented
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and LIBOR. In the U.S., the Alternative Reference Rates Committee has identified the Secured
Overnight Financing Rate ("SOFR") as its preferred alternative to LIBOR. This ASU includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This ASU is effective immediately; however, it is only available through December 31, 2022.We are currently evaluating the potential impact of this ASU on our consolidated financial position and results of operations.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and. Economic Security ("CARES") Act, which, along with earlier issued Internal Revenue Service ("IRS") guidance, contains numerous provisions that may benefit us, including the deferral of certain taxes.The relevant tax implication impacting us is the correction of a technical issue introduced in the Tax Cuts and Jobs Act to provide for fifteen-year useful life and allow bonus depreciation for qualified improvement property.These changes were included in the fixed asset calculations for the tax year ending March 31, 2020, and we amended the tax return for the year ending March 31, 2019 to include this effect.We continue to assess the effect of the CARES Act and ongoing government guidance related to COVID-19 as it is issued.
2. ACQUISITIONS
Petersen MetalsT.A. Industries
On April 2, 2019,December 15, 2020, we acquired 100% of the assetsoutstanding equity of Petersen Metals,T.A. Industries, Inc. (“Petersen”TRUaire”), a leading manufacturer of grilles, registers, and diffusers for the residential and commercial HVAC/R end market, based near Tampa, Florida,in Santa Fe Springs, California. The acquisition also included TRUaire’s wholly-owned manufacturing facility based in Vietnam. The acquisition has extended the Company’s product offerings to the HVAC market as well as added new customers and provide strategic distribution facilities.
The contractual consideration paid for $11.8TRUaire included cash of $284 million ($286.9 million after working capital and closing cash adjustments) and 849,852 shares of which $11.5the Company’s common stock (valued at approximately $76.0 million was paid at transaction signing on November 4, 2020) valued at $97.7 million at transaction close based on the closing andmarket price of the Company's common shares on the acquisition date. The cash consideration was funded through a combination of cash on hand and borrowings under our revolving credit facility,facility. The 849,852 shares of common stock delivered to the sellers as consideration were reissued from treasury shares.
| | | | | |
Acquisition Consideration (Amounts in thousands, except for shares) | |
Cash (a) | $ | 286,925 | |
Common stock (849,852 shares) | 97,656 |
Total consideration transferred | $ | 384,581 | |
(a) Amount includes working capital and closing cash adjustments, and includes the $1.4 million received by the Company on April 1, 2021 as a result of the final working capital true-up adjustment pursuant to the purchase agreement.
The TRUaire acquisition was accounted for as a business combination under FASB Accounting Standards Codification Topic 805, Business Combinations ("Topic 805"). Pursuant to Topic 805, the Company allocated the TRUaire purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, December 15, 2020. The excess of the purchase price over those fair values was recorded to goodwill. The Company's evaluation of the facts and circumstances available of December 15, 2020, to assign fair values to assets acquired and liabilities assumed, including income tax related amounts, is ongoing. As we complete further analysis of tangible assets, intangible assets and liabilities assumed, additional information impacting the assets acquired and the remaining $0.3related allocation thereof, may become available. A change in information related to the net assets acquired may change the amount of the purchase price assigned to goodwill, and, as a result, the preliminary fair values set forth below are subject to adjustments when additional information is obtained and valuations are completed. Provisional adjustments, if any, will be recognized during the reporting period in which the adjustments are determined. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date. The following table summarizes the Company's best initial estimate of the aggregate fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands).
| | | | | | | | | | | | | | | | | | | | |
| | Initial Estimated Fair Value | | Measurement Period | | Updated Estimated Fair Value |
Cash | | $ | 1,471 | | | $ | — | | | $ | 1,471 | |
Accounts Receivable, net | | 13,467 | | | — | | | 13,467 | |
Inventory | | 46,313 | | | (1,300) | | | 45,013 | |
Short-Term Tax Indemnity Assets | | 5,000 | | | — | | | 5,000 | |
Other Current Assets | | 1,285 | | | 1,046 | | | 2,331 | |
Property, Plant and Equipment | | 28,832 | | | (3,065) | | | 25,767 | |
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 | | | 402 | | | 3,252 | |
Accounts Payable | | (4,074) | | | — | | | (4,074) | |
Accrued and Other Current Liabilities | | (3,678) | | | (1,406) | | | (5,084) | |
Lease Liabilities - Short-Term | | (4,811) | | | — | | | (4,811) | |
| | | | | | |
Deferred Tax Liabilities | | (56,249) | | | (6,912) | | | (63,161) | |
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 | | | 2,455 | | | 259,021 | |
Goodwill | | 129,169 | | | (3,609) | | | 125,560 | |
Total Purchase Price | | $ | 385,735 | | | $ | (1,154) | | | $ | 384,581 | |
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 has provided contractual indemnification to the Company for up to $12.5 million representedrelated to uncertain tax positions taken in prior years. The outcome of this arrangement will either be settled or expire by 2023. During the three months ended March 31, 2021, TRUaire received an audit closing letter from Internal Revenue Service related to calendar 2017, a working capital adjustment paidpre-acquisition tax year. As a result of this, $5.0 million of the relevant tax indemnification assets was released in July 2019. Petersen is a leading designer, manufacturer and installeraccordance with the purchase agreement. As of architecturally-specified, engineered metal products and railings, including aluminum and stainless steel railings products for interior and exterior applications. TheJune 30, 2021, approximately $7.5 million of the tax indemnification assets remain outstanding.
Goodwill of $125.6 million represents the excess of the purchase price over the fair value of the identifiableunderlying tangible and intangible assets acquired was $6.1 million allocated toand liabilities assumed. The acquisition goodwill which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from enabling geographic,expanding the Company’s product offerings more broadly across the HVAC/R end marketmarket. The goodwill recorded as part of this acquisition is included in the Contractor Solutions segment. The goodwill associated with the acquisition will not be amortized for financial reporting purposes and product diversificationwill not be deductible for income tax purposes.
TRUaire generated net revenue of $67.4 million and expansiona net income before income taxes of $4.4 million for the period from the acquisition date to June 30, 2021. For the three months ended June 30, 2021, TRUaire generated revenue of $33.5 million and a net income before income taxes of $4.8 million. TRUaire activity is currently included in our Contractor Solutions segment. During the year ended March 31, 2021, the Company incurred and paid $7.8 million of transaction expenses in connection with the TRUaire acquisition, which were included in selling, general and administrative expenses in the Consolidated Statement of Operations. No transaction expenses were incurred during the three months ended June 30, 2021.
Pursuant to Topic 805, unaudited supplemental proforma results of operations for the three months ended June 30, 2020, as Petersen isif the acquisition of TRUaire had occurred on April 1, 2019, are presented below (in thousands, except per share amounts):
| | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | |
Revenue, net | | | $ | 119,674 | | | | | |
Net income | | | 15,513 | | | | | |
| | | | | | | |
Net earnings per common share: | | | | | | | |
Diluted | | | $ | 0.99 | | | | | |
Basic | | | 1.00 | | | | | |
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 strategic complementprojection of future results. The unaudited proforma results include certain proforma adjustments to our existing linenet 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 architecturally-specified building products. The allocation$0.1 million for the three months ended June 30, 2020 that would have been recognized as a result of the fair value step-up of the net assets acquired includedproperty, plant and equipment;
•Additional amortization expense of $3.4 million for the three months ended June 30, 2020 that would have been recognized as a result of the allocation of purchase consideration to customer lists subject to amortization;
•Estimated additional interest expense of $3.2$1.2 million for the three months ended June 30, 2020 as a result of incurring additional borrowing and
•Income tax effect of the proforma adjustments calculated using a blended statutory income tax rate of 24.5% of $1.1 million for the three months ended June 30, 2020.
3. CONSOLIDATION OF VARIABLE INTEREST ENTITIES AND REDEEMABLE NONCONTROLLING INTEREST
Whitmore Joint Venture ("Whitmore JV")
On April 1, 2021, Whitmore Manufacturing, LLC (“Whitmore”), a wholly-owned subsidiary of CSWI, completed the formation of the previously announced joint venture ("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 Shell in the form of cash ($5.3 million) and backlogintangible assets ($8.1 million). The Whitmore JV has been consolidated into the operations of $0.4 million, as well as accounts receivable, inventorythe Company and equipment of $2.2 million, $0.8 million and $0.7 million, respectively, net of current liabilities of $1.5 million. Customer lists are being amortized over 15 years, backlog is amortized over 1.5 years and goodwill is not being amortized. Petersenits activity has been included in our Industrial ProductsSpecialized Reliability Solutions segment since the acquisitionformation date. No pro forma information
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 Company is the primary beneficiary of this VIE is that Whitmore has been providedthe power to direct the most significant activities due to immateriality.its ability to direct the manufacturing decisions of the Whitmore JV. Whitmore JV's total net assets are presented below (in thousands):
3. DISCONTINUED OPERATIONS | | | | | |
| June 30, 2021 |
Cash | $ | 4,791 | |
Accounts receivable, net | 7,179 | |
Inventories, net | 1,257 | |
Prepaid expenses and other current assets | 236 | |
Property, plant and equipment, net | 2,226 | |
Intangible assets, net | 7,895 | |
Other assets | 45 | |
Total assets | $ | 23,629 | |
| |
Accounts payable | $ | 4,537 | |
Accrued and other current liabilities | 120 | |
Total liabilities | $ | 4,657 | |
During the quarterthree months ended December 31, 2017, we commencedJune 30, 2021, the Whitmore JV generated a sale process to divest our Coatings business to allow us to focus resources on our core growth platforms. Our Coatings business manufactured specialized industrial coating products including urethanes, epoxies, acrylics and alkyds. Asnet income of December 31, 2017, the Coatings business met the held-for-sale criteria under ASC 360, "Property, Plant and Equipment," and accordingly, we classified and accounted for the assets and liabilities of the Coatings business as held-for-sale in the accompanying condensed consolidated balance sheets, and as discontinued operations, net of tax, in the accompanying condensed consolidated statements of income and cash flows. We completed an initial assessment of the assets and liabilities of the Coatings business and recorded a $46.0 million impairment based on our best estimates as of the date of issuance of financial results for the quarter ended December 31, 2017. No adjustments to previously recorded estimates have been made.$0.6 million.
On July 31, 2018, we consummatedThe Whitmore JV's LLC Agreement contains a saleput option that gives either member the right to sell its 50% equity interest in the Whitmore JV to the other member at a dollar amount equivalent to 90% of assets relatedthe initiating member's equity interest determined based on the fair market value of the Whitmore JV's net assets. This put option can be exercised, at either member's discretion, by providing written notice to our Coatings businessthe other member after three years from the Whitmore JV's formation, subject to an unrelated third party,certain time restrictions. This redeemable noncontrolling interest is recorded at the termshigher of which were not disclosed due to immateriality. During the three months ended September 30, 2018, we received an aggregate of $6.9 millionredemption value or carrying value each reporting period. Changes in redeemable noncontrolling interest for the sale of assets related to our Coatings business in multiple transactions. This resulted in gains on disposal of $6.9 million due to write-downs of long-lived assets in prior periods.three-month period ended June 30, 2021 were as follows (in thousands):
On March 17, 2020, we completed the sale of the last remaining real property owned by the Coatings business to an unrelated third party, the terms of which were not disclosed due to immateriality. The sale resulted in proceeds and a gain on disposal of $1.5 million due to write-downs of long-lived assets in prior periods. The last remaining asset of the Coatings business is a long-term lease that expires in March 2027. We were unable to terminate the lease, but we have sub-let the property for the remainder of the lease term. As such, this lease was moved back into continuing operations, effective March 31, 2020, and the related right-of-use ("ROU") assets and lease liabilities were reported as continuing operations as of March 31, 2020.
Summarized selected financial information for the Coatings business for the three and sixmonths ended September 30, 2020 and 2019 is presented in the following table (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | |
Revenues, net | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | | |
Loss from discontinued operations before income taxes | | 0 | | | (69) | | | 0 | | | (224) | | | | |
Income tax benefit | | 0 | | | 34 | | | 0 | | | 50 | | | | |
Loss from discontinued operations, net | | $ | 0 | | | $ | (35) | | | $ | 0 | | | $ | (174) | | | | |
| | | | | |
Balance at March 31, 2021 | $ | 0 | |
Fair value of redeemable noncontrolling interest at formation-date | 13,391 | |
Net income attributable to redeemable noncontrolling interest | 315 | |
| |
Adjustments to redemption value | 0 | |
Balance at June 30, 2021 | $ | 13,706 | |
4. INVENTORIES
Inventories consist of the following (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2020 | | March 31, 2020 |
Raw materials and supplies | | $ | 21,401 | | | $ | 20,935 | |
Work in process | | 6,723 | | | 6,076 | |
Finished goods | | 31,692 | | | 33,771 | |
Total inventories | | 59,816 | | | 60,782 | |
Less: LIFO reserve | | (4,816) | | | (4,816) | |
Less: Obsolescence reserve | | (2,910) | | | (2,213) | |
Inventories, net | | $ | 52,090 | | | $ | 53,753 | |
| | | | | | | | | | | | | | |
| | June 30, 2021 | | March 31, 2021 |
Raw materials and supplies | | $ | 33,611 | | | $ | 27,416 | |
Work in process | | 6,325 | | | 6,365 | |
Finished goods | | 72,953 | | | 72,452 | |
Total inventories | | 112,889 | | | 106,233 | |
Less: LIFO reserve | | (4,287) | | | (4,565) | |
Less: Obsolescence reserve | | (3,597) | | | (3,582) | |
Inventories, net | | $ | 105,005 | | | $ | 98,086 | |
5. GOODWILL AND INTANGIBLE ASSETS
During the three months ended June 30, 2021, we revised our segment structure creating 3 reportable segments: Contractor Solutions, Engineered Building Solutions and Specialized Reliability Solutions. Refer to Note 18 for further information on the Company's segment realignment. As part of our segment realignment, we changed our reporting units and reallocated existing goodwill to each of the new reportable segments and associated reporting units, based on management's estimate of the relative fair value of each reporting unit. The result of this reallocation of goodwill has been recast, by reportable segment, as of March 31, 2021.
The changes in the carrying amount of goodwill as of SeptemberJune 30, 20202021 and March 31, 20202021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Total |
Balance at March 31, 2021 | | $ | 169,345 | | | $ | 22,238 | | | $ | 27,212 | | | $ | 218,795 | |
Goodwill re-allocation | | 14,813 | | | 2,727 | | | (17,540) | | | 0 | |
TRUaire acquisition | | 6 | | | 0 | | | 0 | | | 6 | |
Currency translation | | (12) | | | 125 | | | 13 | | | 126 | |
Balance at June 30, 2021 | | $ | 184,152 | | | $ | 25,090 | | | $ | 9,685 | | | $ | 218,927 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Industrial Products | | Specialty Chemicals | | Total |
Balance at March 31, 2020 | | $ | 60,123 | | | $ | 31,563 | | | $ | 91,686 | |
| | | | | | |
Currency translation | | 733 | | | 0 | | | 733 | |
Balance at September 30, 2020 | | $ | 60,856 | | | $ | 31,563 | | | $ | 92,419 | |
In conjunction with the goodwill reallocation described above, during the three months ended June 30, 2021, we performed an impairment test of goodwill held by all reporting units as of March 31, 2021. Based on the results of the goodwill assessment, we determined that the fair values of each reporting unit exceeded its carrying value. As such, we concluded that there was no indication of goodwill impairment for all reporting units.
The following table provides information about our intangible assets (in thousands, except years):
| | | September 30, 2020 | | March 31, 2020 | | June 30, 2021 | | March 31, 2021 |
| | Wtd Avg Life (Years) | | Ending Gross Amount | | Accumulated Amortization | | Ending Gross Amount | | Accumulated Amortization | | Wtd Avg Life (Years) | | Ending Gross Amount | | Accumulated Amortization | | Ending Gross Amount | | Accumulated Amortization |
Finite-lived intangible assets: | Finite-lived intangible assets: | | | | | | | | | | Finite-lived intangible assets: | | | | | | | | | |
Patents | Patents | 11 | | $ | 9,636 | | | $ | (7,329) | | | $ | 9,635 | | | $ | (6,935) | | Patents | 11 | | $ | 9,418 | | | $ | (7,682) | | | $ | 9,461 | | | $ | (7,540) | |
Customer lists and amortized trademarks | Customer lists and amortized trademarks | 12 | | 63,459 | | | (35,661) | | | 62,806 | | | (33,098) | | Customer lists and amortized trademarks | 14 | | 275,213 | | | (47,089) | | | 267,096 | | | (42,345) | |
Non-compete agreements | Non-compete agreements | 5 | | 1,689 | | | (1,770) | | | 1,653 | | | (1,494) | | Non-compete agreements | 5 | | 992 | | | (845) | | | 982 | | | (790) | |
Other | Other | 8 | | 5,248 | | | (2,962) | | | 5,219 | | | (2,628) | | Other | 8 | | 4,767 | | | (3,316) | | | 4,743 | | | (3,141) | |
| | $ | 80,032 | | | $ | (47,722) | | | $ | 79,313 | | | $ | (44,155) | | | $ | 290,390 | | | $ | (58,932) | | | $ | 282,282 | | | $ | (53,816) | |
Trade names and trademarks not being amortized: | Trade names and trademarks not being amortized: | | $ | 11,058 | | | $ | — | | | $ | 11,027 | | | $ | — | | Trade names and trademarks not being amortized: | | $ | 54,602 | | | $ | — | | | $ | 54,594 | | | $ | — | |
Amortization expenses for the three and six months ended SeptemberJune 30, 2021, and June 30, 2020 were $1.7$9.1 million and $3.3 million, respectively. Amortization expenses for the three and six months ended September 30, 2019 were $1.7 million and $3.4 million, respectively. The following table shows the estimated future amortization for intangible assets, as of SeptemberJune 30, 2020,2021, for the remainder of the current fiscal year and the next four fiscal years ending March 31 (in thousands):
| 2021 | $ | 3,152 | | |
2022 | 2022 | 5,525 | | 2022 | $ | 14,880 | |
2023 | 2023 | 4,585 | | 2023 | 19,079 | |
2024 | 2024 | 3,831 | | 2024 | 18,367 | |
2025 | 2025 | 3,108 | | 2025 | 17,409 | |
2026 | | 2026 | 16,499 | |
Thereafter | | Thereafter | 145,224 | |
Total | | Total | $ | 231,458 | |
6. SHARE-BASED COMPENSATION
Refer to Note 65 to our consolidated financial statements included in our Annual Report for a description of the 2015 Equity and Incentive Compensation Plan (the "2015 Plan"). As of SeptemberJune 30, 2020, 714,5862021, 547,386 shares were available for issuance under the 2015 Plan.
We recorded share-based compensation expense as follows for the three and sixmonths ended SeptemberJune 30, 20202021 and 20192020 (in thousands):
| | | Three Months Ended September 30, | | Six Months Ended September 30, | | | Three Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | | |
Share-based compensation expense | Share-based compensation expense | | $ | 1,222 | | | $ | 1,196 | | | $ | 2,550 | | | $ | 2,409 | | | Share-based compensation expense | | $ | 1,888 | | | $ | 1,328 | | | |
Related income tax benefit | Related income tax benefit | | (293) | | | (287) | | | (612) | | | (578) | | | Related income tax benefit | | (453) | | | (319) | | | |
Net share-based compensation expense | Net share-based compensation expense | | $ | 929 | | | $ | 909 | | | $ | 1,938 | | | $ | 1,831 | | | Net share-based compensation expense | | $ | 1,435 | | | $ | 1,009 | | | |
Stock option activity was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended September 30, 2020 |
| | Number of Shares | | Weighted Average Price | | Remaining Contractual Life (Years) | | Aggregate Intrinsic Value (in Millions) |
Outstanding at April 1, 2020 | | 115,858 | | | $ | 25.30 | | | | | |
Exercised | | (52,445) | | | 25.40 | | | | | |
| | | | | | | | |
Outstanding at September 30, 2020 | | 63,413 | | | 25.23 | | | 3.9 | | $ | 3.3 | |
Exercisable at September 30, 2020 | | 63,413 | | | $ | 25.23 | | | 3.9 | | $ | 3.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2021 |
| | Number of Shares | | Weighted Average Price | | Remaining Contractual Life (Years) | | Aggregate Intrinsic Value (in Millions) |
Outstanding at April 1, 2021 | | 63,413 | | | $ | 25.23 | | | | | |
Exercised | | 0 | | | 0 | | | | | |
| | | | | | | | |
Outstanding at June 30, 2021 | | 63,413 | | | 25.23 | | | 3.2 | | $ | 5.9 | |
Exercisable at June 30, 2021 | | 63,413 | | | $ | 25.23 | | | 3.2 | | $ | 5.9 | |
All compensation costs related to stock options were recognized prior to April 1, 2019. NaN options were granted or vested during the three and six months ended SeptemberJune 30, 20202021 and 2019.2020.
Restricted share activity was as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2021 |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding at April 1, 2021: | | 172,916 | | | $ | 70.50 | |
Granted | | 127,727 | | | 172.98 | |
Vested | | (59,166) | | | 58.97 | |
Canceled | | 0 | | | 0 | |
Outstanding at June 30, 2021 | | 241,477 | | | $ | 114.04 | |
| | | | | | | | | | | | | | |
| | Six Months Ended September 30, 2020 |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding at April 1, 2020: | | 202,466 | | | $ | 60.78 | |
Granted | | 67,785 | | | 73.37 | |
Vested | | (71,195) | | | 49.80 | |
Canceled | | (11,825) | | | 68.95 | |
Outstanding at September 30, 2020 | | 187,231 | | | $ | 64.78 | |
During the three months ended June 30, 2021, Joe Armes, the Company's Chairman, Chief Executive Officer and President, was awarded a series of 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, 27,559 performance shares and 19,685 performance restricted stock units. All awards granted to Ms. Armes are included in the above restricted share activity.
During the restriction period, the holders of restricted shares are entitled to vote and receive dividends. Unvested restricted shares outstanding as of SeptemberJune 30, 20202021 and March 31, 2020 included 89,199102,001 and 93,24990,012 shares (at target), respectively, with performance-based vesting provisions, and vesting ranges from 0%-200% based on pre-defined performance targets with market conditions. Performance-based awards accrue dividend equivalents, which are settled upon (and to the extent of) vesting of the underlying award, but do not have the right to vote until vested. Performance-based awards are earned upon the achievement of objective performance targets and are payable in common shares. Compensation expense is calculated based on the fair market value as determined by a Monte Carlo simulation and is recognized over a 36-month cliff vesting period. NaN awards with performance-based vesting provisions were granted during the three months ended September 30, 2020 and 2019. We granted 26,96647,845 and 31,59434,245 awards with performance-based vesting provisions during the sixthree months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, with a vesting range of 0%-200%.
At SeptemberJune 30, 2020,2021, we had unrecognized compensation cost related to unvested restricted shares of $6.3$22.1 million, which will be amortized into net income over the remaining weighted average vesting period of approximately 1.94 years. The total fair value of restricted shares granted during the three months ended SeptemberJune 30, 2021 and 2020 and 2019 was 0 and less than $0.1 million, respectively. The total fair value of restricted shares granted during the six months ended September 30, 2020 and 2019 was $2.5$17.2 million and $2.6$2.5 million, respectively. The total fair value of restricted shares vested during the three months ended SeptemberJune 30, 2021 and 2020 and 2019 was less than $0.1$8.0 million and 0, respectively. The total fair value of restricted shares vested during the six months ended September 30, 2020 and 2019 was $4.3 million and $2.1$4.2 million, respectively.
7. LONG-TERM DEBT
Debt consists of the following (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2020 | | March 31, 2020 |
Revolving Credit Facility, interest rate of 1.40% and 2.24%, respectively | | $ | 0 | | | $ | 0 | |
Whitmore Term Loan, interest rate of 2.15% and 2.99%, respectively | | 10,617 | | | 10,898 | |
Total debt | | 10,617 | | | 10,898 | |
Less: Current portion | | (561) | | | (561) | |
Long-term debt | | $ | 10,056 | | | $ | 10,337 | |
| | | | | | | | | | | | | | |
| | June 30, 2021 | | March 31, 2021 |
Revolving Credit Facility, interest rate of 1.85% and 2.11%, respectively | | $ | 221,000 | | | $ | 232,000 | |
Whitmore Term Loan, interest rate of 2.10% and 2.11%, respectively | | 10,196 | | | 10,337 | |
Total debt | | 231,196 | | | 242,337 | |
Less: Current portion | | (561) | | | (561) | |
Long-term debt | | $ | 230,635 | | | $ | 241,776 | |
Revolving Credit Facility
As discussed in Note 87 to our consolidated financial statements included in our Annual Report, we havehad a five-year, $250.0$300.0 million revolving credit facility agreement, with an additional $50.0 million accordion feature, which matureswas scheduled to mature on September 15, 2022 (the “Revolving Credit Facility”). Borrowings under this facility bearbore interest at a rate of prime plus 0.25%1.00% or London Interbank Offered Rate ("LIBOR") plus 1.25%2.00%, which may beis adjusted based on our quarterly leverage ratio. We also paid a commitment fee of 0.3% for the unutilized portion of this revolving credit facility.
On May 18, 2021, we entered into a Second Amended and Restated Credit Agreement (the “Second Credit Agreement”), which provides for a $400 million revolving credit facility that contains a $25 million sublimit for the issuance of letters of credit and a $10 million sublimit for swingline loans. The Second Credit Agreement is scheduled to mature on May 18, 2026. The Company incurred a total of $2.3 million in underwriting discounts and fees, which are being amortized over the life of the Second Credit Agreement. Borrowings under the Second Credit Agreement bear interest at either base rate or LIBOR, plus, in either case, an applicable margin based on the Company’s leverage 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 0.15%0.25% for the unutilized portion of the Revolving Credit Facility.this revolving credit facility. Interest and commitment fees are payable at least quarterly and the outstanding principal balance is due at the maturity date. The RevolvingSecond Credit FacilityAgreement is secured by substantiallya first priority lien on all tangible and intangible assets and stock issued by the Borrower and its domestic subsidiaries, subject to specified exceptions, and 65% of our domestic assets. the voting equity interests in its first-tier foreign subsidiaries.
During the sixthree months ended SeptemberJune 30, 2020,2021, we borrowed $10.0$12.0 million and repaid $10.0$23.0 million under this facility. As of SeptemberJune 30, 20202021 and March 31, 2020,2021, we had 0$221.0 million and $232.0 million, respectively, in our outstanding balance, which resulted in borrowing capacity of $300.0$179.0 million inclusiveand $68.0 million, respectively. The financial covenants contained in the Second Credit Agreement 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 accordion feature.consummation of permitted acquisitions with consideration in excess of certain threshold amounts set forth in the Second Credit Agreement, and the maintenance of a minimum fixed charge coverage ratio of 1.25 to 1.00, the calculations and terms of which are defined in the Second Credit Agreement. Covenant compliance is tested quarterly, and we were in compliance with all covenants as of SeptemberJune 30, 2020.2021.
Whitmore Term Loan
As of SeptemberJune 30, 2020,2021, Whitmore Manufacturing (one of our wholly-owned operating subsidiaries) had a secured term loan ("Whitmore(the "Whitmore Term Loan") outstanding related to a warehouse and corporate office building and the remodel of an existing manufacturing and research and development facility. The Whitmore Term Loan was entered into in July 2014 and matures on July 31, 2029 and requires payments of $140,000 each quarter. Borrowings under this term loan bear interest at a variable annual rate equal to one month LIBOR plus 2.0%. As of SeptemberJune 30, 20202021 and March 31, 2020,2021, Whitmore Manufacturing had $10.6$10.2 million and $10.9$10.3 million, respectively, in principal amount outstanding under the term loan.Whitmore Term Loan. Interest payments under the Whitmore Term Loan are hedged under an interest rate swap agreement as described in Note 9.
8. LEASES
We have operating leases for manufacturing facilities, offices, warehouses, vehicles and certain equipment. Our leases have remaining lease terms of 1 year to 8.927 years, some of which include escalation clauses and/or options to extend or terminate the leases.
We do not currently have any financing lease arrangements.
| | | Three Months Ended September 30, | | Six Months Ended September 30, | | Three Months Ended June 30, | | |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | | |
Components of Operating Lease Expenses | Components of Operating Lease Expenses | | | | | | | Components of Operating Lease Expenses | | | | |
Operating lease expense (a) | Operating lease expense (a) | | $ | 846 | | | $ | 889 | | | $ | 1,691 | | | $ | 1,793 | | Operating lease expense (a) | | $ | 2,429 | | | $ | 845 | | | |
Short-term lease expense | Short-term lease expense | | 111 | | | 152 | | | 165 | | | 152 | | Short-term lease expense | | 95 | | | 55 | | | |
Total operating lease expense | Total operating lease expense | | $ | 957 | | | $ | 1,041 | | | $ | 1,856 | | | $ | 1,945 | | Total operating lease expense | | $ | 2,524 | | | $ | 900 | | | |
(a) Included in cost of revenues and selling, general and administrative expense | (a) Included in cost of revenues and selling, general and administrative expense | | | | | (a) Included in cost of revenues and selling, general and administrative expense | | |
| (in thousands) | (in thousands) | | September 30, 2020 | | March 31, 2020 | (in thousands) | | June 30, 2021 | | March 31, 2021 |
Operating Lease Assets and Liabilities | Operating Lease Assets and Liabilities | | | | | Operating Lease Assets and Liabilities | | | | |
ROU assets, net (b) | | $ | 15,084 | | | $ | 16,383 | | |
Right-of-use assets, net (b) | | Right-of-use assets, net (b) | | $ | 59,650 | | | $ | 61,707 | |
| Short-term lease liabilities (c) | Short-term lease liabilities (c) | | $ | 3,188 | | | $ | 3,056 | | Short-term lease liabilities (c) | | $ | 8,011 | | | $ | 8,063 | |
Long-term lease liabilities (c) | Long-term lease liabilities (c) | | 13,757 | | | 15,179 | | Long-term lease liabilities (c) | | 54,861 | | | 56,709 | |
Total operating lease liabilities | Total operating lease liabilities | | $ | 16,945 | | | $ | 18,235 | | Total operating lease liabilities | | $ | 62,872 | | | $ | 64,772 | |
(b) Included in other assets, net | | | | | |
(b) Included in other assets | | (b) Included in other assets | | | | |
(c) Included in accrued and other current liabilities and other long-term liabilities | (c) Included in accrued and other current liabilities and other long-term liabilities | | (c) Included in accrued and other current liabilities and other long-term liabilities | |
| | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
(in thousands) | | 2021 | | 2020 |
Supplemental Cash Flow | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities (a) | | $ | 2,359 | | | $ | 933 | |
Right-of-use assets obtained in exchange for new operating lease obligations | | 29 | | | 59 | |
(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) | | 7.97 | | 6.01 |
Weighted average discount rate (percent) | | 2.6 | % | | 4.3 | % |
| | | | | |
Maturities of operating lease liabilities were as follows (in thousands): | |
Year Ending March 31, 2022 (excluding the three months ended June 30, 2021) | $ | 7,198 | |
2023 | 9,019 | |
2024 | 8,920 | |
2025 | 8,785 | |
2026 | 8,786 | |
Thereafter | 26,520 | |
Total lease liabilities | 69,228 | |
Less: Imputed interest | (6,356) | |
Present value of lease liabilities | $ | 62,872 | |
| | | | | | | | | | | | | | |
| | Six Months Ended September 30, |
(in thousands) | | 2020 | | 2019 |
Supplemental Cash Flow | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities (a) | | $ | 1,885 | | | $ | 1,736 | |
ROU assets obtained in exchange for new operating lease obligations | | 128 | | | 643 | |
(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) | | 5.8 | | 6.3 |
Weighted average discount rate (percent) | | 4.3 | % | | 4.3 | % |
| | | | | |
Maturities of operating lease liabilities were as follows (in thousands): | |
Year Ending March 31, 2021 (excluding the six months ended September 30, 2020) | $ | 1,916 | |
2022 | 3,827 | |
2023 | 3,121 | |
2024 | 2,851 | |
2025 | 2,548 | |
Thereafter | 4,963 | |
Total lease liabilities | 19,226 | |
Less: Imputed interest | (2,281) | |
Present value of lease liabilities | $ | 16,945 | |
9. DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING
We have an interest rate swap agreement to hedge exposure to floating interest rates on a certain portion of our debt.the Whitmore Term Loan, as discussed in Note 7. As of SeptemberJune 30, 20202021 and March 31, 2020,2021, we had $10.7$10.2 million and $10.9$10.3 million, respectively, of notional amount outstanding designated as an interest rate swap with third parties. The interest rate swap is highly effective. At SeptemberJune 30, 2020,2021, the maximum remaining length of the interest rate swap contract was approximately 8.88.1 years. The fair value of the interest rate swap designated as a hedging instrument is summarized below (in thousands):
| | | September 30, 2020 | | March 31, 2020 | | June 30, 2021 | | March 31, 2021 |
| Current derivative liabilities | Current derivative liabilities | $ | 288 | | | $ | 271 | | Current derivative liabilities | $ | 277 | | | $ | 280 | |
Non-current derivative liabilities | Non-current derivative liabilities | 1,466 | | | 1,492 | | Non-current derivative liabilities | 878 | | | 736 | |
The impact of changes in fair value of the interest rate swap is included in Note 12.16.
Current and non-current derivative assets are reported in our condensed consolidated balance sheets in prepaid expenses and other current assets and other assets, respectively. Current and non-current derivative liabilities are reported in our condensed consolidated balance sheets in accrued and other current liabilities and other long-term liabilities, respectively.
We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluation of our counterparties and expect all counterparties to meet their obligations. We have not experienced credit losses from our counterparties.
10. EARNINGS PER SHARE
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings per share for the three and six months ended SeptemberJune 30, 20202021 and 20192020 (amounts in thousands, except per share data):
| | | Three Months Ended September 30, | | Six Months Ended September 30, | | | Three Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | | |
Income from continuing operations | | $ | 16,354 | | | $ | 8,818 | | | $ | 28,312 | | | $ | 24,163 | | | |
Loss from discontinued operations | | 0 | | | (35) | | | 0 | | | (174) | | | |
Net income | Net income | | $ | 16,354 | | | $ | 8,783 | | | $ | 28,312 | | | $ | 23,989 | | | Net income | | $ | 20,363 | | | $ | 11,960 | | | |
Less: Net income attributable to redeemable noncontrolling interest | | Less: Net income attributable to redeemable noncontrolling interest | | (315) | | | 0 | | | |
Net income attributable to CSW Industrials, Inc. shareholders | | Net income attributable to CSW Industrials, Inc. shareholders | | $ | 20,048 | | | $ | 11,960 | | | |
| Weighted average shares: | Weighted average shares: | | | Weighted average shares: | | | |
Common stock | Common stock | | 14,651 | | | 14,874 | | | 14,627 | | | 14,875 | | | Common stock | | 15,605 | | | 14,603 | | | |
Participating securities | Participating securities | | 96 | | | 115 | | | 100 | | | 115 | | | Participating securities | | 110 | | | 104 | | | |
Denominator for basic earnings per common share | Denominator for basic earnings per common share | | 14,747 | | | 14,989 | | | 14,727 | | | 14,990 | | | Denominator for basic earnings per common share | | 15,715 | | | 14,707 | | | |
Potentially dilutive securities | Potentially dilutive securities | | 95 | | | 191 | | | 98 | | | 180 | | | Potentially dilutive securities | | 66 | | | 101 | | | |
Denominator for diluted earnings per common share | Denominator for diluted earnings per common share | | 14,842 | | | 15,180 | | | 14,825 | | | 15,170 | | | Denominator for diluted earnings per common share | | 15,781 | | | 14,808 | | | |
| Basic earnings (loss) per common share: | | | |
Continuing operations | | $ | 1.11 | | | $ | 0.59 | | | $ | 1.92 | | | $ | 1.61 | | | |
Discontinued operations | | 0 | | | (0.01) | | | 0 | | | (0.01) | | | |
Net income | | $ | 1.11 | | | $ | 0.58 | | | $ | 1.92 | | | $ | 1.60 | | | |
| Diluted earnings (loss) per common share: | | | |
Continuing operations | | $ | 1.10 | | | $ | 0.58 | | | $ | 1.91 | | | $ | 1.59 | | | |
Discontinued operations | | 0 | | | 0 | | | 0 | | | (0.01) | | | |
Net income | | $ | 1.10 | | | $ | 0.58 | | | $ | 1.91 | | | $ | 1.58 | | | |
Net income per share attributable to CSW Industrials, Inc. shareholders: | | Net income per share attributable to CSW Industrials, Inc. shareholders: | | | |
Basic | | Basic | | $ | 1.28 | | | $ | 0.81 | | | |
Diluted | | Diluted | | $ | 1.27 | | | $ | 0.81 | | | |
11. SHAREHOLDERS' EQUITY
Share Repurchase Program
On November 7, 2018, we announced that our Board of Directors authorized a program to repurchase up to $75.0 million of our common stock over a two-year period. TheseOn October 30, 2020, we announced that our Board of Directors authorized a new program to repurchase up to $100.0 million of our common stock, which replaced the previously announced $75.0 million program. Under the newly-authorized program, shares may be repurchased from time to time in the open market or in privately negotiated transactions. Repurchases will be made from time to time 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. TheOur Board of Directors has established an expiration of December 31, 2022, for completion of the new repurchase program; however, the program may be limited or terminated at any time at our discretion without notice. NaN shares were repurchased during the three months ended June 30, 2021, and 115,151 shares were repurchased for an aggregate amount of $7.3 million, under the prior $75.0 million share repurchase program during the three months ended SeptemberJune 30, 2020 and 2019, respectively.2020. As of SeptemberJune 30, 2020, a total of 740,1372021, 0 shares had been repurchased for an aggregate amount of $46.0 million.under the previously announced $100.0 million program.
Dividends
In April 2019, we commenced a quarterly dividend program at a quarterly rate of $0.135 per share.program. Total dividends of $2.0$2.4 million and $2.0 million were paid during the three months ended SeptemberJune 30, 2021 and 2020, and 2019, respectively.Total dividends of $4.0 million and $4.1 million were paid during the six months ended September 30, 2020 and 2019, respectively.
On October 8, 2020,July 15, 2021, we announced a quarterly dividend of $0.135$0.150 per share payable on NovemberAugust 13, 20202021 to shareholders of record as of October 30, 2020.July 29, 2021. Any future dividends at the existing $0.135$0.150 per share quarterly rate or otherwise will be reviewed individually and declared by our Board of Directors in its discretion.
12. FAIR VALUE MEASUREMENTS
The fair value of the interest rate swap contract (as discussed in Note 9) is determined using Level 2 inputs. The carrying value of our debt (discussed in Note 7) approximates fair value as it bears interest at floating rates. The carrying amounts of other financial instruments (i.e., cash and cash equivalents, accounts receivable, net, accounts payable) approximate their fair values at SeptemberJune 30, 20202021 and March 31, 20202021 due to their short-term nature.
13. RETIREMENT PLANS
Refer to Note 1413 to our consolidated financial statements included in our Annual Report for a description of our retirement and post-retirement benefits.
The following tables set forth the combined net pension benefit recognized in our condensed consolidated financial statements for all plans (in thousands):
| | | Three Months Ended September 30, | | Six Months Ended September 30, | | | Three Months Ended June 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | |
Service cost, benefits earned during the period | Service cost, benefits earned during the period | | $ | 10 | | | $ | 18 | | | $ | 20 | | | $ | 35 | | | Service cost, benefits earned during the period | | $ | 12 | | | $ | 10 | | |
Interest cost on projected benefit obligation | Interest cost on projected benefit obligation | | 36 | | | 523 | | | 71 | | | 1,046 | | | Interest cost on projected benefit obligation | | 34 | | | 36 | | |
Expected return on assets | Expected return on assets | | (24) | | | (653) | | | (47) | | | (1,307) | | | Expected return on assets | | (28) | | | (24) | | |
Amortization of net actuarial loss | Amortization of net actuarial loss | | 18 | | | 12 | | | 37 | | | 25 | | | Amortization of net actuarial loss | | 18 | | | 18 | | |
Pension plan termination | | 0 | | | 7,019 | | | 0 | | | 7,019 | | | |
| Net pension benefit | Net pension benefit | | $ | 40 | | | $ | 6,919 | | | $ | 81 | | | $ | 6,818 | | | Net pension benefit | | $ | 36 | | | $ | 40 | | |
The components of net periodic cost for retirement and postretirement benefits, other than service costs, are included in other expense, net in our condensed consolidated statements of income.
Employee Stock Ownership Plan ("ESOP") - During the six monthsquarters ended SeptemberJune 30, 2019,2021 and 2020, we offered lump sum paymentscontributed shares of common stock out of treasury shares with a value of $2.3 million and $3.6 million, respectively, to eligible active and terminated vested participants in our qualified U.S. pension plan (the “Qualified Plan”), representing approximately 42% of our liability. Approximately 74% of those participants accepted the lump sum offer for an aggregate payment of $17.0 million in August 2019. We entered into an annuity purchase contract for the remaining liability in September 2019, and terminated the Qualified Plan effective September 30, 2019. The termination required an additional contribution of $0.5 million, which was paid in September 2019, and resulted in an overall termination charge of $7.0 million ($5.4 million, net of tax) recorded in other (expense) income, net, due primarily to the recognition of expenses that were previously included in accumulated other comprehensive loss and the recognition of additional costs associated with the annuity purchase contract. After the participant data for the annuity purchase contract was finalizedESOP, based on performance in the fiscal fourth quarter ended March 31, 2020, the Qualified Plan had excess funds of $0.5 million, which were distributed into the Defined Contribution Plan.prior year.
14. CONTINGENCIES
From time to time, we are involved in various claims and legal actions that arise in the ordinary course of business. There are no matters pending that we currently believe have a reasonable possibility of having a material impact to our business, consolidated financial position, results of operations or cash flows.
15. INCOME TAXES
For the three months ended SeptemberJune 30, 2020,2021, we earned $21.5$26.8 million from continuing operations before taxes and provided for income taxes of $5.2$6.4 million, resulting in an effective tax rate of 24.1%. For the six months ended September 30, 2020, we earned $37.2 million from continuing operations before taxes and provided for income taxes of $8.9 million, resulting in an effective tax rate of 23.8%23.9%. The provision for income taxes differed from the statutory rate for the three and six months ended SeptemberJune 30, 20202021 primarily due to state and foreign income taxes, excess tax deductions related to stockexecutive compensation a change in indefinite reinvestment assertion related to the investment in a foreign subsidiary, foreign tax credits, adjustments related to state tax returns and state R&D credits, the provision for global intangible low-taxed income ("GILTI") andlimitations, an increase in the reserves for uncertain tax provisions.positions and provision for global intangible low-taxed income ("GILTI"), partially offset by excess tax deductions related to stock compensation and deductions related to foreign-derived intangible income ("FDII") and foreign tax credits.
For the three months ended SeptemberJune 30, 2019,2020, we earned $12.5$15.6 million from continuing operations before taxes and provided for income taxes of $3.6$3.7 million, resulting in an effective tax rate of 29.2%. For the six months ended September 30, 2019, we earned $32.2 million from continuing operations before taxes and provided for income taxes of $8.0 million, resulting in an effective tax rate of 24.9%23.5%. The provision for income taxes differed from the statutory rate for the three and six months ended SeptemberJune 30, 2019,2020, primarily due to the provision for GILTI, adjustments related to foreign items,state income taxes, tax credits, excess tax deductions related to stock compensation and adjustmentsa change in indefinite reinvestment assertion related to state tax returns.the investment in a foreign subsidiary.
We are currently under examination by the state of IllinoisInternal Revenue Service for the fiscal years ended March 31, 2018 and 2017.Whitmore's federal short period tax return for tax year ending September 30, 2015. We have not been notified of any material adjustments.
16. OTHER COMPREHENSIVE INCOME (LOSS)
The following table provides an analysis of the changes in accumulated other comprehensive loss (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2020 | | 2019 |
Currency translation adjustments: | | | | |
Balance at beginning of period | | $ | (7,847) | | | $ | (6,611) | |
Adjustments for foreign currency translation | | 1,052 | | | (669) | |
Balance at end of period | | $ | (6,795) | | | $ | (7,280) | |
| | | | |
Interest rate swaps: | | | | |
Balance at beginning of period | | $ | (1,445) | | | $ | (691) | |
Unrealized gain (losses), net of taxes of $0 and $62, respectively (a) | | 1 | | | (232) | |
Reclassification of losses included in interest expense, net, net of taxes of $(16) and $(4), respectively | | 59 | | | 15 | |
| | | | |
Other comprehensive income (loss) | | 60 | | | (217) | |
Balance at end of period | | $ | (1,385) | | | $ | (908) | |
| | | | |
Defined benefit plans: | | | | |
Balance at beginning of period | | $ | (875) | | | $ | (3,470) | |
Amortization of net losses, net of taxes of $(1) and $(4), respectively (b) | | 4 | | | 18 | |
Pension plan termination, net of taxes of $0 and $(669), respectively | | 0 | | | 2,516 | |
Other comprehensive income | | 4 | | | 2,534 | |
Balance at end of period | | $ | (871) | | | $ | (936) | |
| | | Six Months Ended September 30, | | Three Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Currency translation adjustments: | Currency translation adjustments: | | | | | Currency translation adjustments: | | | | |
Balance at beginning of period | Balance at beginning of period | | $ | (9,185) | | | $ | (6,869) | | Balance at beginning of period | | $ | (4,394) | | | $ | (9,185) | |
Adjustments for foreign currency translation | Adjustments for foreign currency translation | | 2,390 | | | (411) | | Adjustments for foreign currency translation | | 489 | | | 1,338 | |
Balance at end of period | Balance at end of period | | $ | (6,795) | | | $ | (7,280) | | Balance at end of period | | $ | (3,905) | | | $ | (7,847) | |
| Interest rate swaps: | Interest rate swaps: | | Interest rate swaps: | |
Balance at beginning of period | Balance at beginning of period | | $ | (1,390) | | | $ | (394) | | Balance at beginning of period | | $ | (803) | | | $ | (1,390) | |
Unrealized losses, net of taxes of $28 and $143, respectively (a) | | (105) | | | (538) | | |
Reclassification of losses included in interest expense, net, net of taxes of $(29) and $(6), respectively | | 110 | | | 24 | | |
Other comprehensive income (loss) | | 5 | | | (514) | | |
Unrealized gain, net of taxes of $44 and $28, respectively (a) | | Unrealized gain, net of taxes of $44 and $28, respectively (a) | | (166) | | | (106) | |
Reclassification of losses included in interest expense, net, net of taxes of $(15) and $(14), respectively | | Reclassification of losses included in interest expense, net, net of taxes of $(15) and $(14), respectively | | 57 | | | 51 | |
| Other comprehensive income | | Other comprehensive income | | (109) | | | (55) | |
Balance at end of period | Balance at end of period | | $ | (1,385) | | | $ | (908) | | Balance at end of period | | $ | (912) | | | $ | (1,445) | |
| Defined benefit plans: | Defined benefit plans: | | Defined benefit plans: | |
Balance at beginning of period | Balance at beginning of period | | $ | (871) | | | $ | (3,466) | | Balance at beginning of period | | $ | (799) | | | $ | (871) | |
Amortization of net losses, net of taxes of $0 and $(4), respectively (b) | | 0 | | | 14 | | |
Pension plan termination, net of taxes of $0 and $(669), respectively | | 0 | | | 2,516 | | |
Other comprehensive income | | 0 | | | 2,530 | | |
Amortization of net losses, net of taxes of $(2) and $1, respectively (b) | | Amortization of net losses, net of taxes of $(2) and $1, respectively (b) | | 7 | | | (4) | |
| Balance at end of period | Balance at end of period | | $ | (871) | | | $ | (936) | | Balance at end of period | | $ | (792) | | | $ | (875) | |
(a) Unrealized gains (losses) are reclassified to earnings as underlying cash interest payments are made. We expect to recognize a loss of $0.2 million, net of deferred taxes, over the next twelve months related to designated cash flow hedges based on their fair values at SeptemberJune 30, 2020.2021.
(b) Amortization of actuarial losses out of accumulated comprehensive loss are included in the computation of net periodic pension expense. See Note 13 for additional information.
17. REVENUE RECOGNITION
Refer to Note 1918 to our consolidated financial statements included in our Annual Report for a description of our disaggregation of revenues. Disaggregation of revenues reconciled to our reportable segments is as follows (in thousands):
| | | Three Months Ended September 30, 2020 | | Six Months Ended September 30, 2020 | | | Three Months Ended June 30, 2021 | |
| | Industrial Products | | Specialty Chemicals | | Total | | Industrial Products | | Specialty Chemicals | | Total | | | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Total | |
Build-to-order | Build-to-order | | $ | 21,483 | | | $ | 0 | | | $ | 21,483 | | | $ | 42,026 | | | $ | 0 | | | $ | 42,026 | | | Build-to-order | | $ | 0 | | | $ | 23,649 | | | $ | 0 | | | $ | 23,649 | | |
Book-and-ship | Book-and-ship | | 51,010 | | | 32,447 | | | 83,457 | | | 91,706 | | | 62,172 | | | 153,878 | | | Book-and-ship | | 110,216 | | | 2,001 | | | 25,400 | | | 137,617 | | |
Net revenues | Net revenues | | $ | 72,493 | | | $ | 32,447 | | | $ | 104,940 | | | $ | 133,732 | | | $ | 62,172 | | | $ | 195,904 | | | Net revenues | | $ | 110,216 | | | $ | 25,650 | | | $ | 25,400 | | | $ | 161,266 | | |
| | | Three Months Ended September 30, 2019 | | Six Months Ended September 30, 2019 | | | Three Months Ended June 30, 2020 | |
| | Industrial Products | | Specialty Chemicals | | Total | | Industrial Products | | Specialty Chemicals | | Total | | | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Total | |
Build-to-order | Build-to-order | | $ | 22,041 | | | $ | 0 | | | $ | 22,041 | | | $ | 41,242 | | | $ | 0 | | | $ | 41,242 | | | Build-to-order | | $ | 0 | | | $ | 20,543 | | | $ | 0 | | | $ | 20,543 | | |
Book-and-ship | Book-and-ship | | 40,728 | | | 38,555 | | | 79,283 | | | 84,879 | | | 77,536 | | | 162,415 | | | Book-and-ship | | 49,826 | | | 1,612 | | | 18,983 | | | 70,421 | | |
Net revenues | Net revenues | | $ | 62,769 | | | $ | 38,555 | | | $ | 101,324 | | | $ | 126,121 | | | $ | 77,536 | | | $ | 203,657 | | | Net revenues | | $ | 49,826 | | | $ | 22,155 | | | $ | 18,983 | | | $ | 90,964 | | |
Contract liabilities, which are included in accrued and other current liabilities in our condensed consolidated balance sheets were as follows (in thousands):
| | | | | |
Balance at April 1, 2020:2021: | $ | 2,8921,018 | |
Revenue recognized during the period | (1,625)(534) | |
| |
New contracts and revenue added to existing contracts during the period | 1,683333 | |
Balance at SeptemberJune 30, 20202021 | $ | 2,950817 | |
18. SEGMENTS
As discussed in Note 20Beginning with the quarter ended June 30, 2021, we revised our segment structure to align with how our chief operating decision maker (who was determined to be our Chief Executive Officer) views our business, assesses performance and allocates resources to our consolidated financial statements inbusiness components. Effective April 1, 2021, following the completion of various strategic transactions including the acquisition of TRUaire and the formation of the Whitmore JV, our Annual Report, we conduct our operations through 2 business segments based on type of productis now organized into 3 reportable segments: (1) Contractor Solutions; (2) Engineered Building Solutions and how we manage the business: Industrial Products and Specialty Chemicals.(3) Specialized Reliability Solutions.
Three Months Ended SeptemberJune 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Industrial Products | | Specialty Chemicals | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
Revenues, net | | $ | 72,493 | | | $ | 32,447 | | | $ | 104,940 | | | $ | 0 | | | $ | 104,940 | |
Operating income | | 19,727 | | | 5,815 | | | 25,542 | | | (3,362) | | | 22,180 | |
2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
Revenues, net to external customers | | $ | 110,216 | | | $ | 25,650 | | | $ | 25,400 | | | $ | 161,266 | | | $ | — | | | $ | 161,266 | |
Intersegment revenue | | 26 | | | 0 | | | 47 | | | 73 | | | (73) | | | — | |
Operating income | | 29,512 | | | 3,854 | | | 269 | | | 33,635 | | | (5,161) | | | 28,474 | |
Three Months Ended SeptemberJune 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Industrial Products | | Specialty Chemicals | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
Revenues, net | | $ | 62,769 | | | $ | 38,555 | | | $ | 101,324 | | | $ | 0 | | | $ | 101,324 | |
Operating income | | 16,413 | | | 7,142 | | | 23,555 | | | (3,433) | | | 20,122 | |
2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
Revenues, net to external customers | | $ | 49,826 | | | $ | 22,154 | | | $ | 18,984 | | | $ | 90,964 | | | $ | — | | | $ | 90,964 | |
Intersegment revenue | | 58 | | | 0 | | | 14 | | | 72 | | | (72) | | | — | |
Operating income | | 15,908 | | | 4,038 | | | 307 | | | 20,253 | | | (4,000) | | | 16,253 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six months ended September 30, 2020 | | | | | | | | |
(in thousands) | | Industrial Products | | Specialty Chemicals | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
Revenues, net | | $ | 133,732 | | | $ | 62,172 | | | $ | 195,904 | | | $ | 0 | | | $ | 195,904 | |
Operating income | | 36,034 | | | 9,761 | | | 45,795 | | | (7,363) | | | $ | 38,432 | |
TOTAL ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six months ended September 30, 2019 | | | | | | | | |
(in thousands) | | Industrial Products | | Specialty Chemicals | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
Revenues, net | | $ | 126,121 | | | $ | 77,536 | | | $ | 203,657 | | | $ | 0 | | | $ | 203,657 | |
Operating income | | 33,456 | | | 13,765 | | | 47,221 | | | (6,777) | | | $ | 40,444 | |
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(in thousands) | | Contractor Solutions | | Engineered Building Solutions | | Specialized Reliability Solutions | | Subtotal - Reportable Segments | | Eliminations and Other | | Total |
June 30, 2021 | | $ | 712,676 | | | $ | 71,212 | | | $ | 106,359 | | | $ | 890,247 | | | $ | 13,995 | | | $ | 904,242 | |
March 31, 2021 | | 686,408 | | | 67,281 | | | 108,028 | | | $ | 861,717 | | | 13,240 | | | 874,957 | |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our continuing operations financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included in this Quarterly Report, as well as our consolidated financial statements and related notes for the fiscal year ended March 31, 20202021 included in our Annual Report. This discussion and analysis contains forward-looking statements based on current expectations relating to future events and our future performance that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” below. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those risk factors set forth in our Annual Report and in this Quarterly Report.
Overview
We are a growth-oriented, diversified industrial growth company with well-established, scalable platforms and domain expertise across two business segments: Industrial Products and Specialty Chemicals.a strategic focus on providing niche, value-added products in the end markets we serve. Our broad portfolio of leading products provides performance optimizing and life safety solutions to our customers. Our products include mechanical products for heating, ventilation, air conditioning and refrigeration ("HVAC/R"), grilles, registers and diffusers, engineered building products and high-performance specialty lubricants and sealants. End markets that we serve include HVAC/R, architecturally-specified building products, plumbing, energy, rail, mining and general industrial. Our manufacturing operations are concentrated in the United States ("U.S."), Canada and Canada, butVietnam, and we also have distribution operations in U.S., Australia, Canada and the United Kingdom ("U.K."). Our products are sold directly to end users or through designated channels in over 100 countries around the world, including: Australia, Belgium, Brazil, Canada, China, Colombia, Germany, Japan, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Sweden, the U.K., United Arab Emirates and the U.S.
Many of our products are used to protect the capital assets of our customers that are expensive to repair or replace and are critical to their operations. We have a source of recurring revenue from our end users' maintenance, repair and overhaul activities and the consumable nature of many of our products. We also provide some custom and semi-custom products that strengthen and enhance our customer relationships. The reputation of our product portfolio is built on more than 100 highly respected industrial brands including No. 5®, KOPR-KOTE®, Kats Coatings®, Safe-T-Switch®, Air Sentry®, Deacon®, Leak Freeze®, Greco® and Greco®TRUaire®.
We believe that our broad portfolio of products and markets served, as well as our brand recognition, will continue to provide opportunities; however, we face ongoing challenges affecting many companies, such as environmental and other regulatory compliance, combined with overall global economic uncertainty.
In March 2020,The COVID-19 pandemic and its resulting impacts, including the World Health Organization declared the outbreak of COVID-19 a pandemic. COVID-19 continues to spread throughout the world and has created a recessionary environment in the U.S. and around the globe. During the three and six months ended September 30, 2020, we experienced asubstantial decline in demand in some of the end markets we serve to varying degrees. Combined with significant volatility incrude oil prices that occurredbegan in the first fiscal quarter to date, both factorsMarch 2020, had aan overall negative impact on our financial results.
All of our operations and products support critical infrastructure and are considered "essential"results in all of the relevant jurisdictions in which we operate. In response tothree months ended June 30, 2020. During the three months ended June 30, 2021, the COVID-19 pandemic we took numerous measures across our operating sitescontinues to ensure we continue to placehave an impact on human health, the highest priority on the health, safetyglobal economy and well-being of our employees, while continuing to support our customers. Through the date of this filing, our businesses have continued to operate throughoutsociety at large. While the COVID-19 pandemic with appropriate safeguards forhas contributed to increased demand in certain parts of our employeesbusiness, including the HVAC/R end market, we expect customer demand levels and without any material disruptions.
We continue to expect our overall results of operations and financial condition to be adversely impactedhave some level of volatility through the duration of the pandemic duewhen compared to its effects onpre-pandemic periods. In addition, the economycountermeasures taken by federal, state and/or local governments and the Federal Reserve in response to the COVID-19 pandemic, as well as the recovering demand foras jurisdictions relax COVID-19 protocols, have had business impacts, including increased material cost inflation and logistics costs increases. Beginning in the three months ended March 31, 2021, we began implementing pricing initiatives to mitigate the impact of rising costs, which initiatives have continued and increased during the three months ended June 30, 2021.
Despite strong demand in certain of our productsend markets and services, though we expect the magnitudesigns of the adverse impact to be mixed across our served end markets. However,recovery in others, we cannot reasonably estimate the magnitude or length of the pandemic’s adverse impact, including the effects of any vaccine or its ultimate impact on our business or financial condition, due to continued uncertainty regarding (1) the duration and severity of the COVID-19 pandemic and (2) the extent of thecontinued potential for short and long-term impactimpacts on our facilities and employees, customer demand and availability of materials through supply channels.chain.
Whitmore Joint Venture ("Whitmore JV")
On April 1, 2021, Whitmore Manufacturing, LLC (“Whitmore”), a wholly-owned subsidiary of CSWI, completed the formation of the previously announced joint venture ("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 Shell in the form of cash and intangible assets. The Whitmore JV is deemed to be a variable interest entity ("VIE") and the Company is the primary beneficiary of this VIE, primarily due to the Company having the power to direct the manufacturing activities, which are considered the most significant activities for the Whitmore JV. Refer to Note 3 for further information on the Whitmore JV. 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.
Segment Realignment
Beginning with the quarter ended June 30, 2021, we revised our segment structure to align with how our chief operating decision maker (who was determined to be our Chief Executive Officer) views our business, assesses performance and allocates resources to our business components. Effective April 1, 2021, following the completion of various strategic transactions including the acquisition of TRUaire and the formation of the Whitmore JV, our business is now organized into three reportable segments:
1.Contractor Solutionsmanufactures and supplies products predominantly for residential and commercial HVAC/R and plumbing applications, which are designed primarily for professional tradespeople. This segment is comprised primarily of RectorSeal and TRUaire operating companies.
2.Engineered Building Solutionsprovides 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. This segment is comprised primarily of Balco, Greco and Smoke Guard operating companies.
3.Specialized Reliability Solutionsprovides products for increasing the reliability, performance and lifespan of industrial assets and solving equipment maintenance challenges. This segment is comprised primarily of Whitmore and the Whitmore JV operating companies.
RESULTS OF OPERATIONS
The following discussion provides an analysis of our condensed consolidated results of continuing operations and results for each of our segments.
All acquisitions are described in Note 2 to our condensed consolidated financial statements included in this Quarterly Report. TRUaire activity has been included in our results within Contractor Solutions segment since the December 15, 2020 acquisition date. Whitmore JV activity has been included in our Specialized Reliability Solutions segment since the April 1, 2021 formation date. Consolidation of VIE (related to the Whitmore JV) is described in Note 3 to our condensed consolidated financial statements included in this Quarterly Report.
Revenues, net
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| | Three Months Ended September 30, |
(Amounts in thousands) | | 2020 | | 2019 |
Revenues, net | | $ | 104,940 | | | $ | 101,324 | |
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| | | Six Months Ended September 30, | | Three Months Ended June 30, |
(Amounts in thousands) | (Amounts in thousands) | | 2020 | | 2019 | (Amounts in thousands) | | 2021 | | 2020 |
Revenues, net | Revenues, net | | $ | 195,904 | | | $ | 203,657 | | Revenues, net | | $ | 161,266 | | | $ | 90,964 | |
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Net revenues for the three months ended SeptemberJune 30, 20202021 increased $3.6$70.3 million, or 3.6%77.3%, as compared with the three months ended SeptemberJune 30, 2019.2020. The increase was primarily due to the acquisition of TRUaire ($33.5 million or 36.8%). Excluding the acquisition impact, the organic sales increased $36.8 million, or 40.5%, from the prior year due to increased sales volumes into HVAC/R, ($10.9 million) and plumbing, ($1.9 million), partially offset by decreased sales volumes into energy ($3.7 million), general industrial ($3.3 million), rail ($1.3 million) and architecturally-specified building products, ($0.7 million)mining, energy and industrial end markets.
Net revenues formarkets, as well as pricing initiatives that began in the sixthree months ended September 30, 2020 decreased $7.8 million, or 3.8%, as compared withMarch 31, 2021 and continued and increased during the sixthree months ended SeptemberJune 30, 2019. The decrease was primarily due2021 to decreased sales volumes into general industrial ($6.5 million), energy ($6.0 million), rail ($3.0 million), architecturally-specified building products ($1.0 million) and mining ($0.9 million) end markets, partially offset by increased sales volumes into the HVAC/R ($9.3 million) and plumbing ($0.5 million) end markets.mitigate rising costs.
Gross Profit and Gross Profit Margin
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| | Three Months Ended September 30, |
(Amounts in thousands, except percentages) | | 2020 | | 2019 |
Gross profit | | $ | 48,736 | | | $ | 47,404 | |
Gross profit margin | | 46.4 | % | | 46.8 | % |
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| | | Six Months Ended September 30, | | Three Months Ended June 30, |
(Amounts in thousands, except percentages) | (Amounts in thousands, except percentages) | | 2020 | | 2019 | (Amounts in thousands, except percentages) | | 2021 | | 2020 |
Gross profit | Gross profit | | $ | 91,488 | | | $ | 94,639 | | Gross profit | | $ | 68,598 | | | $ | 42,752 | |
Gross profit margin | Gross profit margin | | 46.7 | % | | 46.5 | % | Gross profit margin | | 42.5 | % | | 47.0 | % |
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Gross profit for the three months ended SeptemberJune 30, 20202021 increased $1.3$25.8 million, or 2.8%60.5%, as compared with the three months ended SeptemberJune 30, 2019.2020. The increase was primarily a result of the impact of increased sales partially offset by a $0.8 million gain on sale of property, plant and equipment in the prior year that did not recur. Gross profit margin of 46.4% for the three months ended September 30, 2020 decreased slightly as compared with 46.8% for the three months ended September 30, 2019. The decrease in gross profit margin is primarily due to the $0.8 million gain on sale of property, plant and equipment.
Gross profit for the six months ended September 30, 2020 decreased $3.2 million, or 3.3%, as compared with the six months ended September 30, 2019. The decrease in gross profit was due to decreased sales and a $0.8 million gain on sale of property, plant and equipment in the prior year that did not recur. Gross profit margin of 46.7% for the six months ended September 30, 2020 increased slightly as compared with the six months ended September 30, 2019, due to the discrete costs relating to a project in architecturally-specified building products in the prior year that did not recur, partially offset by the $0.8 million gain on sale of property, plant and equipment.
TRUaire acquisition.
Operating ExpensesGross profit margin of 42.5% for the three months ended June 30, 2021 decreased as compared with 47.0% for the three months ended June 30, 2020. The decrease is primarily due to the TRUaire acquisition, including $3.9 million purchase accounting effect, and material and freight costs increases outpacing the implemented pricing initiatives.
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| | Three Months Ended September 30, |
(Amounts in thousands, except percentages) | | 2020 | | 2019 |
Operating expenses | | $ | 26,556 | | | $ | 27,282 | |
Operating expenses as a percentage of revenues, net | | 25.3 | % | | 26.9 | % |
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Operating Expenses
| | | Six Months Ended September 30, | | Three Months Ended June 30, |
(Amounts in thousands, except percentages) | (Amounts in thousands, except percentages) | | 2020 | | 2019 | (Amounts in thousands, except percentages) | | 2021 | | 2020 |
Operating expenses | Operating expenses | | $ | 53,056 | | | $ | 54,195 | | Operating expenses | | $ | 40,124 | | | $ | 26,499 | |
Operating expenses as a percentage of revenues, net | Operating expenses as a percentage of revenues, net | | 27.1 | % | | 26.6 | % | Operating expenses as a percentage of revenues, net | | 24.9 | % | | 29.1 | % |
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Operating expenses for the three months ended SeptemberJune 30, 2020 decreased $0.72021 increased $13.6 million, or 2.7%51.4%, as compared with the three months ended SeptemberJune 30, 2019.2020. The decrease in operating expensesincrease was primarily due to reduced travel-relatedthe added expenses ($1.2 million), partially offset by an increaserelated to the inclusion of TRUaire's business in personnel-related expenses.the current period and increased spend related to sales commissions and enterprise resource planning system pre-implementation and optimization. The decrease in operating expenses as a percentage of revenues was primarily attributable to increased revenues.sales increasing by a greater percentage than the increase in operating expenses.
Operating expenses for the six months ended September 30, 2020 decreased $1.1 million, or 2.1%, as compared with the six months ended September 30, 2019. The decrease in operating expenses was primarily due to reduced spend on travel-related expenses ($2.2 million), partially offset by severance costs resulting from the departure of a former executive officer ($0.5 million). The increase in operating expenses as a percentage of sales was attributable to decreased sales.
Operating Income
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| | Three Months Ended September 30, |
(Amounts in thousands, except percentages) | | 2020 | | 2019 |
Operating income | | $ | 22,180 | | | $ | 20,122 | |
Operating margin | | 21.1 | % | | 19.9 | % |
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| | | Six Months Ended September 30, | | Three Months Ended June 30, |
(Amounts in thousands, except percentages) | (Amounts in thousands, except percentages) | | 2020 | | 2019 | (Amounts in thousands, except percentages) | | 2021 | | 2020 |
Operating income | Operating income | | $ | 38,432 | | | $ | 40,444 | | Operating income | | $ | 28,474 | | | $ | 16,253 | |
Operating margin | Operating margin | | 19.6 | % | | 19.9 | % | Operating margin | | 17.7 | % | | 17.9 | % |
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Operating income for the three months ended SeptemberJune 30, 20202021 increased $2.1$12.2 million, or 10.2%75.2%, as compared with the three months ended SeptemberJune 30, 2019,2020, primarily as a result of the increase in gross profit, and a decrease in operating expenses, as discussed above.
Operating income for the six months ended September 30, 2020 decreased $2.0 million, or 5.0%, as compared with the six months ended September 30, 2019, primarily as a result of the decrease in gross profit, partially offset by a decreasethe increase in operating expenses, as discussed above.
Other Income and Expense
Net interest expense of $0.3$1.5 million for the three months ended SeptemberJune 30, 2020 was comparable2021 increased $1.2 million as compared to the three months ended SeptemberJune 30, 2019. Net interest expense of $0.6 million for the six months ended September 30, 2020 decreased $0.2 million as compared with the six months ended September 30, 2019.2020. The decreaseincrease was attributabledue to lower averageincreased outstanding long-term debt, and lower interest rate.primarily resulting from borrowings to fund our acquisition of TRUaire.
Other expense, net decreased $7.0$0.1 million to net expense of $0.4$0.2 million for the three months ended SeptemberJune 30, 20202021 as compared with net expense of $7.4$0.3 million for the three months ended SeptemberJune 30, 2019.2020. The decrease is due to $7.0 million of expenses recognized in connection with the termination of our U.S. defined benefit pension plan in the prior year. Other
expense, net was a net loss of $0.7 million for the six months ended September 30, 2020 as compared with net loss of $7.5 million for the six months ended September 30, 2019. The decrease in net loss was due to $7.0 million of expenses recognized in connection with the termination of our U.S. defined benefit pension plan in the prior year, partially offset by an increase indecreased losses arising from transactions in currencies other than our sites' functional currencies.
Provision for Income Taxes and Effective Tax Rate
For the three months ended SeptemberJune 30, 2020,2021, we earned $21.5$26.8 million from continuing operations before taxes and provided for income taxes of $5.2$6.4 million, resulting in an effective tax rate of 24.1%. For the six months ended September 30, 2020, we earned $37.2 million from continuing operations before taxes and provided for income taxes of $8.9 million, resulting in an effective tax rate of 23.8%23.9%. The provision for income taxes differed from the statutory rate for the three and six months ended SeptemberJune 30, 20202021 primarily due to state and foreign income taxes, excess tax deductions related to stockexecutive compensation a change in indefinite reinvestment assertion related to the investment in a foreign subsidiary, foreign tax credits, adjustments related to state tax returns and state R&D credits, the provision for global intangible low-taxed income ("GILTI") andlimitations, an increase in the reserves for uncertain tax provisions.positions and provision for global intangible low-taxed income ("GILTI"), partially offset by excess tax deductions related to stock compensation and deductions related to foreign-derived intangible income ("FDII") and foreign tax credits.
For the three months ended SeptemberJune 30, 2019,2020, we earned $12.5$15.6 million from continuing operations before taxes and provided for income taxes of $3.6$3.7 million, resulting in an effective tax rate of 29.2%. For the six months ended September 30, 2019, we earned $32.2 million from continuing operations before taxes and provided for income taxes of $8.0 million, resulting in an effective tax rate of 24.9%23.5%. The provision for income taxes differed from the statutory rate for the three and six months ended SeptemberJune 30, 2019,2020, primarily due to the provision for GILTI, adjustments related to foreign items,state income taxes, tax credits, excess tax deductions related to stock compensation and adjustmentsa change in indefinite reinvestment assertion related to state tax returns.the investment in a foreign subsidiary.
We are currently under examination by the state of IllinoisInternal Revenue Service for the fiscal years ended March 31, 2018 and 2017.Whitmore's federal short period tax return for tax year ending September 30, 2015. We have not been notified of any material adjustments.
Business Segments
We conduct our operations through twothree business segments based on type of product and how we manage the business. We evaluate segment performance and allocate resources based on each segment's operating income. The key operating results for our twothree segments are discussed below.
Industrial ProductsContractor Solutions Segment Results
Industrial Products includes specialty mechanical products, fireThe Contractor Solutions segment manufactures and smoke protection products, architecturally-specified building products and storage, filtration and application equipment for use with our specialty chemicals and othersupplies products for general industrial application. residential and commercial HVAC/R and plumbing applications, which are designed primarily for professional tradespeople.
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| | Three Months Ended September 30, |
(Amounts in thousands) | | 2020 | | 2019 |
Revenues, net | | $ | 72,493 | | | $ | 62,769 | |
Operating income | | 19,727 | | | 16,413 | |
Operating margin | | 27.2 | % | | 26.1 | % |
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| | | Six Months Ended September 30, | | Three Months Ended June 30, |
(Amounts in thousands) | (Amounts in thousands) | | 2020 | | 2019 | (Amounts in thousands) | | 2021 | | 2020 |
Revenues, net | Revenues, net | | $ | 133,732 | | | $ | 126,121 | | Revenues, net | | $ | 110,242 | | | $ | 49,884 | |
Operating income | Operating income | | 36,034 | | | 33,456 | | Operating income | | 29,512 | | | 15,908 | |
Operating margin | Operating margin | | 26.9 | % | | 26.5 | % | Operating margin | | 26.8 | % | | 31.9 | % |
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Net revenues for the three months ended SeptemberJune 30, 20202021 increased $9.7$60.4 million, or 15.5%121.0%, as compared with the three months ended SeptemberJune 30, 2019.2020. The increase was primarily due to the TRUaire acquisition ($33.5 million or 67.1%). Excluding the acquisition impact, the organic sales increased by $26.9 million, or 53.9%, due to increased sales volumes into HVAC/R, ($10.7 million) and plumbing ($1.2 million), partially offset by decreased sales volumes into general industrial ($1.1 million), rail ($0.7 million) and architecturally-specified building products ($0.6 million) end markets.
Net revenues for the six months ended September 30, 2020 increased $7.6 million, or 6.0%,markets, as compared withwell as pricing initiatives that began in the three months ended SeptemberMarch 31, 2021 and continued and increased during the three months ended June 30, 2019. The increase was primarily due2021 to the increased sales volumes into HVAC/R ($9.4 million), plumbing ($1.0 million) and architecturally-specified building products ($0.7 million) end markets, partially offset by decreased sales volumes into general industrial ($2.0 million) and rail ($1.6 million) end markets.mitigate rising costs.
Operating income for the three months ended SeptemberJune 30, 20202021 increased $3.3$13.6 million, or 20.2%85.5%, as compared with the three months ended SeptemberJune 30, 2019.2020. The increase was primarily due to the impact ofTRUaire acquisition and increased organic sales, partially offset by increases inincreased spend related to sales commissions and enterprise resource planning ("ERP") system-related expensessystem pre-implementation and personnel-related expenses.optimization.
Operating income for the six months ended September 30, 2019 increased $2.6 million, or 7.7%, as compared with the six months ended September 30, 2019. The increase was due primarily to the impact of increased sales, partially offset by increases in ERP system-related expenses and personnel-related expenses.
Specialty ChemicalsEngineered Building Solutions Segment Results
Specialty Chemicals is comprisedThe Engineered Building Solutionssegment provides primarily code-driven products focused on life safety that are engineered to provide elegant solutions for the construction, refurbishment and modernization of pipe thread sealants, firestopping sealantscommercial, institutional, and caulks, adhesives/solvent cements, lubricants and greases, drilling compounds, anti-seize compounds, chemical formulations, and degreasers and cleaners.
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| | Three Months Ended September 30, |
(Amounts in thousands) | | 2020 | | 2019 |
Revenues, net | | $ | 32,447 | | | $ | 38,555 | |
Operating income | | 5,815 | | | 7,142 | |
Operating margin | | 17.9 | % | | 18.5 | % |
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multi-family residential buildings.
| | | Six Months Ended September 30, | | Three Months Ended June 30, |
(Amounts in thousands) | (Amounts in thousands) | | 2020 | | 2019 | (Amounts in thousands) | | 2021 | | 2020 |
Revenues, net | Revenues, net | | $ | 62,172 | | | $ | 77,536 | | Revenues, net | | $ | 25,650 | | | $ | 22,154 | |
Operating income | Operating income | | 9,761 | | | 13,765 | | Operating income | | 3,854 | | | 4,038 | |
Operating margin | Operating margin | | 15.7 | % | | 17.8 | % | Operating margin | | 15.0 | % | | 18.2 | % |
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Net revenues for the three months ended SeptemberJune 30, 2020 decreased $6.12021 increased $3.5 million, or 15.8%, as compared with the three months ended SeptemberJune 30, 2019.2020. The decreaseincrease was primarily due to decreased sales volumes into energy ($3.7 million), general industrial ($2.2 million), rail ($0.5 million)enhanced marketing efforts to promote existing and mining ($0.2 million) end markets, partially offset by increased sales volumes into plumbing ($0.7 million) and HVAC/R ($0.2 million) end markets.
Net revenues fornewly developed products in the six months ended September 30, 2020 decreased $15.4 million, or 19.8%, as compared with the three months ended September 30, 2019. The decrease was primarily due to decreased sales volumes into energy ($6.0 million), general industrial ($4.5 million), architecturally-specified building products ($1.8 million), rail ($1.4 million), mining ($0.9 million)end market, market share gains due to competitive lead times in the market place and plumbing ($0.5 million) end markets.improved specification levels.
Operating income for the three months ended SeptemberJune 30, 20202021 decreased $1.3$0.2 million, or 18.6%4.6%, as compared with the three months ended SeptemberJune 30, 2019.2020. The decrease was due to decreased revenues and a $0.8 million gain on sale of property, plant and equipmentshift in the prior year that did not recur, partially offset by decreases in travel-related expenses, personnel-related expenses and sales commissions.to lower margin projects.
Operating income
Specialized Reliability Solutions Segment Results
Specialized Reliability Solutions segment provides long-established products for increasing the reliability, performance and lifespan of industrial assets and solving equipment maintenance challenges.
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| | Three Months Ended June 30, |
(Amounts in thousands) | | 2021 | | 2020 |
Revenues, net | | $ | 25,447 | | | $ | 18,998 | |
Operating income | | 269 | | | 307 | |
Operating margin | | 1.1 | % | | 1.6 | % |
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Net revenues for the sixthree months ended SeptemberJune 30, 2020 decreased $4.02021 increased $6.4 million, or 29.1%33.9%, as compared with the three months ended SeptemberJune 30, 2019.2020. The increase was primarily due to the newly formed Whitmore JV ($1.6 million), demand recovery in the general industrial and energy end markets and pricing initiatives that began in the three months ended June 30, 2021 to mitigate rising costs.
Operating income for the three months ended June 30, 2021 declined slightly compared to the three months ended June 30, 2020. The decrease was primarily due to decreased revenuesincreased material and a $0.8 million gain on sale of property, plant and equipment infreight expenses outpacing the prior year that did not recur, partially offset by decreases in travel-related expenses, personnel-related expenses, and sales commissions.implemented pricing initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Analysis
| | | Six Months Ended September 30, | | Three Months Ended June 30, |
(Amounts in thousands) | (Amounts in thousands) | | 2020 | | 2019 | (Amounts in thousands) | | 2021 | | 2020 |
Net cash provided by operating activities, continuing operations | | $ | 44,783 | | | $ | 37,496 | | |
Net cash used in investing activities, continuing operations | | (4,351) | | | (15,319) | | |
Net cash provided by operating activities | | Net cash provided by operating activities | | $ | 18,929 | | | $ | 14,146 | |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | | 304 | | | (1,837) | |
Net cash used in financing activities | Net cash used in financing activities | | (12,274) | | | (25,155) | | Net cash used in financing activities | | (13,701) | | | (11,471) | |
Existing cash, cash generated by continuing operations and borrowings available under our Revolving Credit Facilityrevolving credit facility are our primary sources of short-term liquidity. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. Our sources of operating cash generally include the sale of our products and services and the conversion of our working capital, particularly accounts receivable and inventories. Our cash balance (including cash and cash equivalents) at SeptemberJune 30, 20202021 was $47.3$15.7 million, as compared with $18.3$10.1 million at March 31, 2020.2021.
For the sixthree months ended SeptemberJune 30, 2020,2021, our cash provided by operating activities from continuing operations was $44.8$18.9 million, as compared with $37.5$14.1 million for sixthree months ended SeptemberJune 30, 2019.2020.
•Working capital providedused cash for the sixthree months ended SeptemberJune 30, 20202021 due to lowerhigher accounts receivable ($5.016.2 million) and higher inventories ($11.0 million), partially offset by higher accounts payable and other current liabilities ($2.0 million) and lower inventories ($0.9 million), partially offset by higher prepaid expenses and other current assets ($2.410.9 million).
•Working capital used cash for the sixthree months ended SeptemberJune 30, 20192020 due to higher inventories ($6.5 million) and lower accounts payable and other current liabilities ($3.1 million), higher accounts receivable ($1.1 million) and higher inventories ($0.91.5 million), partially offset by lower accounts receivable ($3.3 million) and lower prepaid expenses and other current assets ($3.00.5 million).
Cash flows provided by investing activities from operations during the three months ended June 30, 2021 were $0.3 million, as compared with $1.8 million used in investing activities from continuing operations duringfor the sixthree months ended SeptemberJune 30, 2020 were $4.4 million, as compared with $15.3 million for the six months ended September 30, 2019.2020.
•Capital expenditures during the sixthree months ended SeptemberJune 30, 2021 and 2020 and 2019 were $4.4$1.1 million and $4.6$1.8 million, respectively. Our capital expenditures have been focused on enterprise resource planning systems, new product introductions, capacity expansion, ERP systems, continuous improvement, automation and automation.consolidation of manufacturing facilities.
•During the sixthree months ended SeptemberJune 30, 2019, we acquired Petersen for $11.82021, proceed of $1.4 million, was received as as discussed in Note 2 result of final working capital true-up adjustment related to our condensed consolidated financial statements included in this Quarterly Reportthe TRUaire acquisition.
Cash flows used in financing activities during the sixthree months ended SeptemberJune 30, 2021 and 2020 and 2019 were $12.3$13.7 million and $25.2$11.5 million, respectively. Cash outflows resulted from:
•Net repayments on our line of credit and term loan (as discussed in Note 7 to our condensed consolidated financial statements included in this Quarterly Report) of $0.3$11.1 million and $20.3$0.1 million during the sixthree months ended SeptemberJune 30, 20202021 and 2019,2020, respectively.
•Repurchases of shares under our share repurchase program (as discussed in Note 11 to our condensed consolidated financial statements included in this Quarterly Report) of $0 and $7.3 million and $0 during the sixthree months ended SeptemberJune 30, 2021 and 2020, and 2019, respectively.
•Proceeds from the acquisition of redeemable noncontrolling interest shareholder for its investment in the consolidated Whitmore JV of $5.3 million during the three months ended June 30, 2021, as discussed in Note 3 to our condensed consolidated financial statements included in this Quarterly Report.
•Dividend payments of $4.0$2.4 million and $4.1$2.0 million during the sixthree months ended SeptemberJune 30, 20202021 and 2019,2020, respectively.
We believe that available cash and cash equivalents, cash flows generated through continuing operations and cash available under our Revolving Credit Facilityrevolving credit facility will be sufficient to meet our liquidity needs, including capital expenditures, for at least the next 12 months.
Acquisitions and Dispositions
We regularly evaluate acquisition opportunities of various sizes. The cost and terms of any financing to be raised in conjunction with any acquisition, including our ability to raise capital, is a critical consideration in any such evaluation. Note 2 to our condensed consolidated financial statements included in this Quarterly Report contains a discussion of the recent acquisitions.
Financing
Credit Facilities
See Note 7 to our condensed consolidated financial statements included in this Quarterly Report for a discussion of our indebtedness. We were in compliance with all covenants as of SeptemberJune 30, 2020.2021.
We have entered into an interest rate swap agreement to hedge our exposure to variable interest payments related to our indebtedness. This agreement is more fully described in Note 9 to our condensed consolidated financial statements included in this Quarterly Report, and in “Item 3. Quantitative and Qualitative Disclosures about Market Risk” below.
Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2020,2021, we did not have any off-balance sheet arrangements that we believe have or are reasonably likely to have a material adverse effect on our financial condition or results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations are based on our condensed consolidated financial statements and related footnotes contained within this Quarterly Report. Our critical accounting policies used in the preparation of our condensed consolidated financial statements were discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report. No significant changes to these policies, as described in our Annual Report, have occurred in the sixthree months ended SeptemberJune 30, 2020.2021.
The process of preparing condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions to determine certain of the assets, liabilities, revenues and expenses. These estimates and assumptions are based upon what we believe is the best information available at the time of the estimates or assumptions. The estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from those estimates.
Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our condensed consolidated financial statements provide a meaningful and fair perspective of our consolidated financial condition and results of operations. This is not to suggest that other general risk factors, such as changes in worldwide demand, changes in material costs, performance of acquired businesses and others, could not adversely impact our consolidated financial condition, results of operations and cash flows in future periods. See “Cautionary Note Regarding Forward-Looking Statements” below.
ACCOUNTING DEVELOPMENTS
We have presented the information about pronouncements not yet implemented in Note 1 to our condensed consolidated financial statements included in this Quarterly Report.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements appearing in this Quarterly Report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include expected restructuring charges and the results of the restructuring, financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “expects,” “plans,” “anticipates,” “estimates,” “believes,” “potential,” “projects,” “forecasts,” “intends,” or the negative thereof or other comparable terminology. Forward-looking statements may include, but are not limited to, statements that relate to, or statements that are subject to risks, contingencies or uncertainties that relate to:
•our business strategy;
•adverse changes in global economic conditions, including changes resulting from the effects of the COVID-19 pandemic;
•future levels of revenues, operating margins, income from operations, net income or earnings per share;
•anticipated levels of demand for our products and services;
•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; and
•the effective date and expected impact of accounting pronouncements.pronouncements; and
•other factors listed under "Risk Factors" in our Annual Report and other filings with the SEC.
Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements for a number of important factors, including those listed under “Risk Factors” in our Annual Report and in this Quarterly Report. You should not put undue reliance on any forwarding-looking statements in this Quarterly Report. We assume no obligation to update or revise these forward-looking statements, except as required by law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely affect our consolidated financial position and results of operations. We seek to minimize the risk associated with changes in interest rates through regular operating and financing activities, and when deemed appropriate, through the use of an interest rate swap. It is our policy to enter into interest rate swaps only to the extent considered necessary to meet our risk management objectives. We do not purchase, hold or sell derivative financial instruments for trading or speculative purposes.
Variable Rate Indebtedness
We are subject to interest rate risk on our variable rate indebtedness. Fluctuations in interest rates have a direct effect on interest expense associated with our outstanding indebtedness. As of SeptemberJune 30, 2020,2021, we had $0$221.0 million in outstanding
variable rate indebtedness, after consideration of our interest rate swap. We manage, or hedge, interest rate risks related to our borrowings by means of an interest rate swap agreement. At SeptemberJune 30, 2020,2021, we had an interest rate swap agreement that covered 100.0%4.4% of our $10.6$231.2 million total outstanding indebtedness. Each quarter point change in interest rates would result in a negligible$0.6 million change in our interest expense on an annual basis.
We may also be exposed to credit risk in derivative contracts we may use. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We have sought to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties.
Foreign Currency Exchange Rate Risk
We conduct a small portion of our operations outside of the U.S. in currencies other than the U.S. dollar. Our non-U.S. operations are conducted primarily in their local currencies, which are also their functional currencies, and include the Australian dollar, British pound, Canadian dollar and 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 recognized foreign currency transaction net losses of $0.3$0.1 million and $0.1$0.2 million for the three months ended SeptemberJune 30, 20202021 and 2019, respectively, and $0.5 million and $0.2 million for the six months ended September 30, 2020, and 2019, respectively, which are included in other expense, net on our condensed consolidated statements of income. We realized a net gain/(loss)gain associated with foreign currency translation of $1.1$0.5 million and $(0.7)$1.3 million for the three months ended SeptemberJune 30, 20202021 and 2019, respectively, and $2.4 million and $(0.4) million for the six months ended September 30, 2020, and 2019, respectively, which are included in accumulated other comprehensive income (loss).
Based on a sensitivity analysis at SeptemberJune 30, 2020,2021, a 10% change in the foreign currency exchange rates for the three and six months ended SeptemberJune 30, 20202021 would have impacted our net earnings by a negligible amount. This calculation assumes that all currencies change in the same direction and proportion relative to the U.S. dollar and that there are no indirect effects, such as changes in non-U.S. dollar sales volumes or prices.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Executive Vice President and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, (the "Exchange Act")) as of the end of the period covered by this Quarterly Report. Based on such evaluation, the Company's Chief Executive Officer and Executive Vice President and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended SeptemberJune 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
The disclosure contained in Note 14 to our condensed consolidated financial statements included in “Item 1. Financial Statements” of this Quarterly Report is incorporated by reference into this “Item 1. Legal Proceedings.” In addition to the foregoing, we and our subsidiaries are from time to time named defendants in certain lawsuits incidental to our business, including product liability claims that are insured, subject to applicable deductibles, and are involved from time to time as parties to governmental proceedings, all arising in the ordinary course of business. Although the outcome of lawsuits or other proceedings involving us and our subsidiaries cannot be predicted with certainty, and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, management does not currently expect the amount of any liability that could arise with respect to these matters, either individually or in the aggregate, to have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A. Risk Factors.
There are numerous factors that affect our business and results of operations, many of which are beyond our control. In addition to other information set forth in this Quarterly Report, careful consideration should be given to “Item 1A. Risk Factors” in Part I and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of our Annual Report, which contain descriptions of significant factors that may cause the actual results of operations in future periods to differ materially from those currently expected or desired.
There have been no material changes in the risk factors discussed in our Annual Report and subsequent SEC filings. The
risks described in this Quarterly Report, our Annual Report and in our other SEC filings or press releases from time to time are
not the only risks we face. Additional risks and uncertainties are currently deemed immaterial based on management’s
assessment of currently available information, which remains subject to change; however, new risks that are currently unknown
to us may arise in the future that could materially adversely affect our business, financial condition, results of operations or cash
flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Note 11 to our condensed consolidated financial statements included in “Item 1. Financial Statements” of this Quarterly Report includes a discussion of our share repurchase programs. The following table represents the number of shares repurchased during the quarter ended SeptemberJune 30, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Number of Shares (or Approximate Dollar Value) That May Yet Be Purchased Under the Program (a) |
| | | | | | | | (in millions) |
July 1 - 31 | | — | | | $ | — | | | — | | | $ | 29.0 | |
August 1 - 31 | | 82 | | (b) | 73.31 | | | — | | | 29.0 | |
September 1 - 30 | | — | | | — | | | — | | | 29.0 | |
Total | | 82 | | | | | — | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Number of Shares (or Approximate Dollar Value) That May Yet Be Purchased Under the Program (a) |
| | | | | | | | (in millions) |
April 1 - 30 | | 22,498 | | (b) | $ | 136.32 | | | — | | | $ | 100.0 | |
May 1 - 31 | | 833 | | (b) | 121.82 | | | — | | | 100.0 | |
June 1 - 30 | | — | | | — | | | — | | | 100.0 | |
Total | | 23,331 | | | | | — | | | |
(a) On November 7, 2018,October 30, 2020, we announced that our Board of Directors authorized a new program allowing us to repurchase sharesup to $100.0 million of our common stock, up to an aggregate market value ofwhich replaces the previously announced $75.0 million during a two-year period. Theprogram. Under the newly-authorized program, shares may be repurchased from time to time in the open market or in privately negotiated transactions. Our Board of Directors has established an expiration of December 31, 2022, for completion of the new repurchase program; however, the program may be limited or terminated at any time.time at our discretion without notice. As of SeptemberJune 30, 2020, 740,1372021, no shares of our common stock had been repurchased under the program for an aggregate of $46.0 million.program.
(b) Represents shares tendered by employees to satisfy minimum tax withholding amounts for restricted share vesting at an average price per share of $73.31.vesting.
Item 6. Exhibits
| | | | | | | | |
Exhibit No. | | Description |
3.1 | | |
3.2 | | |
10.1* | | Second Amended and Restated Credit FacilityAgreement, 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 the Administrative Agent |
31.1* | | |
31.2* | | |
32.1** | | |
32.2** | | |
101.INS | | XBRL Instance Document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation LinkBase Document |
101.DEF | | XBRL Taxonomy Extension Definition LinkBase Document |
101.LAB | | XBRL Taxonomy Extension Label LinkBase Document |
101.PRE | | XBRL Taxonomy Extension Presentation LinkBase Document |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
_________________________
* Filed herewith
** Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | |
| | CSW INDUSTRIALS, INC. |
| | |
October 30, 2020August 4, 2021 | | /s/ Joseph B. Armes |
| | Joseph B. Armes |
| | Chief Executive Officer (Principal Executive Officer) |
| | |
October 30, 2020August 4, 2021 | | /s/ James E. Perry |
| | James E. Perry |
| | Chief Financial Officer (Principal Financial Officer) |