Uncommon
Reliability
2018 Annual Report
TO OUR STOCKHOLDERS:
Fiscal 2018 was a year of meaningful progress for our company.
While fiscal 2017 was a year of transition, where we made sig-
nificant progress toward becoming an integrated, diversified
industrial manufacturer, fiscal 2018 saw the substantial com-
pletion of our initial, post spin-off integration efforts and our
movement towards a more sustainable, growth-focused business.
A significant element of this progress included a strategic
repositioning marked by our decision to divest our Coatings
business and simplify our operating structure by condensing
our reportable segments from three to two: Industrial Products
and Specialty Chemicals. In the process, we flattened our
operating leadership structure to become more efficient and
responsive to change. We believe this strategic action will
allow us to enhance our operating results, better align our
resources to support our ongoing business strategy, and
heighten our focus on delivering long-term, profitable growth
for our stockholders.
Within our continuing operations, we were pleased to deliver
in excess of 13% growth in revenue, as we continued to take
advantage of favorable conditions in many of our end markets.
Our Industrial Products segment finished the year on a very
strong note, with over 17% revenue growth driven by HVAC,
plumbing and energy end markets, as well as contributions
from Greco Aluminum Railings, which we acquired in February
2017. Greco contributed approximately one third of our consoli-
dated revenue growth and has been a very successful acquisition,
performing above our expectations in all respects. Within our
Specialty Chemicals segment, revenues grew by more than 8%,
driven by energy, HVAC and plumbing end markets.
which were focused on rationalizing and optimizing our oper-
ations to increase efficiencies. Along with this improved profit-
ability, we delivered strong cash flow performance for our
stockholders, as our continuing operations drove over 45%
growth in operating cash flow year over year.
While I am very pleased with the work we have accomplished
in fiscal 2018, I am not satisfied. In fiscal 2019 we will continue
to take advantage of further operational improvement opportu-
nities, positioning our businesses for future growth and value
enhancement. Our results for fiscal 2018 underscore our
commitment to driving long-term stockholder value through
leveraging our more efficient and more profitable operating
platform to serve our customers well. This commitment is
shared at all levels of our organization, as through our ESOP,
our employees are stockholders and our collective interests
are aligned.
We also remain focused on growth through acquisition, where
we will continue our disciplined approach in pursuing accretive,
complementary product offerings that leverage our routes to
market to drive growth. As always, we will pursue this with a
commitment to prudent stewardship of our stockholders’
capital and discipline in how we allocate that capital to drive
attractive risk-adjusted returns.
On behalf of all of my colleagues and fellow stockholders at CSW
Indus trials, thank you for your continued support of our company.
Sincerely,
Sincerely,
At the consolidated level, we delivered over 53% growth in
operating income compared to last year. These results demon-
strate the benefits of our post spin-off integration efforts,
Joseph B. Armes
Chairman, CEO and President
FISCAL 2018 REVENUE BY SEGMENT
REVENUE (cid:2151)(cid:2202)(cid:3)(cid:120)(cid:161)(cid:3)(cid:157)(cid:120)(cid:146)(cid:146)(cid:120)(cid:178)(cid:161)(cid:237)(cid:2152)
57%
Industrial
Products
43%
Specialty
Chemicals
$326
$287
$267
2016
2017
2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:58)(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2018
OR
(cid:133)(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 001-37454
CSW INDUSTRIALS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(state or other jurisdiction of
incorporation or organization)
5420 Lyndon B. Johnson Freeway, Suite 500, Dallas, Texas
(Address of principal executive offices)
47-2266942
(I.R.S. Employer
Identification No.)
75240
(zip code)
(214) 884-3777
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
Nasdaq Stock Market LLC
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No (cid:58)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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 (cid:58) No (cid:133)
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 (cid:58) No (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. (cid:58)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Yes (cid:133) No (cid:58)
Large accelerated filer (cid:133)
Accelerated filer (cid:58)
Non-accelerated filer (cid:133)
(Do not check if smaller
reporting company)
Smaller reporting company (cid:133)
Emerging growth company (cid:133)
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. (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:58)
The aggregate market value of the registrant’s common stock held by non-affiliates, based on the last sale price for the common stock as reported by
the Nasdaq Global Select Market on September 29, 2017 the last business day of our most recently completed second fiscal quarter was approximately
$479.8 million.
As of May 24, 2018, the latest practicable date, 15,841,605 shares of the registrant’s common stock, par value $0.01 per share, were issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the definitive proxy statement for the registrant’s Annual Meeting of Stockholders is incorporated by reference into
Part III hereof.
ITEM 1: Business
ITEM 1A: Risk Factors
ITEM 1B: Unresolved Staff Comments
ITEM 2: Properties
ITEM 3: Legal Proceedings
ITEM 4: Mine Safety Disclosures
TABLE OF CONTENTS
PART I
PART II
ITEM 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
ITEM 6: Selected Financial Data
ITEM 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk
ITEM 8: Financial Statements and Supplementary Data
ITEM 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A: Controls and Procedures
ITEM 9B: Other Information
PART III
ITEM 10: Directors, Executive Officers and Corporate Governance
ITEM 11: Executive Compensation
ITEM 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 13: Certain Relationships and Related Transactions, and Director Independence
ITEM 14: Principal Accounting Fees and Services
PART IV
ITEM 15: Exhibits, Financial Statement Schedules
SIGNATURES
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 XBRL Instance Document
EX-101 XBRL Taxonomy Extension Schema
EX-101 XBRL Taxonomy Extension Calculation Linkbase Document
EX-101 XBRL Taxonomy Extension Definition Linkbase Document
EX-101 XBRL Taxonomy Extension Label Linkbase Document
EX-101 XBRL Taxonomy Extension Presentation Linkbase Document
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Unless otherwise specified, or the context otherwise requires, the references in this Annual Report on Form 10-K for the
fiscal year ended March 31, 2018 (“Annual Report”) to “our company,” “the Company,” “we,” “us,” “our” or “CSWI” refer to
CSW Industrials, Inc. together with our wholly-owned subsidiaries.
PART I
ITEM 1: BUSINESS
General
CSWI is a diversified industrial growth company with well-established, scalable platforms and domain expertise across
two business segments: Industrial Products and Specialty Chemicals. Our broad portfolio of leading products provides
performance optimizing solutions to our customers. Our products include mechanical products for heating, ventilation and air
conditioning (“HVAC”) and refrigeration applications, sealants and high-performance specialty lubricants. Markets that we serve
include HVAC, industrial, rail, plumbing, architecturally-specified building products, energy, mining and other general industrial
markets. Our manufacturing operations are concentrated in the United States (“U.S.”) and Canada, but we also have distribution
operations in Australia, Canada and the United Kingdom (“U.K.”), and our products are sold directly or through designated
channels in over 100 countries around the world, including: Australia, Brazil, Canada, China, Colombia, the Netherlands, Russia,
South Africa, Sweden, the U.K. and the U.S.
Drawing on our innovative and proven technologies, we seek to deliver solutions to our professional customers that require
superior performance and reliability. We believe that our industrial brands, such as RectorSeal No. 5® and KOPR-KOTE®, are
well known in the specific industries we serve and have a reputation for high quality and reliability. Through organic growth and
acquisitions, we believe that we are well positioned to offer our customers an increasingly broad portfolio of performance
optimizing solutions. We have a successful record of making accretive acquisitions, and we believe that there are further attractive
acquisition opportunities available within the markets in which we operate.
We have a long history of providing high quality specialty chemicals, sealants and other products, accompanied by
dependable service and attention to customer satisfaction. For example, our specialty lubricants were used on the excavation
equipment for the Panama Canal in the late 1800s. We also have a long history of innovation. We believe that we were the first
to develop a method for removing internal acid from air conditioning and refrigeration systems, pioneering the market for acid
neutralizers. We partner with our customers to solve specific challenges, such as environment-friendly lubricants, which were
specifically developed to provide high performance in rail applications combined with biodegradability and no eco-toxicity and
to satisfy strict environmental requirements.
CSWI is a Delaware corporation and was incorporated in 2014 in anticipation of CSWI's separation from Capital Southwest
Corporation ("Capital Southwest"), which occurred on September 30, 2015. Since the separation, CSWI has been an independent,
publicly-traded company, listed on the Nasdaq Global Select Market. The separation was executed on September 30, 2015
through a pro-rata share distribution of all the then outstanding shares of common stock of CSWI to the holders of common stock
of Capital Southwest (the "Share Distribution").
Our Competitive Strengths
We believe we have the following competitive strengths:
Broad Portfolio of Industry Leading Products and Solutions
We have a broad portfolio of products with leading industry positions in the specific end markets in which we operate. We
believe our products and solutions are differentiated from those of our competitors by superior performance, quality and total
value delivered to customers. For example, our RectorSeal No. 5® product is widely regarded as an industry standard for thread
sealants for HVAC, plumbing and electrical configurations. Additionally, we believe our KOPR-KOTE® product is recognized
as the anti-seize compound of choice for use in oil and gas drilling operations, where it is requested by name.
Sustainable Organic Revenue Growth and Operating Performance
We focus on end markets with strong growth trends. We also have a loyal customer base that recognizes the performance
and quality of our products and solutions, including continuously evaluating the potential uses of existing products to broaden
1
our market penetration. Further, our customer base is diverse: for the fiscal year ended March 31, 2018, no single customer
represented 10% or more of our net revenues.
These factors have enabled us to generate strong margin performance. We are focused on improving our profitability
through targeted investments to further optimize our manufacturing processes. For example, in both of our reportable segments,
we have taken actions to consolidate our manufacturing footprint in order to optimize capacity, improve efficiency and leverage
technologies while enhancing product quality. Further, we continually look to refine our manufacturing processes in all of our
manufacturing facilities to lower manufacturing costs, increase production capacity and improve product quality.
Stable Platform for Acquisitions with Proven Track Record
We believe that our experience in identifying, completing and integrating acquisitions is one of our core competitive
strengths, as evidenced by over 30 acquisitions that we have successfully completed since 1991. Since April 1, 2012, our
acquisitions have either (1) added new products designed to service our existing end markets, or (2) provided an entry into new,
complementary end markets where we can drive revenue growth and improved profitability. Historically, our acquisitions have
been relatively small, lower-risk acquisitions of a product that we have identified as having the potential to benefit from our
extensive distribution network and manufacturing efficiencies.
We did not complete any acquisitions during the fiscal year ended March 31, 2018, and completed one acquisition during
the fiscal year ended March 31, 2017. Effective February 28, 2017, we acquired Greco Aluminum Railings, a leading
manufacturer of high-quality engineered railing and safety systems for multi-family and commercial structures. Effective
October 1, 2015, we acquired substantially all of the assets of Deacon Industries, Inc., a leading manufacturer of high temperature
sealants and injectable packings. Effective December 16, 2015, we acquired substantially all of the assets of AC Leak Freeze, a
leading manufacturer of original equipment manufacturer-safe air conditioning and refrigerant leak repair solutions.
Culture of Product Enhancement and Customer Centric Solutions
We have a long history of serving our customers with high quality products and solutions. We work closely with our
customers, industry experts and research partners to continuously improve our existing products to meet evolving customer and
market requirements. Our highly trained and specialized personnel work directly with our current and prospective customers to
enhance our product offerings by expanding the use and markets for our existing products. We focus on product enhancements
and product line extensions that are designed to meet the specific application needs of our customers. We believe this focus has
helped us build strong industrial brands and develop a reputation for high quality, in turn leading us to realize improved customer
retention and loyalty. Further, our ability to meet the needs of high-value niche end markets with customized solutions that
leverage our existing products has enabled us to differentiate ourselves from our larger competitors that may not have the
flexibility or interest in responding quickly to evolving customer demands in these smaller, niche markets.
Diverse Sales and Distribution Channels
Many of our products are sold through service-intensive distribution networks committed to technical support and customer
satisfaction. We primarily market through an international network of independent manufacturer representatives and agents
calling on our wholesale distributors, contractors and direct customers. The strong, long-term relationships we have developed
with our wholesale distribution partners allow us to introduce new products, including both newly developed and acquired
products. In addition, our extensive distribution network allows us to reach and serve niche end markets that provide organic
growth opportunities and form a key component of our acquisition strategy.
Our Growth Strategy
We are focused on creating significant stockholder value over the long term by increasing our revenue, profitability and
free cash flow through: (1) expanding the markets and uses for our existing products; and, (2) growing the portfolio of products
we manufacture, market and sell through organic growth initiatives and targeted acquisitions. We believe the key drivers of our
growth include:
Leveraging Existing Customer Relationships and Products and Solutions
We expect to drive revenue growth by leveraging our reputation for providing high quality products to our long-standing
customer base. Our team of sales representatives, engineers and other technical personnel continues to proactively collaborate
2
with our distributors and end users to enhance and adapt existing products and solutions to meet evolving customer needs. In
addition, we seek to leverage our existing customer base to cross-sell our products and solutions across our two business
segments, thereby driving organic growth.
Product Innovation to Accelerate Organic Growth
The collaborative relationships and open feedback channels we have with our distributors and end users allow us to add
value not only through enhancing and adapting existing products and solutions, but also through efficiently developing new
products and solutions to meet existing and future customer needs. Our research and development, sales and marketing personnel
work together to identify product opportunities and methodically pursue development of innovative new products. Through
developing new products and solutions to both address new markets and complement our product portfolio in markets we
currently serve, we create increased opportunities to drive organic growth.
Focused Acquisitions that Leverage our Distribution Channels
While we are focused on new product development, improving our existing products and penetrating new markets with
these products, we expect to continue to identify and execute acquisitions that will broaden our portfolio of products and offer
attractive risk-adjusted returns. We primarily focus on commercially proven products and solutions that would benefit from a
broader distribution network and are attractive to our customers in target end markets. Once acquired, our intent is to utilize our
extensive distribution networks to increase revenue by selling those products to our diversified customer base.
Benefits Resulting from the Share Distribution
Historically, our operating companies functioned as independent companies with discrete strategies and capital structures.
The Share Distribution has allowed us, as an independent, standalone company, to pursue a strategy focused on rationalizing our
organizational structure and management around our two business segments. We expect this strategy to enable us to realize cost
and operational synergies, implement best practices across our operations, cross-sell product offerings and, as a result, grow our
market share and increase our profitability.
Additionally, we believe our integrated structure allows us to more effectively allocate capital across our two business
segments, enabling more efficient financing of operations and planned growth.
Raw Materials and Suppliers
Our products are manufactured using various raw materials, including base oils, copper flake, aluminum, polyvinyl chloride
and tetra-hydrofuran. These raw materials are available from numerous sources, and we do not anticipate significant shortages
of such materials in the future. We generally purchase these raw materials and components as needed. We do not depend on a
single source of supply for any significant raw materials.
Intellectual Property
We own a number of trademarks and patents relating to the names and designs of our products. We consider our trademarks
and patents to be valuable assets of our business. In addition, our pool of proprietary information, consisting of know-how and
trade secrets related to the design, manufacture and operation of our products, is considered particularly valuable. Accordingly,
we take proactive measures to protect such proprietary information. In aggregate, we own the rights to the products that we
manufacture and sell and are not materially encumbered by licensing or franchise agreements. Our trademarks can typically be
renewed indefinitely as long as they remain in use, whereas our existing patents generally expire 10 to 20 years from the dates
they were filed, which has occurred at various times in the past. We do not believe that the expiration of any individual patent
will have a material adverse impact on our business, financial condition or results of operations.
Export Regulations
We are subject to export control regulations in countries from which we export products and services. These controls may
apply by virtue of the country in which the products are located or by virtue of the origin of the content contained in the products.
If the controls of a particular country apply, the level of control generally depends on the nature of the goods and services in
question. Where controls apply, the export of our products generally requires an export license or authorization (either on a per-
product or per transaction basis) or that the transaction qualify for a license exception or the equivalent, and may also be subject
3
to corresponding reporting requirements. See Note 18 to our consolidated financial statements included in Item 8 of this Annual
Report for financial and other information regarding our operations on a geographical basis.
Environmental Regulations
Our operations are subject to certain foreign, federal, state and local regulatory requirements relating to environmental,
waste management, labor and health and safety matters. Management believes that our business is operated in material
compliance with all such regulations. To date, the cost of such compliance has not had a material impact on our capital
expenditures, earnings or competitive position or that of our operating subsidiaries. Despite the existence of policies, practices
and procedures to prevent and mitigate risks, violations may occur in the future as a result of human error, equipment failure or
other causes. Further, we cannot predict the nature, scope or effect of environmental legislation or regulatory requirements that
could be imposed, or how existing or future laws or regulations will be administered or interpreted. Compliance with more
stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies, could require substantial
expenditures by us and could have a material impact on our business, financial condition and results of operations.
Employees
As of March 31, 2018, we employed 730 individuals within our continuing operations. Of these employees, 18 are
represented by unions. We believe relations with our employees throughout our operations are generally satisfactory, including
those employees represented by unions. No unionized facility accounted for more than 10% of our consolidated revenues for the
fiscal year ended March 31, 2018.
Available Information
We maintain an Internet web site at www.cswindustrials.com. Our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of
the Securities Exchange Act of 1934 (the “Exchange Act”) are made available free of charge through the “Investors” section of
our Internet web site as soon as reasonably practicable after we electronically file the reports with, or furnish the reports to, the
U.S. Securities and Exchange Commission (“SEC”).
We also make available free of charge on our web site our Corporate Governance Guidelines and Code of Business Conduct
and Ethics, as well as the charters of our Audit Committee, our Compensation and Talent Development Committee and our
Nominating and Corporate Governance Committee. You may access these documents in the “Corporate Governance” section on
the “Investors” page of our website.
4
Business Segments
We operate in two business segments: Industrial Products and Specialty Chemicals. The table below provides an overview
of these business segments. For financial information regarding our segments, see Note 18 to our consolidated financial
statements included in Item 8 of this Annual Report.
Business
Segment
Principal Product
Categories
Key End Use Markets
Representative Industrial Brands
• Specialty mechanical products
• Fire and smoke protection products
• Architecturally-specified building
products
Industrial Products
• Storage, filtration and application
equipment for use with our specialty
chemicals and other products for
general industrial applications
• Plumbing
• HVAC
• Refrigeration
• Electrical
• Commercial construction
• Rail car and locomotive
• General industrial
• Lubricants and greases
• Drilling compounds
• Anti-seize compounds
• Chemical formulations
• Degreasers and cleaners
• Penetrants
• Pipe thread sealants
• Firestopping sealants and caulks
• Adhesives/solvent cements
Specialty Chemicals
• Energy
• Drilling and boring
• Water well drilling
• Mining
• Rail
• Steel
• Power generation
• Cement
• Aviation
• Plumbing
• HVAC
• Electrical
• Oil and gas
• Commercial construction
• General industrial
• Refrigeration
Industrial Products
Our Industrial Products segment consists of: specialty mechanical products; fire and smoke protection products;
architecturally-specified building products; and storage, filtration and application equipment for use with our specialty chemicals
and other products for general industrial applications. These industrial products are primarily manufactured internally, although
we strategically engage third-party manufacturers for certain products. We ensure the quality of internally- and externally-
manufactured products through our stringent quality control review procedures. Our building products are eco-friendly, enabling
them to be easily incorporated into the “Green Building” market. Our key product types and brand names are included below:
5
Product Types
Specialty Mechanical Products
• condensate switches, traps and pans
• line set covers
• condensate removal pumps and equipment mounting brackets
• air diffusers for use by professional air conditioning contractors
• tamper resistant locking refrigerant caps
• ductless mini-split systems installation support tools
• drain waste and vent systems mechanical products
• decorative roof drain downspout nozzles
• wire pulling head tools
• equipment pads
Fire and Smoke Protection Products
• fire-rated and smoke-rated opening protective systems
Architecturally-Specified Building Products
• expansion joint covers
• fire barriers
• specialty silicone seals
• stair nosings
• partition closure systems
• entrance mats and grids
• photoluminescent egress markings and signage
• trench and access covers
• architectural grating
• engineered railing
Storage, Filtration and Application Equipment
• lubrication application and management systems
• storage and filtration devices
Brand Names
• Airtec®
• ArmorPad™
• Clean Check®
• EZ Trap®
• Fortress®
• Goliath® Pans
• G-O-N®
• Hubsett™
• Magic Vent®
• Mighty Bracket™
• Novent®
• Safe-T-Switch®
• Slim Duct™
• SureSeal®
• Titan™ Pans
• Wire Grabber™
• Smoke Guard®
• Balco®
• DuraFlex™
• Greco™
• llumiTread™
• MetaBlock™
• MetaFlex™
• MetaGrate™
• MetaMat™
• Michael Rizza™
• UltraGrid™
• Air Sentry®
• Guardian®
• Oil Safe®
• Whitmore Rail™
New Product Development – Customer experience is a core competency in our Industrial Products segment. We gather
"voice of the customer" market research through organized focus groups and online surveys, as well as through less formal
channels. Ideas for new products or enhancements to existing products are also generated by our relationships with end users,
independent sales representatives, distributors and our internal sales and marketing team. We also actively monitor the
competitive landscape using a variety of methods. We develop new products and modify existing products in our research and
development (“R&D”) labs in Houston, Texas; Rockwall, Texas; Boise, Idaho; Wichita, Kansas; and Windsor, Canada.
Competition – Our competition in the Industrial Products segment is varied. Competitors range from small entrepreneurial
companies with a single product, to large multinational original equipment manufacturers (“OEMs”). In the specialty mechanical
products category, we compete with Diversitech, Supco, Little Giant, Mitsubishi, Cherne, Mainline and JR Smith. Most of our
products are sold through distribution channels, and we compete based on breadth of product line, customer service and pricing.
In the fire and smoke protection category we compete with Won Door, Stoebich, McKeon and others, typically on the basis of
product innovation, knowledge of building codes and customer service. In the architecturally-specified building products
6
category, we compete primarily with Emseal, Inpro, and MM Systems on the basis of product innovation, price and driving
architectural specifications. In the lubricant storage, filtration and transfer space, we compete with Des-Case, Hy-Pro, IFH and
others on the basis of superior performance, brand strength and breadth of product line.
Customers – Our primary customers for specialty mechanical products are HVAC, plumbing and electrical wholesalers and
distributors. Some of these are local single location distributors, but many are regional or national in scope with hundreds of
locations. The majority of these products are sold domestically; however, a small portion is sold internationally through similar
channels, and a small number of OEMs purchase these products directly. Fire and smoke protection products are sold through
local building products distributors who also perform installations and service. Architecturally-specified building products are
sold primarily through a network of distributors. Storage, filtration and application products are marketed and sold worldwide
through a service-intensive distribution network.
Seasonality – A significant portion of our products are sold into the HVAC market, which is seasonal by nature. While
products are sold throughout the year, sales tend to peak during summer months.
Specialty Chemicals
Our Specialty Chemicals segment manufactures and supplies highly specialized consumables that impart or enhance
properties such as lubricity, anti-seize qualities, friction, sealing properties and heat control. In addition, the segment includes
penetrants, pipe thread sealants, firestopping sealants and caulks and adhesives/solvent cements, which are primarily
manufactured internally. These materials are typically used in harsh operating conditions, including extreme heat and pressure
and chemical exposure, where commodity products would fail. These products protect and extend the working life of large
capital equipment such as cranes, rail systems, mining equipment, oil rigs and rotating and grinding equipment found in various
industrial segments such as steel mills, canning and bottling, mining and cement. Additionally, our Specialty Chemicals segment
manufactures and supplies specialty products used in the HVAC, building and refrigeration market. These products enhance,
repair or condition the internal working systems of both industrial and residential systems and are critical to ensuring safe,
efficient and effective long-term operational integrity. The Specialty Chemicals segment also supplies products and services into
the water well treatment space, which includes testing services and diagnosis of current conditions, coupled with consumable
solutions to resolve any problems that have been defined. Our key product types and brand names are included below:
7
Product Types
• railroad track lubricants, conditioners and positive friction consumables
• oil field anti-seize products for drilling and conveyance piping
• open gear specialty lubricants for heavy equipment
• specialty lubricants for various industrial applications
• water well treatment products and services
• chemical sealants to stop air-conditioning refrigerant leaks
• engineered specialty thread sealants designed to seal and secure metal
• specialty sealants for high temperature applications
• solvent cements and fire stop caulks
Brand Names
• AC Leak Freeze®
• Bio Fireshield™
• BioRail®
• Deacon®
• Decathlon™
• Envirolube®
• Gearmate®
• KATS® Coatings
• KOPR-KOTE®
• Medallion™
• Metacaulk®
• Paragon™
• Rail Armor®
• RectorSeal No. 5®
• Run-N-Seal®
• Sterilene™
• Surtac®
• T Plus 2®
• TOR Armor®
• Tru-Blu™
• Unicid™
• Well-Guard®
• Whitcam®
New Product Development – We develop relationships with end-users and channel partners to understand existing and new
operating conditions where technical innovation or enhancement is needed. For example, these relationships have generated
innovation in the areas of modifying existing lubrication products to operate in arctic conditions or modifying an existing product
for use in an application where salt water may be present. The development teams located in Rockwall, Texas and Houston,
Texas are also actively defining new end markets for product use and penetration.
Competition – In general, our products are specialty products, rather than commodity, competitors tend to be varied and
include global, regional and local companies that may be large or small. The product sales cycle is often long when compared
to many commodity consumables, resulting in verifiable and repeatable product performance being the key driver of choice,
rather than price. As these products protect and enhance the operation of large capital equipment, qualification is based on the
proof of value in application, resulting in a high changeover risk barrier. Typical competitors include Shell, Castrol, Fuchs and
Exxon-Mobil. Competitors of our sealants and adhesives products include Dow Corning Corporation, Henkel, 3M Company,
Specified Technologies Inc. and Hilti. We compete primarily on the basis of product differentiation, superior performance, quality
and customer-centric service.
Customers – Specialty Chemicals products are primarily sold through value-added distribution partners, as well as
maintenance and repair operations or catalog channels. Specialty Chemicals provides both market-specific and product line-
specific training to both the distribution partners and potential end users. Our specialists often visit end users with our distribution
partners to advise on critical application issues, which enhances our ability to both “pull” demand from the end-user and “push”
demand to the distributor partner. Specialty Chemicals customers include petrochemical facilities, industrial manufacturers,
construction, utilities, plant maintenance customers, building contractors and repair service companies.
8
Discontinued Operations and Segment Realignment
During the third quarter of fiscal year ended March 31, 2018, we committed to a plan to divest our Strathmore Products
business (the "Coatings business"). This determination resulted in the reclassification of the assets comprising that business to
assets held-for-sale, and a corresponding adjustment to our consolidated statements of operations to reflect discontinued
operations for all periods presented.
Additionally, as a result of our determination to divest the Coatings business, we have realigned our reportable segments to
better align our resources to support our ongoing business strategy. We retained our Industrial Products Segment and combined
the remaining non-coatings business lines of our historical Coatings, Sealants & Adhesives Segment into the Specialty Chemicals
Segment. The reportable segment realignment is consistent with the manner in which we evaluate performance and make
resource allocation decisions, subsequent to the decision to divest the Coatings business. Historical segment information has
been retrospectively adjusted to reflect the effect of this change. Our segment information is more fully disclosed in Note 18 to
our consolidated financial statements included in Item 8 of this Annual Report. Historical information also reflects discontinued
operations presentation for the portion of our business meeting the held-for-sale criteria as described in Note 3 to our consolidated
financial statements included in Item 8 of this Annual Report.
ITEM 1A: RISK FACTORS
Consider carefully the following risk factors, which we believe are the principal risks that we face and of which we are
currently aware, and the other information in this Annual Report, including our consolidated financial statements and related
notes to those financial statements. If any of the risks described below occur, our business, financial results, financial condition
and stock price could be materially adversely affected. While we believe the risks disclosed below are the principal risks we face
and of which we are currently aware, additional risks and uncertainties not presently known to us, or that we currently deem
immaterial, may also impair our business operations.
The industries in which we operate are highly competitive, and many of our products are in highly competitive markets,
particularly certain specialty chemicals products. We may lose market share to producers of other products that can be
substituted for our products.
The industries in which we operate are highly competitive, and we face significant competition from both large international
competitors and from smaller regional competitors. Our competitors may improve their competitive position in our core markets
by successfully introducing new or substitute products, improving their manufacturing processes or expanding their capacity or
manufacturing facilities. Further, some of our competitors benefit from advantageous cost positions that could make it
increasingly difficult for us to compete in markets for less-differentiated applications. If we are unable to keep pace with our
competitors’ products and manufacturing process innovations or cost position, our financial condition and results of operations
could be materially adversely affected.
In addition, competition among producers of certain specialty chemicals products is intense. Increased competition from
existing or newly-developed chemical products may reduce demand for our products in the future, and our customers may decide
on alternate sources to meet their requirements. If we are unable to successfully compete with other producers or if other products
can be successfully substituted for our products, our sales may decline.
Challenging and volatile conditions in the overall global economy, particularly in the U.S., including the capital, credit and
commodities markets, could materially adversely affect our financial position, results of operations and cash flows.
Our financial position, results of operations and cash flows could be materially adversely affected by difficult economic
conditions and significant volatility in the capital, credit and commodities markets and in the overall economy. Challenging and
volatile conditions in the U.S. and globally could affect our business in a number of ways. For example:
• weak economic conditions, especially in our key end markets, could reduce demand for our products, impacting our
revenues and margins;
•
as a result of volatility in commodity prices, we may encounter difficulty in achieving sustained market acceptance of
past or future price increases, which could have a material adverse effect on our financial position, results of operations
and cash flows;
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• under difficult market conditions, there can be no assurance that access to credit or the capital markets would be available
or sufficient, and in such a case, we may not be able to successfully obtain additional financing on reasonable terms, or
at all; and
•
challenging market conditions could result in our key customers experiencing financial difficulties and/or electing to limit
spending, which in turn could result in decreased sales and earnings for us.
Our attempts to address evolving customer needs requires that we continually enhance our products. Our efforts to enhance
our products may not be commercially viable and failure to develop commercially successful products or keep pace with our
competitors could harm our business and results of operations.
A failure to develop commercially successful products or product enhancements or to identify product extensions could
materially adversely affect our financial results. If our attempts to develop or enhance products is unsuccessful, we may be
unable to recover our development costs, which could have an adverse effect on our business and results of operations. In
addition, our inability to enhance or develop products that are able to meet the evolving needs of our customers, including a
failure to do so that results in our products lagging those of new or existing competitors, could reduce demand for our products
and may have a material adverse effect on our business and results of operations.
The cyclical nature of certain end markets that our business serves can cause significant fluctuations in our results of
operations and cash flows.
The cyclical nature of the supply and demand balance of certain end markets that we serve, including the energy and mining
industries, poses risks to us that are beyond our control and can affect our operating results. These markets are highly competitive;
are driven to a large extent by end-use markets; and may experience overcapacity, all of which may affect demand for and pricing
of our products and result in volatile operating results and cash flows over our business cycle. Future growth in product demand
may not be sufficient to utilize current or future capacity. Excess industry capacity may continue to depress our volumes and
margins on some products. Our operating results, accordingly, may be volatile as a result of excess industry capacity, as well as
from rising energy and raw materials costs.
Our acquisition and integration of businesses could negatively impact our financial results.
Acquiring businesses involves a number of financial, accounting, managerial, operational, legal, compliance and other risks
and challenges, including the following, any of which could adversely affect our financial statements:
•
any acquired business, technology, service or product could under-perform relative to our expectations and the price that
we paid for it, not achieve cost savings or other synergies in accordance with our anticipated timetable or require us to
take an impairment related to the acquired business;
• we may decide to divest businesses, technologies, services or products for financial, strategic or other reasons, which
may require significant financial and managerial resources and may result in unfavorable accounting treatment;
• we may incur or assume significant debt in connection with our acquisitions, which would increase our leverage and
interest expense, thereby reducing funds available to us for purposes such as working capital, capital expenditures,
research and development and other general corporate purposes;
• pre-closing and post-closing earnings and charges could adversely impact operating results in any given period, and the
impact may be substantially different from period to period;
•
the process of integrating acquired operations may create operating difficulties and may require significant financial and
managerial resources that would otherwise be available for existing operations;
• we could experience difficulty in integrating financial and other controls and systems;
• we may lose key employees or customers of the acquired company;
• we may assume liabilities that are unknown or for which our indemnification rights are insufficient, or known or
contingent liabilities may be greater than anticipated; and
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•
conforming the acquired company's standards, process, procedures and controls, including accounting systems and
controls, with our operations could cause internal control deficiencies related to our internal control over financial
reporting or exposure to regulatory sanctions resulting from the acquired company's activities.
Weakness in the energy industry may adversely affect certain segments of our end market customers and reduce our sales and
results of operations.
Some of our customers are impacted by a weakness in the energy industry. This means our operations and earnings may
be significantly affected by changes in oil, gas and petrochemical prices and drilling activities. Oil, gas, petrochemical and
product prices and margins in turn depend on local, regional and global events or conditions that affect supply and demand for
the relevant commodity.
Loss of key suppliers, the inability to secure raw materials on a timely basis, or our inability to pass commodity price increases
on to customers could have an adverse effect on our business.
Materials used in our manufacturing operations are generally available on the open market from multiple sources. However,
some of the raw materials we use are only available from a limited number of sources; accordingly, any disruptions to a critical
suppliers' operations could have a material adverse effect on our business and results of operations. Prices paid for raw materials
could be affected by the energy industry and other commodity prices; tariffs and duties on imported materials; foreign currency
exchange rates; and phases of the general business cycle and global demand. We may be unable to pass along price increases to
our customers, which could have a material adverse effect on our business and results of operations.
If we are not able to successfully execute and realize the expected financial benefits from strategic restructuring and other
integration and cost-saving initiatives, our business could be adversely affected.
From time to time, our business has engaged in strategic restructuring activities and cost savings initiatives, and such
activities may occur in the future. These efforts have included consolidating certain manufacturing facilities in a broader effort
to streamline and rationalize our manufacturing processes as we further integrate our operations.
While we expect meaningful financial benefits from our strategic restructuring and other cost-saving initiatives, we may
not realize the full benefits expected within the anticipated time frame. Adverse effects from restructuring activities could
interfere with our realization of anticipated synergies, customer service improvements and cost savings from these strategic
initiatives. Additionally, our ability to fully realize the benefits and implement restructuring programs may be limited by certain
contractual commitments. Moreover, because such expenses are difficult to predict, we may incur substantial expenses in
connection with the execution of restructuring plans in excess of what is forecasted. Further, restructuring activities are a complex
and time-consuming process that can place substantial demands on management, which could divert attention from other business
priorities or disrupt our daily operations. Any of these failures could, in turn, materially adversely affect our business, financial
condition, results of operations and cash flows, which could constrain our liquidity.
If these measures are not successful or sustainable, we may undertake additional restructuring and cost reduction efforts,
which could result in future charges. Moreover, our ability to achieve our other strategic goals and business plans may be
adversely affected, and we could experience business disruptions with customers and elsewhere if our past or future restructuring
efforts prove ineffective.
We rely on independent distributors as a channel to market for many of our products. Termination of a substantial number
of our distributor relationships or an increase in a distributor's sales of our competitors’ products could have a material
adverse effect on our business, financial condition, results of operations or cash flows.
We depend on the services of domestic and international independent distributors to sell our products and, in many cases,
provide service and aftermarket support to end users of our products. Rather than serving as passive conduits for delivery of
products, our distributors play a significant role in determining which of our products are available for purchase by contractors
to service end users. While the use of distributors expands the reach and customer base for our products, the maintenance and
administration of distributor relationships is costly and time consuming. The loss of a substantial number of our distributors
could have a material adverse effect on our business, financial condition, results of operations or cash flows. In certain
international jurisdictions, distributors are conferred certain legal rights that could limit our ability to modify or terminate
distribution relationships.
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Many of the distributors with whom we transact business also offer competitors’ products and services to our customers.
An increase in the distributors’ sales of our competitors’ products to our customers, or a decrease in the number of our products
the distributor makes available for purchase, could have a material adverse effect on our business, financial condition, results of
operations or cash flows.
Growth of our business will depend in part on market awareness of our industrial brands, and any failure to develop, maintain,
protect or enhance our industrial brands would hurt our ability to retain or attract customers.
We believe that building and maintaining market awareness, brand recognition and goodwill is critical to our success. This
will depend largely on our ability to continue to provide high-quality products, and we may not be able to do so effectively. Our
efforts in developing our industrial brands may be affected by the marketing efforts of our competitors and our reliance on our
independent dealers, distributors and strategic partners to promote our industrial brands effectively. If we are unable to cost-
effectively maintain and increase positive awareness of our industrial brands, our businesses, results of operations and financial
condition could be harmed.
We are dependent on contract manufacturers for manufacturing of certain products that we sell.
We use third parties to manufacture certain of our products. To the extent that we rely on third parties to perform these
functions, we will not be able to directly control product delivery schedules and quality assurance. This lack of control may
result in product shortages or quality assurance problems that could delay shipments of products, increase manufacturing,
assembly, testing or other costs or diminish our brand recognition or relationships with our customers. If a contract manufacturer
experiences capacity constraints or financial difficulties, suffers damage to its facilities, experiences power outages, natural
disasters, labor shortages or labor strikes, or any other disruption of assembly or testing capacity, we may not be able to obtain
alternative manufacturing in a timely manner or on commercially acceptable terms.
We may not be able to consummate acquisitions at our historical rate and at appropriate valuations, which could negatively
impact our growth rate and stock price.
As part of our business strategy, we acquire businesses in the ordinary course, some of which may be material; please see
“Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included in this Annual Report for additional information. Our ability to grow revenues, earnings and cash flow at or above our
historic rates depends in part upon our ability to identify, successfully acquire and integrate businesses at accretive valuations
and realize anticipated synergies. Our inability to do so could adversely impact our growth rate and our stock price. Our ability
to implement our inorganic growth strategy will be limited by our ability to identify appropriate acquisition candidates, which
are difficult to identify for a number of reasons, including high valuations and competition among prospective buyers. Covenants
in our credit agreement and our financial resources, including available cash and borrowing capacity, will also limit our ability
to consummate acquisitions, which may require additional debt financing, resulting in higher leverage and an increase in interest
expense. Changes in accounting or regulatory requirements could also adversely impact our ability to consummate acquisitions.
Our relationships with our employees could deteriorate, which could adversely affect our operations.
As a manufacturing company, we rely on a positive relationship with our employees to produce our products and maintain
our production processes and productivity. As of March 31, 2018, we had 730 full-time employees in our continuing operations,
of which 18 were subject to collective bargaining agreements. If our workers were to engage in a strike, work stoppage or other
slowdown, our operations could be disrupted, or we could experience higher labor costs. In addition, if significant portions of
our employees were to become unionized, we could experience significant operating disruptions and higher ongoing labor costs,
which could adversely affect our business, financial condition and results of operations.
Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our
ability to operate and grow successfully.
Our success in the highly competitive end markets in which we operate will continue to depend to a significant extent on
our key employees, and we are dependent on the expertise of our executive officers and other key employees. Loss of the services
of any of these individuals could have an adverse effect on our business. Further, we may not be able to retain or recruit qualified
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individuals to join our company. The loss of executive officers or other key employees could result in high transition costs and
could disrupt our operations.
Chemical processing is inherently hazardous, which could result in accidents that disrupt our operations or expose us to
significant losses or liabilities.
Hazards associated with chemical processing and the related storage and transportation of raw materials, products and
wastes exist in our operations and the operations of other occupants with whom we share manufacturing sites. These hazards
could lead to an interruption or suspension of operations and have an adverse effect on the productivity and profitability of a
particular manufacturing facility or on us as a whole. These potential risks include, but are not necessarily limited to chemical
spills and other discharges or releases of toxic or hazardous substances or gases, pipeline and storage tank leaks and ruptures,
explosions and fires and mechanical failure. These hazards may result in personal injury and loss of life, damage to property and
contamination of the environment, which may result in a suspension of operations and the imposition of civil or criminal penalties,
including governmental fines, expenses for remediation and claims brought by governmental entities or third parties. The loss
or shutdown of operations over an extended period at any of our major operating facilities could have a material adverse effect
on our financial condition and results of operations. Our property, business interruption and casualty insurance may not fully
insure us against all potential hazards incidental to our business.
Regulation of our employees’ exposure to certain chemicals or other hazardous products could require material expenditures
or changes in our operations.
Certain chemicals that we use in the manufacture of our products may have adverse health effects. The Occupational Safety
and Health Administration limits the permissible employee exposure to some of those chemicals. Future studies on the health
effects of certain chemicals may result in additional or new regulations that further restrict or prohibit the use of, and exposure
to, certain chemicals. Additional regulation of certain chemicals could require us to change our operations, and these changes
could affect the quality of our products and materially increase our costs.
Regulatory and statutory changes applicable to us or our customers could adversely affect our financial condition and results
of operations.
We and many of our customers are subject to various national, state and local laws, rules and regulations. Changes in any
of these areas could result in additional compliance costs, seizures, confiscations, recall or monetary fines, any of which could
prevent or inhibit the development, distribution and sale of our products.
In addition, we benefit from certain regulations, including building code regulations, which require the use of products that
we and other manufacturers sell. For example, certain environmental regulations may encourage the use of more environmentally
friendly products, such as some of the lubricants and greases that we manufacture. If these regulations were to change, demand
for our products could be reduced and our results of operations could be adversely affected.
Compliance with extensive environmental, health and safety laws could require material expenditures, changes in our
operations or site remediation.
Our operations and properties are subject to regulation under environmental laws, which can impose substantial sanctions
for violations. We must conform our operations to applicable regulatory requirements and adapt to changes in such requirements
in all jurisdictions in which we operate. Certain materials we use in the manufacture of our products can represent potentially
significant health and safety concerns. We use large quantities of hazardous substances and generate hazardous wastes in certain
of our manufacturing operations. Consequently, our operations are subject to extensive environmental, health and safety laws
and regulations at the international, national, state and local level in multiple jurisdictions. These laws and regulations govern,
among other things, air emissions, wastewater discharges, solid and hazardous waste management, site remediation programs
and chemical use and management. Many of these laws and regulations have become more stringent over time, and the costs of
compliance with these requirements may increase, including costs associated with any necessary capital investments. In addition,
our production facilities require operating permits that are subject to renewal and, in some circumstances, revocation. The
necessary permits may not be issued or continue in effect, and renewals of any issued permits may contain significant new
requirements or restrictions. The nature of the chemical industry exposes us to risks of liability due to the use, production,
13
management, storage, transportation and sale of materials that may be hazardous and can cause contamination or personal injury
or damage if released into the environment.
Compliance with environmental laws and regulations generally increases the costs of transportation and storage of raw
materials and finished products, as well as the costs of storage and disposal of wastes. We may incur substantial costs, including
fines, damages, criminal or civil sanctions and remediation costs, or experience interruptions in our operations for violations
arising under environmental laws, regulations or permit requirements.
Our permits, licenses, registrations or authorizations and those of our customers or distributors may be modified, suspended,
terminated or revoked before their expiration or we and/or they may be unable to renew them upon their expiration. We may
bear liability for failure to obtain, maintain or comply with required authorizations.
We are required to obtain and maintain, and may be required to obtain and maintain in the future, various permits, licenses,
registrations and authorizations for the ownership or operation of our business, including the manufacturing, distribution, sale
and marketing of our products and importing of raw materials. These permits, licenses, registrations and authorizations could be
modified, suspended, terminated or revoked or we may be unable to renew them upon their expiration for various reasons,
including for non-compliance. These permits, licenses, registrations and authorizations can be difficult, costly and time
consuming to obtain and could contain conditions that limit our operations. Our failure to obtain, maintain and comply with
necessary permits, licenses, registrations or authorizations for the conduct of our business could result in fines or penalties, which
may be significant. Additionally, any such failure could restrict or otherwise prohibit certain aspects of our operations, which
could have a material adverse effect on our business, financial condition and results of operations.
Many of our customers and distributors require similar permits, licenses, registrations and authorizations to operate. If a
significant customer, distributor or group thereof were to have an important permit, license, registration or authorization revoked
or such permit, license, registration or authorization was not renewed, forcing them to cease or reduce their business, our sales
could decrease, which would have a material adverse effect on our business, financial condition and results of operations.
Failure to maintain effective disclosure controls and procedures and internal controls over financial reporting could have a
material adverse effect on our business and stock price.
Effective internal controls are necessary for us to provide reliable financial reports, effectively prevent fraud and operate
successfully as a public company. If we cannot provide reliable financial reports or effectively prevent fraud, our reputation and
operating results could be harmed. If we are unable to maintain effective disclosure controls and procedures and internal controls
over financial reporting, we may not be able to provide reliable financial reports, which in turn could affect our operating results
or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in
reported financial information, which could negatively affect our stock price, limit our ability to access capital markets in the
future, and require additional costs to improve internal control systems and procedures.
Our insurance policies may not cover, or fully cover, us against natural disasters, global conflicts or environmental risk.
We currently have insurance policies for certain operating risks, which include certain property damage, including certain
aspects of business interruption for certain sites, operational and product liability, transit, directors’ and officers’ liability,
industrial accident insurance and other risks customary in the industries in which we operate. However, we may become subject
to liability (including in relation to pollution, occupational illnesses, injury resulting from tampering, product contamination or
degeneration or other hazards) against which we have not insured or cannot fully insure.
For example, hurricanes may affect our facilities or the failure of our information systems as a result of breakdown,
malicious attacks, unauthorized access, viruses or other factors could severely impair several aspects of operations, including,
but not limited to, logistics, sales, customer service and administration. In addition, in the event that a product liability or third-
party liability claim is brought against us, we may be required to recall our products in certain jurisdictions if they fail to meet
relevant quality or safety standards, and we cannot guarantee that we will be successful in making an insurance claim under our
policies or that the claimed proceeds will be sufficient to compensate the actual damages suffered.
Should we suffer a major uninsured loss, a product liability judgment against us or a product recall, future earnings could
be materially adversely affected. We could be required to increase our debt or divert resources from other investments in our
business to discharge product related claims. In addition, adverse publicity in relation to our products could have a significant
14
effect on future sales, and insurance may not continue to be available at economically acceptable premiums. As a result, our
insurance coverage may not cover the full scope and extent of claims against us or losses that we incur, including, but not limited
to, claims for environmental or industrial accidents, occupational illnesses, pollution and product liability and business
interruption.
We have a complex tax structure, and changes in effective tax rates or adverse outcomes resulting from examination of our
income tax returns could adversely affect our results.
We have a complex tax structure and our future effective tax rates could be adversely affected by changes in tax laws,
regulations, accounting principles or interpretations thereof. In addition, we are also subject to periodic examination of our
income tax returns by the Internal Revenue Service (the "IRS") and other tax authorities. We regularly assess the likelihood of
adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be
no assurance that the outcomes from these examinations will not have a material adverse effect on our business, financial
condition and results of operations.
We are also exposed to changes in tax law which can impact our current and future year's tax provision. We continue to
assess the impact of the recently enacted H.R.1, commonly referred to as the Tax Cuts and Jobs Act, and the Finance (No. 2) Act
2017 in the U.K. (together, the “New Tax Laws”), as well as any future regulations implementing the New Tax Laws and any
interpretations of the New Tax Laws. The effect of those regulations and interpretations, as well as any additional tax reform
legislation in the U.S., U.K. or elsewhere, could have a material adverse effect on our business, financial condition and results of
operations.
Our business relies heavily on trademarks, trade secrets, other intellectual property and proprietary information, and our
failure or inability to protect our rights could harm our competitive position with respect to the manufacturing and sale of
some of our products.
Our ability to protect and preserve our trademarks, trade secrets and other intellectual property and proprietary information
relating to our business is an important factor to our success. However, we may be unable to prevent third parties from using our
intellectual property and other proprietary information without our authorization or from independently developing intellectual
property and other proprietary information that is similar to ours, particularly in those countries where the laws do not protect
our proprietary rights to the same degree as in the U.S. In addition, because certain of our products are manufactured by third
parties, we have shared some of our intellectual property with those third parties. There can be no guarantee that those third
parties, some of whom are located in jurisdictions where intellectual property risks may be more pronounced, will comply with
contractual commitments to preserve and protect our intellectual property.
The use of our intellectual property and other proprietary information by others could reduce or eliminate any competitive
advantage we have developed, potentially causing us to lose sales or otherwise harm our business. If it becomes necessary for
us to litigate to protect these rights, any proceedings could be burdensome and costly, and we may not prevail.
Our intellectual property may not provide us with any competitive advantage and may be challenged by third parties.
Moreover, our competitors may already hold or in the future may hold intellectual property rights in the U.S. or abroad that, if
enforced or issued, could possibly prevail over our rights or otherwise limit our ability to manufacture or sell one or more of our
products in the U.S. or internationally. Despite our efforts, we may be sued for infringing on the intellectual property rights of
others. This litigation is costly and, even if we prevail, the costs of such litigation could adversely affect our financial condition.
Adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets and
manufacturing expertise. The loss of employees who have specialized knowledge and expertise could harm our competitive
position and cause our sales and operating results to decline as a result of increased competition. In addition, others may obtain
knowledge of our trade secrets through independent development or other access by legal means.
The failure to protect our intellectual property and other proprietary information, including our processes, apparatuses,
technology, trade secrets, trade names and proprietary manufacturing expertise, methods and compounds, could have a material
adverse effect on our businesses and results of operations.
15
Security breaches and other disruptions to our information technology systems could compromise our information, disrupt
our operations, and expose us to liability, which may adversely impact our operations.
In the ordinary course of our business, we store sensitive data, including our proprietary business information and that of
our customers, suppliers and business partners, and personally identifiable information of our employees in our information
technology systems, including in our data centers and on our networks. The secure processing, maintenance and transmission of
this data is critical to our operations. Despite our efforts to secure our information systems from cyber-security attacks or breaches
our information technology systems may be vulnerable to attacks by hackers or breached or disrupted due to employee error,
malfeasance or other disruptions. Any such attack, breach or disruption could compromise our information technology systems
and the information stored in them could be accessed, publicly disclosed, lost or stolen and our business operations could be
disrupted. Additionally, any significant disruption or slowdown of our systems could cause customers to cancel orders or cause
standard business processes to become inefficient or ineffective, which could adversely affect our financial position, results of
operations or cash flows. Any such access, disclosure or other loss of information or business disruption could result in legal
claims or proceedings, liability under laws that protect the privacy of personal information, and damage to our reputation, which
could adversely impact our operations.
We are subject to the U.S. Foreign Corrupt Practices Act and other anti-corruption laws, as well as other laws governing our
operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures,
and legal expenses, which could adversely affect our business, financial condition and results of operations.
Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”), and other
anti-corruption laws that apply in countries where we do business. The FCPA and these other laws generally prohibit us and our
employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other
persons to obtain or retain business or gain some other business advantage. We conduct business in a number of jurisdictions
that pose a high risk of potential FCPA violations, and we participate in relationships with third parties whose actions could
potentially subject us to liability under the FCPA or other anti-corruption laws. In addition, we cannot predict the nature, scope
or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing
laws might be administered or interpreted.
We are also subject to other laws and regulations governing our international operations, including regulations administered
by the U.S. Department of Commerce’s Bureau of Industry and Security, the U.S. Department of Treasury’s Office of Foreign
Asset Control and various non-U.S. government entities, including applicable export control regulations, economic sanctions on
countries and persons, customs requirements, currency exchange regulations and transfer pricing regulations (collectively, “Trade
Control Laws”).
We have and maintain a compliance program with policies, procedures and employee training to help ensure compliance
with applicable anti-corruption laws and the Trade Control Laws. However, despite our compliance programs, there is no
assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the
FCPA or other legal requirements, or Trade Control Laws. If we are not in compliance with the FCPA and other anti-corruption
laws or Trade Control Laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial
measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and
liquidity.
Likewise, any investigation of any potential violations of the FCPA, other anti-corruption laws or Trade Control Laws by
the U.S. or foreign authorities could also have an adverse impact on our reputation, business, financial condition and results of
operations.
Our outstanding indebtedness and the restrictive covenants in the agreements governing our indebtedness limit our operating
and financial flexibility.
We are required to make scheduled repayments and, under certain events of default, mandatory repayments on our
outstanding indebtedness, which may require us to dedicate a substantial portion of our cash flows from operations to payments
on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures, R&D
efforts and other general corporate purposes, and could generally limit our flexibility in planning for, or reacting to, changes in
our business and industry.
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In addition, the agreements governing our indebtedness impose certain operating and financial restrictions on us and
somewhat limit management’s discretion in operating our businesses. These agreements limit or restrict our ability, among other
things, to: incur additional debt; pay dividends and make other distributions; make investments and other restricted payments;
create liens; sell assets; and enter into transactions with affiliates.
We are also required to comply with leverage and interest coverage financial covenants and deliver to our lenders audited
annual and unaudited quarterly financial statements. Our ability to comply with these covenants may be affected by events
beyond our control. Failure to comply with these covenants could result in an event of default which, if not cured or waived, may
have a material adverse effect on our business, financial condition, results of operations and cash flows.
If the Share Distribution were to fail to qualify as a tax-free transaction for U.S. federal income tax purposes, then we and
our stockholders could incur significant U.S. federal income tax liabilities.
In connection with the Share Distribution, Capital Southwest received an opinion from a nationally recognized accounting
firm to the effect that the Share Distribution should qualify as tax free under Sections 355 and 368(a)(1)(D) of the Internal
Revenue Code (“the Code”), except with respect to any cash received in lieu of fractional shares of CSWI common stock. An
opinion of an accounting firm is not binding on the IRS. Accordingly, the IRS may reach conclusions with respect to the Share
Distribution that are different from the conclusions reached in the opinion. The opinion relied on certain facts, assumptions,
representations and undertakings from Capital Southwest and us regarding the past and future conduct of the companies’
respective businesses and other matters, which, if incomplete, incorrect or not satisfied, could alter that accounting firm’s
conclusions.
As part of the Share Distribution, we agreed to not take certain actions that would be inconsistent with the qualification of
the Share Distribution as tax free under the Code, and we agreed to indemnify Capital Southwest for any tax liabilities resulting
from such actions we take. If the Share Distribution ultimately is determined to be taxable, it could expose Capital Southwest
and its shareholders to significant U.S. federal income tax liabilities for which we may be liable, which may have a material
adverse effect on our business, financial condition, results of operations and cash flows.
We may acquire various structured financial instruments for purposes of hedging or reducing our risks, which may be costly
and ineffective.
We may seek to hedge against commodity price fluctuations and credit risk by using structured financial instruments such
as futures, options, swaps and forward contracts. Use of structured financial instruments for hedging purposes may present
significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging transaction can result
in losses in the hedging transaction. Hedging activities also involve the risk of an imperfect correlation between the hedging
instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the instrument being
hedged. Use of hedging activities may not prevent significant losses and could increase our losses.
Fluctuations in currency exchange rates may significantly impact our results of operations and may significantly affect the
comparability of our results between financial periods.
Our operations are conducted in many countries. The results of the operations and the financial position of these
subsidiaries are reported in the relevant foreign currencies and then translated into U.S. dollars at the applicable exchange rates
for inclusion in our consolidated financial statements. The main currencies to which we are exposed, besides the U.S. dollar, are
primarily the Canadian dollar, the British pound and the Australian dollar. The exchange rates between these currencies and the
U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies
against the U.S. dollar will decrease the U.S. dollar equivalent of the amounts derived from these operations reported in our
consolidated financial statements, and an appreciation of these currencies will result in a corresponding increase in such amounts.
Because many of our raw material costs are determined with respect to the U.S. dollar rather than these currencies, depreciation
of these currencies may have an adverse effect on our profit margins or our reported results of operations. Conversely, to the
extent that we are required to pay for goods or services in foreign currencies, the appreciation of such currencies against the U.S.
dollar will tend to negatively impact our results of operations. In addition, currency fluctuations may affect the comparability of
our results of operations between financial periods.
17
We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than
the local currency of the transacting entity. Given the volatility of exchange rates, there can be no assurance that we will be able
to effectively manage our currency transaction risks, that our hedging activities will be effective or that any volatility in currency
exchange rates will not have a material adverse effect on our financial condition or results of operations.
Forward-Looking Statements
This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements reflect the current views of our senior management with respect to future events and our financial
performance. These statements include forward-looking statements with respect to our business and industry in general.
Statements that include the words “may,” “expects,” “plans,” “anticipates,” “estimates,” “believes,” “potential,” “projects,”
“forecasts,” “intends,” or the negative thereof or other comparable terminology and similar statements of a future or forward-
looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.
Forward-looking statements include, but are not limited to, statements that relate to, or statements that are subject to risks,
contingencies or uncertainties that relate to:
• our business strategy;
•
•
•
future levels of revenues, operating margins, income from operations, net income or earnings per share;
anticipated levels of demand for our products and services;
future levels of research and development, capital, environmental or maintenance expenditures;
• our beliefs regarding the timing and effects on our business of health and safety, tax, environmental or other legislation,
rules and regulations;
•
•
the success or timing of completion of ongoing or anticipated capital, restructuring or maintenance projects;
expectations regarding the acquisition or divestiture of assets and businesses;
• our ability to obtain appropriate insurance and indemnities;
•
•
•
•
the potential effects of judicial or other proceedings, including tax audits, on our business, financial condition, results of
operations and cash flows;
the anticipated effects of actions of third parties such as competitors, or federal, foreign, state or local regulatory
authorities, or plaintiffs in litigation;
the expected impact of accounting pronouncements; and
the other factors listed above under “Risk Factors.”
Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current
knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements.
The foregoing factors should not be construed as exhaustive. If one or more of these or other risks or uncertainties materialize,
or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Any forward-
looking statements you read in this Annual Report reflect our views as of the date of this Annual Report with respect to future
events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations,
growth strategy and liquidity. You should not place undue reliance on these forward-looking statements and you should carefully
consider all of the factors identified in this Annual Report that could cause actual results to differ. We assume no obligation to
update these forward-looking statements, except as required by law.
ITEM 1B: UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2: PROPERTIES
Properties
Our principal executive offices are located at 5420 Lyndon B. Johnson Freeway, Suite 500, Dallas, Texas 75240. Our
headquarters is a leased facility, which we began to occupy on March 7, 2016. The lease term expires August 31, 2026.
18
We consider the many offices, manufacturing and R&D facilities, warehouses and other properties that we own or lease to
be in good condition and generally suitable for the purposes for which they are used. The following table presents our principal
manufacturing locations by segment and excludes facilities classified as discontinued operations.
Location
Use
Segment
Square Footage Owned/Leased
Boise, Idaho
Fall River, Massachusetts
Houston, Texas
Rockwall, Texas
Wichita, Kansas
Windsor, Ontario, Canada
Manufacturing,
Office and R&D
Manufacturing and
Office
Manufacturing,
Office, R&D and
Warehouse
Manufacturing,
Office, R&D and
Warehouse
Manufacturing and
Office
Manufacturing,
Office and R&D
Industrial Products
40,800
Leased
Both
Both
Both
140,200
Leased
253,900
Owned
227,600
Owned
Industrial Products
Industrial Products
42,800
42,000
Owned
Leased
We believe that our facilities are adequate for our current operations. We may endeavor to selectively reduce or expand our
existing lease commitments as circumstances warrant. See Note 8 to our consolidated financial statements included in Item 8 of
this Annual Report for additional information regarding our operating lease obligations.
ITEM 3: LEGAL PROCEEDINGS
We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or
otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our operating
companies. We are not currently a party to any legal proceedings that, individually or in the aggregate, are expected to have a
material effect on our business, financial condition, results of operations or financial statements, taken as a whole.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
19
PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common shares are listed on the Nasdaq Global Select Market. The following table sets forth, for the periods indicated,
the high and low sales prices of our common stock, as reported by Nasdaq:
Fiscal year ended March 31, 2017:
First quarter (April 1, 2016 – June 30, 2016)
Second quarter (July 1, 2016 – September 30, 2016)
Third quarter (October 1, 2016 – December 31, 2016)
Fourth quarter (January 1, 2017 – March 31, 2017)
Fiscal year ended March 31, 2018:
First quarter (April 1, 2017 – June 30, 2017)
Second quarter (July 1, 2017 – September 30, 2017)
Third quarter (October 1, 2017 – December 31, 2017)
Fourth quarter (January 1, 2018 – March 31, 2018)
$
$
High
Low
35.96 $
34.86
39.25
41.85
40.80 $
45.20
50.00
49.31
30.03
30.76
29.25
34.59
34.05
37.80
44.30
41.70
Holders
As of May 24, 2018, there were approximately 500 holders of record of our common stock. The number of holders of
record is based upon the actual numbers of holders registered at such date and does not include holders of shares in “street name”
or persons, partnerships, associates, corporations or other entities in security position listings maintained by depositories.
Dividend Policy
We do not currently pay dividends on our common stock. Any future payment of dividends will be at the discretion of our
Board of Directors and will depend upon various factors then existing, including earnings, financial condition, results of
operations, capital requirements, level of indebtedness, any contractual restrictions with respect to payment of dividends,
restrictions imposed by applicable law, general business conditions and other factors that our Board of Directors may deem
relevant.
Issuer Purchases of Equity Securities
Note 11 to our consolidated financial statements included in Item 8 of this Annual Report includes a discussion of our share
repurchase program. The following table represents the number of shares repurchased through March 31, 2018.
Period
January 1 - 31
February 1 - 28
March 1 - 31
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)
206 (b) $
17,938 (c)
9,765 (d)
27,909
45.90
44.29
45.04
— $
15,811
9,512
25,323
34.9
34.2
33.8
20
(a) On November 11, 2016, we announced that our Board of Directors authorized us to repurchase shares of our common stock up to an
aggregate market value of $35.0 million during a two-year period. The program may be limited or terminated at any time. As of
March 31, 2018, 26,544 shares have been repurchased for an aggregate of $1.2 million.
(b) Represents shares tendered by employees to satisfy minimum tax withholding amounts for restricted share vesting.
(c) Includes 2,127 shares tendered by employees to satisfy minimum tax withholding amounts for restricted share vesting at an average
price per share of $45.85.
(d) Includes 253 shares tendered by employees to satisfy minimum tax withholding amounts for restricted share vesting at an average
price per share of $45.77.
Stock Performance Chart
The following graph compares the cumulative total shareholder return on our common stock from October 1, 2015 (the
date on which our common shares began "regular way" trading on the Nasdaq Global Select Market) through March 31, 2018
compared with the Russell 2000 Index and a composite custom peer group, selected on an industry basis. The graph assumes
that $100 was invested at the market close on October 1, 2015 and that all dividends were reinvested. The stock price performance
of the following graph is not necessarily indicative of future stock price performance. The custom peer group consists of the
following:
Astec Industries
Chase Corp.
Columbus McKinnon Corp
CTS Corp.
Flotek Industries, Inc.
Futurefuel Corp.
Gorman-Rupp Company
Innospec Inc.
Koppers Holdings
Kraton Performance Polymers NN, Inc.
Landec Corp
Littelfuse, Inc.
LSB Industries
Methode Electronics, Inc.
Omnova Solutions
Orbotech Ltd.
Quaker Chemical
Tredegar Corp.
WD-40 Company
This graph is furnished and not filed with the SEC. Notwithstanding anything to the contrary set forth in any of our previous
filings made under the Securities Act of 1933 or the Exchange Act that incorporate future filings made by us under those statutes,
the stock performance graph below is not to be incorporated by reference in any prior filings, nor shall it be incorporated by
reference into any future filings made by us under those statutes.
$200.00
$180.00
$160.00
$140.00
$120.00
$100.00
$80.00
10/01/15
03/31/16
09/30/16
03/31/17
09/30/17
03/31/18
CSWI
Russell 2000
Custom Peer Group
21
ITEM 6: SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
RESULTS OF OPERATIONS (a)
Revenues, net
Gross profit
Operating expenses
Operating income
Interest expense, net
Provision for income taxes
Income from continuing operations
Diluted earnings per share for continuing
operations
Fiscal Years Ended March 31,
2016
(d) (e)
$
2018
(b)
326,222 $
147,916
(97,202)
50,714
(2,317)
(15,565)
32,682
2017
(c)
287,460 $
128,931
(95,805 )
33,126
(2,695 )
(14,360 )
17,800
2015
(e)
261,834 $
126,425
(82,391 )
44,034
(611 )
(15,223 )
29,705
2014
(e)
231,713
112,086
(74,173 )
37,913
(131 )
(12,794 )
24,732
266,917 $
134,667
(88,472 )
46,195
(3,036 )
(19,166 )
23,807
2.09
1.12
1.52
1.90
1.58
FINANCIAL CONDITION
Working capital
Total assets
Total debt
Retirement obligations and other liabilities
Total equity
$
82,713 $
340,816
24,020
6,738
265,765
108,547 $
398,427
73,207
14,844
272,438
123,958 $
392,671
89,682
13,566
258,010
93,774 $
286,521
26,704
30,255
204,601
90,884
277,820
45,097
12,233
196,186
(a) Results of operations have been adjusted retrospectively for all periods presented to reflect discontinued operations. For additional
information see Note 3 to our consolidated financial statements included in Item 8 of this Annual Report.
(b) Results of operations in the fiscal year ended March 31, 2018 included costs of $1.4 million resulting from restructuring and realignment
initiatives, resulting in a reduction of after tax net earnings of $0.9 million.
(c) Results of operations in the fiscal year ended March 31, 2017 included costs of $6.6 million resulting from restructuring and realignment
initiatives, resulting in a reduction of after tax net earnings of $4.3 million.
(d) Results of operations in the fiscal year ended March 31, 2016 included a curtailment gain of $8.0 million resulting from freezing our
qualified pension plan, resulting in an increase of after tax net earnings of $5.2 million.
(e) We began operations on September 30, 2015 as a result of the Share Distribution discussed in Note 1 to our consolidated financial
statements included in Item 8 of this Annual Report. The financial position, results of operations and cash flows for periods prior to
September 30, 2015 represent the combined financial information of our wholly-owned subsidiaries contributed to us as a result of the
Share Distribution. The financial statements for periods prior to the Share Distribution may not include all of the expenses that would
have been incurred had our wholly-owned subsidiaries been operating as separate, publicly-traded (“standalone”) companies during those
periods and may not reflect the consolidated results of operations, financial position, and cash flows as a standalone company during all
periods presented.
22
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with,
the accompanying consolidated financial statements and notes. See “Item 1A. Risk Factors” and the “Forward-Looking
Statements” included in this Annual Report on Form 10-K for the fiscal year ended March 31, 2018 (“Annual Report”) for a
discussion of the risks, uncertainties and assumptions associated with these statements. Unless otherwise noted, all amounts
discussed herein are consolidated.
EXECUTIVE OVERVIEW
Our Company
We are a diversified industrial growth company with well-established, scalable platforms and domain expertise across two
segments: Industrial Products and Specialty Chemicals. Our broad portfolio of leading products provides performance optimizing
solutions to our customers. CSWI delivers products and systems that help contractors do their jobs better, faster and easier; make
buildings safer and more aesthetically pleasing; protect valuable assets from corrosion; and improve the reliability of mission
critical equipment. Our products include mechanical products for heating, ventilation and air conditioning (“HVAC”) and
refrigeration applications, sealants and high-performance specialty lubricants. Markets that we serve include HVAC,
architecturally-specified building products, industrial, plumbing, energy, rail, mining and other general industrial markets. Our
manufacturing operations are concentrated in the United States ("U.S.") and Canada, and we have distribution operations in
Australia, Canada and the United Kingdom ("U.K."). Our products are sold directly or through designated channels both
domestically and internationally.
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. The maintenance, repair and overhaul and consumable nature of many of our products is a source of
recurring revenue for us. We also provide some custom and semi-custom products that enhance our customer relationships. The
reputation of our product portfolio is built on more than 100 well-respected brand names, such as RectorSeal No. 5, Kopr Kote,
KATS Coatings, Jet-Lube Extreme, Smoke Guard, Safe-T-Switch, Mighty Bracket, Balco, Whitmore, Air Sentry, Oil Safe,
Deacon, AC Leak Freeze and Greco Aluminum Railings.
Prior to the Share Distribution on September 30, 2015 (see discussion below), our operating companies operated as separate
businesses. The consolidated financial statements included in this Annual Report include all revenues, costs, assets and liabilities
directly attributable to the businesses discussed above. However, the combined financial statements for periods prior to the Share
Distribution may not include all of the expenses that would have been incurred had the businesses been operating as separate
publicly traded (“standalone”) companies during those periods.
We believe that our broad portfolio of products and markets served and our brand recognition will continue to provide
opportunities; however, we face ongoing challenges affecting many companies, such as environmental and other regulatory
compliance and overall global economic uncertainty. During the fiscal year ended March 31, 2018, we continued to experience
strong sales growth in key end markets such as HVAC and plumbing, where our innovative chemical and mechanical products
have increased market penetration. We also continue to benefit from a robust commercial construction cycle. During the fiscal
year ended March 31, 2018, we also experienced decreased spending by many of our customers in the mining and rail end markets
as customers adjusted to weakened demand in response to lower market prices for coal and other natural resources. These market
conditions also indirectly impacted general industrial end markets that we serve. We expect that the current environment will
persist into the next fiscal year, impacting primarily the rail and mining markets.
In February 2018, we announced a strategic repositioning to enhance our operating results, simplify our operating structure,
and better align our resources to support our ongoing business strategy. This strategic repositioning included several key actions,
including:
• We initiated a plan to divest Strathmore Products (the "Coatings" business) in the third quarter of the fiscal year ended
March 31, 2018, the revenues of which were approximately one-third of the former Coatings, Sealants & Adhesives
(“CS&A”) segment. In connection with this plan, the Coatings business was classified as assets held for sale and
presented as discontinued operations.
23
• We condensed our three reportable segments into two: Industrial Products and Specialty Chemicals. As a result, the
Sealants and Adhesives businesses, which were part of the former CS&A segment, were integrated into the Specialty
Chemicals segment.
• We flattened our operational leadership structure, resulting in the departure of our President and Chief Operating Officer,
and our operational leadership reporting directly to our Chairman and Chief Executive Officer.
For additional information regarding discontinued operations and our segment realignment, see Note 1 to our consolidated
financial statements included in "Item 8. Financial Statements and Supplementary Data" ("Item 8") of this Annual Report.
The Share Distribution
On September 30, 2015, Capital Southwest Corporation (“Capital Southwest”) spun-off certain of its industrial products,
coatings, sealants and adhesives and specialty chemicals businesses by means of a distribution of the outstanding shares of
common stock of CSWI on a pro rata basis to holders of Capital Southwest common stock (the “Share Distribution”). CSWI
became an independent, publicly-traded company on October 1, 2015 following the Share Distribution.
Following the Share Distribution, we incurred capital costs in the process of integrating our operations, including the
consolidation of some of our manufacturing facilities and operational improvement initiatives. Through these efforts, we expect
to continue to generate sales synergies through greater cross-selling opportunities and expansion of product line applications, and
to generate cost synergies through operating more efficiently and effectively. We have also incurred additional costs as a result
of being a public company, such as additional employee-related costs, costs to build out certain standalone corporate functions,
information systems costs and other organizational-related costs. While we believe the majority of these expected post-Share
Distribution costs have been incurred to date, we may incur additional costs in the future as we seek to further optimize our
organization and operations.
Markets and Outlook
Looking ahead, fiscal year 2019 should be a transitional year as we expect to complete the disposition of the Coatings
business, which is reflected in our discontinued operations. We expect this strategic repositioning to allow us to focus on a faster
growing, more profitable and streamlined group of businesses and the underlying products, as we have simplified our reporting
segments to Industrial Products and Specialty Chemicals. Our diverse product portfolio in those segments serve attractive end
markets that should continue to benefit from growth, primarily in North America, but we anticipate continued growth in key
international regions primarily for our specialty chemical product portfolio, such as Asia, Latin America, South America and the
Middle East. We anticipate revenue growth in our key end markets during fiscal year ending March 31, 2019 due to our
innovative technologies, new product introductions, product differentiation and favorable industry trends.
In fiscal year 2019, we expect capital expenditures to be approximately $5 to $7 million. Capital expenditures will be
focused on maintenance and replacement, continuous improvement and revenue growth.
We were pleased with our most recent acquisition, Greco, as it outperformed in all respects from our acquisition model,
driving revenue growth of 5.7% and $2.8 million of our operating profit growth in the fiscal year ended March 31, 2018. We
will continue to pursue bolt-on acquisitions in our key end markets and channels in fiscal year 2019, but we will remain
disciplined in our approach, including but not limited to our assessment of valuation, prospective synergies, diligence, cultural
fit, integration, etc.
HVAC
The HVAC market is our largest market served and it represented approximately 30% of our net sales in both fiscal years
ended March 31, 2018 and 2017. We provide an extensive array of products for installation, repair and maintenance of HVAC
systems that includes our largest product family, consisting of condensate switches, as well as condensate pans, air diffusers,
condensate pumps, refrigerant caps, line set covers and other chemical and mechanical products. The industry is driven by new
construction projects, as well as replacement and repair of existing HVAC systems. New HVAC systems are heavily influenced
by macro trends in building construction. The HVAC market tends to be seasonal with the peak sales season beginning in March
and continuing through August. Construction and repair is typically performed by contractors, and we utilize our global
24
distribution network to drive sales of our brands to such contractors. For the fiscal year ending March 31, 2019, we anticipate
growth in the HVAC market to be stronger than the gross domestic product.
Architecturally-Specified Building Products
Architecturally-specified building products represented approximately 28% and 24% of our net sales in the fiscal years
ended March 31, 2018 and 2017, respectively. We manufacture and sell products such as engineered railings, smoke and fire
protection systems, expansion joints and stair edge nosings for large commercial buildings and parking facilities. Sales of these
products are driven by architectural specifications and safety codes, and the sales process is typically long as these are multi-year
construction projects. International expansion is driving revenues in this end market as larger buildings are being designed and
built, as well as refurbished and retrofitted. The construction market is a key driver for sales of architecturally-specified building
products. Our outlook for growth in new construction is slightly stronger than the growth expected in the U.S. gross domestic
product in the fiscal year ending March 31, 2019 due to continued share expansion in our engineered railing products and
technologies.
Industrial
The industrial end market represented approximately 15% and 17% of our net sales in the fiscal years ended March 31,
2018 and 2017, respectively. The industrial end market includes customers who manufacture chemicals, steel equipment and a
wide variety of materials. We include sales of lubricants and breathers, as well as various other industrial products in the industrial
end market. We serve this market primarily through a network of industrial distributors. We expect our sales into this market in
the fiscal year ending March 31, 2019 to grow in line with the gross domestic product.
Plumbing
The plumbing market represented approximately 11% and 12% of our net sales in the fiscal years ended March 31, 2018
and 2017, respectively. We provide many products to the plumbing industry including thread sealants, solvent cements, fire-
stopping products, condensate switches and trap guards, as well as other mechanical products. Installation is typically performed
by contractors, and we utilize our global distribution network to drive sales of our brands to contractors. We are not anticipating
any significant changes in the overall plumbing market in the fiscal year ending March 31, 2019.
Energy
The energy market represented approximately 7% and 6% of our net sales in the fiscal years ended March 31, 2018 and
2017, respectively. We provide market-leading lubricants and anti-seize compounds, as well as greases, for use in maintenance
of oilfield drilling equipment. The outlook for the energy industry is heavily dependent on the demand growth from both mature
markets and developing geographies. We saw robust growth in the energy market in the fiscal year ended March 31, 2018 due in
large part to increased drilling driven by increased global rig count activity and market share gains. We do not expect a similar
expansion in drilling activity in the fiscal year ending March 31, 2019.
Rail
The rail market represented approximately 4% and 5% of our net sales in the fiscal years ended March 31, 2018 and 2017,
respectively. We provide an array of products into the rail industry, including lubricants and lubricating devices for rail lines,
which increase efficiency and reduce noise for and extend the life of rail cars. We leverage our technical expertise to build
relationships with key decision-makers to ensure that our products meet required specifications. For the fiscal year ending
March 31, 2019, we anticipate ongoing challenges in the rail industry as it continues to be impacted by the mining and energy
markets. The reduction in North American coal consumption and transport coupled with the increased use of pipelines for
transport of gas and oil is expected to continue to adversely impact the class 1 rail providers' operating margins, which tends to
drive cost containment activity that limits the use of maintenance consumables.
Mining
The mining market represented approximately 4% of our net sales in both fiscal years ended March 31, 2018 and 2017.
We provide market-leading lubricants to open gears used in large mining excavation equipment, primarily through our distribution
network. The North American mining industry has experienced headwinds due to continued low coal demand, which is caused
25
by lower oil and gas prices and increased regulations. We are not anticipating a significant improvement in the coal or non-coal
related (e.g. iron, diamond, etc.) mining market conditions within North America in the fiscal year ending March 31, 2019;
however, the mining industry outside of North America is expected to see growth in the fiscal year ending March 31, 2019.
RESULTS OF OPERATIONS
The following discussion provides an analysis of our consolidated results of operations and results for each of our segments.
The acquisitions listed below impact comparability:
Acquisition
Greco
Leak Freeze
Deacon
Effective Date
February 28, 2017
December 16, 2015 Specialty Chemicals
Industrial Products
Segment
October 1, 2015
Specialty Chemicals
The operations of each acquired business have been included in the applicable segment since the effective date of the
acquisition. All acquisitions are described in Note 2 to our consolidated financial statements included in Item 8 of this Annual
Report.
Throughout this discussion, we refer to costs incurred related to “restructuring and realignment.” These costs represent
both restructuring and non-restructuring charges incurred as a result of manufacturing footprint optimization activities, including
those activities described in Note 1 to our consolidated financial statements included in Item 8 of this Annual Report.
Net Revenues
(amounts in thousands)
Revenues, net
Fiscal Years Ended March 31,
2018
2017
2016
$
326,222 $
287,460 $
266,917
Net revenues for the fiscal year ended March 31, 2018 increased $38.8 million, or 13.5%, as compared with the fiscal year
ended March 31, 2017, including $16.5 million related to the Greco acquisition. Excluding the impact of acquisitions, increased
sales volumes of both existing products and new products, particularly into the HVAC and plumbing end markets as well as
thread sealants and firestopping products ($16.4 million) and increases in the energy market ($8.6 million), were partially offset
by decreased sales into the legacy architecturally-specified building products and industrial ($2.7 million) end markets.
Net revenues for the fiscal year ended March 31, 2017 increased $20.5 million, or 7.7%, as compared with the fiscal year
ended March 31, 2016, including $5.1 million related to acquisitions. Excluding the impact of acquisitions, increased sales
volume of both existing products and new products, particularly into the HVAC ($11.8 million), architecturally-specified building
products ($8.1 million) and plumbing ($2.3 million) markets, partially offset by decreased sales into the energy and rail ($4.4
million) markets and mining ($2.4 million) market.
Net revenues into the Americas, Europe, Middle East and Africa, and Asia Pacific represented approximately 90%, 6%,
and 4%, respectively, of net revenues for the fiscal year ended March 31, 2018; 89%, 7% and 4%, respectively, of net revenues
for the fiscal year ended March 31, 2017; and 87%, 8%, and 5%, respectively, of net revenues for the fiscal year ended March 31,
2016. The presentation of net revenues by geographic region is based on the location of the customer. For additional information
regarding net revenues by geographic region, see Note 18 to our consolidated financial statements included in Item 8 of this
Annual Report.
Gross Profit and Gross Profit Margin
(amounts in thousands, except percentages)
Gross profit
Gross profit margin
Fiscal Years Ended March 31,
2018
147,916
$
2017
128,931
$
2016
134,667
$
45.3 %
44.9%
50.5 %
26
Gross profit for the fiscal year ended March 31, 2018 increased $19.0 million, or 14.7%, as compared with the fiscal year
ended March 31, 2017, including $6.4 million related to the Greco acquisition. Gross profit margin for the fiscal year ended
March 31, 2018 of 45.3% increased from 44.9% for the fiscal year ended March 31, 2017. Excluding the impact of acquisitions,
the increase is attributable to increased sales and lower restructuring and realignment costs.
Gross profit for the fiscal year ended March 31, 2017 decreased $5.7 million, or 4.3%, as compared with the fiscal year
ended March 31, 2016, including $2.7 million related to acquisitions. Gross profit margin for the fiscal year ended March 31,
2017 of 44.9% decreased from 50.5% for the fiscal year ended March 31, 2016. The decrease was attributable to restructuring
and realignment charges ($5.1 million), a pension curtailment benefit in 2016 that did not recur ($2.7 million) and increased other
post-retirement benefits following the freeze of the pension plan in 2016 ($0.8 million), partially offset by the impact of increased
sales on absorption of fixed manufacturing costs.
Selling, General and Administrative Expense
(amounts in thousands, except percentages)
Operating and impairment expenses
Operating and impairment expenses as a % of sales
Fiscal Years Ended March 31,
2018
2017
2016
$
97,202
$
95,805
$
88,472
29.8 %
33.3%
33.1 %
Selling, general and administrative expense for the fiscal year ended March 31, 2018 increased $1.4 million, or 1.5%, as
compared with the fiscal year ended March 31, 2017. The increase was attributable to increases from the acquired Greco business
($3.5 million) mostly offset by lower severance costs ($2.4 million) and implementation costs for our internal controls framework
incurred in the prior fiscal year that did not recur.
Selling, general and administrative expense for the fiscal year ended March 31, 2017 increased $7.3 million, or 8.3%, as
compared with the fiscal year ended March 31, 2016. The increase was attributable to restructuring and realignment ($2.6
million), executive transition and other severance costs ($2.8 million), implementation costs related to the design of our internal
controls framework ($1.0 million), increased other post-retirement benefits following the freeze of the pension plan ($1.2 million)
and impairment of certain patents ($0.3 million).
Operating Income
(amounts in thousands, except percentages)
Operating income
Operating margin
Fiscal Years Ended March 31,
2018
2017
2016
$
50,714
$
33,126
$
46,195
15.5 %
11.5%
17.3 %
Operating income for the fiscal year ended March 31, 2018 increased by $17.6 million, or 53.1%, as compared with the
fiscal year ended March 31, 2017. The increase was a result of the $19.0 million increase in gross profit, slightly offset by the
$1.4 million increase in selling, general and administrative expense as discussed above.
Operating income for the fiscal year ended March 31, 2017 decreased by $13.1 million, or 28.3%, as compared with the
fiscal year ended March 31, 2016. The decrease was primarily a result of the $5.7 million decrease in gross profit and the $7.3
million increase in selling, general and administrative expense as discussed above.
Other income and expense, net
Interest expense, net for the fiscal year ended March 31, 2018 decreased $0.4 million as compared with the fiscal year
ended March 31, 2017, primarily due to an overall reduction in average outstanding debt under our Revolving Credit Facility
(described in Note 8 to our consolidated financial statements included in Item 8 of this Annual Report).
Interest expense, net for the fiscal year ended March 31, 2017 decreased $0.3 million as compared with the fiscal year ended
March 31, 2016, primarily due to interest expense recognized on the loan related to the acquisition of Strathmore and on our
Revolving Credit Facility.
27
Other income, net decreased by $1.9 million for the fiscal year ended March 31, 2018 to expense of $0.1 million as
compared with the fiscal year ended March 31, 2017. The decline was primarily due to a decrease in gains arising from
transaction in currencies other than our sites' functional currencies.
Other income, net increased by $1.9 million for the fiscal year ended March 31, 2017 to income of $1.7 million as compared
with the fiscal year ended March 31, 2016. The increase was primarily due to an increase in gains arising from transaction in
currencies other than our sites' functional currencies.
Provision for Income Taxes and Effective Tax Rate
The provision for income taxes for the fiscal year ended March 31, 2018 was $15.6 million, representing an effective tax
rate of 32.3%, as compared with the provision of $14.4 million, representing an effective tax rate of 44.7%, for the fiscal year
ended March 31, 2017 and the provision of $19.2 million, representing an effective tax rate of 44.6%, for the fiscal year ended
March 31, 2016. As compared with the statutory rate for the fiscal year ended March 31, 2018, the provision for income taxes
was primarily impacted by the one-time repatriation charge on earnings from foreign subsidiaries, which increased the provision
by $1.9 million, net of the related foreign tax credit, and the effective tax rate by 3.9%, as well as a deferred tax true-up adjustment,
which increased the provision by $1.3 million and the effective tax rate by 2.7%. Other items impacting the effective tax rate
include foreign operations activity in countries with lower statutory rates and domestic operations activity in states with higher
statutory rates.
We accrue interest and penalties on uncertain tax positions as a component of our provision for income taxes. We accrued
interest and penalties on uncertain tax positions of $0.1 million and $0.2 million, respectively, for the fiscal year ended March 31,
2018. We accrued interest and penalties on uncertain tax positions of $0.2 million and $0.2 million, respectively, for the fiscal
year ended March 31, 2017. We accrued interest and penalties on uncertain tax positions of $0.2 million and $0.2 million,
respectively, for the fiscal year ended March 31, 2016.
As of March 31, 2018 and 2017, we had $0.2 million and $0.6 million, respectively, in tax effected net operating loss
carryforwards. Net operating loss carryforwards will expire in periods beyond the next five years.
Business Segments
We conduct our operations through two business segments based on type of product and how we manage the business. We
evaluate segment performance and allocate resources based on each segment’s operating income. The key operating results for
our two business segments are discussed below.
Industrial Products Segment Results
Industrial Products includes specialty mechanical products, fire and smoke protection products, architecturally-specified
building products and storage, filtration and application equipment for use with our specialty chemicals and other products for
general industrial application.
(amounts in thousands, except percentages)
Revenues, net
Operating income
Operating margin
Fiscal Years Ended March 31,
$
2018
186,483
43,984
$
2017
158,654
32,893
$
2016
138,594
31,075
23.6 %
20.7%
22.4 %
Net revenues for the fiscal year ended March 31, 2018 increased $27.8 million, or 17.5%, as compared with the fiscal year
ended March 31, 2017, including $16.5 million related to the acquired Greco business. Excluding the impact of the Greco
acquisition, sales volumes increased in both existing products and new products, particularly into the HVAC and plumbing ($13.1
million) markets, partially offset by a decline in legacy architecturally-specified building products and industrial ($2.7 million)
markets.
Net revenues for the fiscal year ended March 31, 2017 increased $20.1 million or 14.5%, as compared with the fiscal year
ended March 31, 2016, including $1.2 million related to acquisitions. Excluding the impact of acquisitions, sales volumes
increased in both existing products and new products, particularly into the HVAC ($11.8 million), architecturally-specified
28
building products ($8.1 million) and plumbing ($2.3 million) markets and were slightly offset by a decline in sales into rail
markets.
Operating income for the fiscal year ended March 31, 2018 increased $11.1 million, or 33.7%, as compared with the fiscal
year ended March 31, 2017, including $2.8 million related to the Greco acquisition. Excluding the impact of acquisitions, the
increase was primarily attributable to increased net revenues, which includes the impact of price increases, a decline in
restructuring and realignment costs ($0.3 million) and a decline in costs related to the design of our internal controls framework.
Operating income for the fiscal year ended March 31, 2017 increased $1.8 million, or 5.9%, as compared with the fiscal
year ended March 31, 2016. The increase was primarily attributable to increased net revenues, partially offset by a pension plan
curtailment benefit in the prior year that did not recur ($3.2 million), restructuring and realignment costs ($0.6 million) and
implementation costs related to the design of our internal controls framework ($0.4 million).
Specialty Chemicals Segment Results
Specialty Chemicals includes pipe thread sealants, firestopping sealants and caulks, adhesives/solvent cements, lubricants
and greases, drilling compounds, anti-seize compounds, chemical formulations and degreasers and cleaners.
(amounts in thousands, except percentages)
Revenues, net
Operating income
Operating margin
Fiscal Years Ended March 31,
$
2018
139,735
18,427
$
2017
128,714
13,508
$
2016
128,051
22,110
13.2 %
10.5%
17.3 %
Net revenues for the fiscal year ended March 31, 2018 increased $11.0 million, or 8.6%, as compared with the fiscal year
ended March 31, 2017. The increase was attributable to increased sales volumes into the energy market ($7.6 million) and
increased sales volumes and prices of thread sealants and firestopping products ($3.4 million).
Net revenues for the fiscal year ended March 31, 2017 increased $0.7 million, or 0.5%, as compared with the fiscal year
ended March 31, 2016, net of $3.9 million contributed by acquisitions. Excluding the impact of acquisitions, the decrease was
due to decreases in sales volumes into the energy ($6.7 million), industrial ($1.9 million) and rail ($1.8 million) markets, partially
offset by increased sales of thread sealants and firestopping products ($7.1 million).
Operating income for the fiscal year ended March 31, 2018 increased $4.9 million, or 36.4%, as compared with the fiscal
year ended March 31, 2017. The increase was attributable to the impact of increased net revenues and a decline in restructuring
and realignment costs ($5.3 million), partially offset by negative product mix.
Operating income for the fiscal year ended March 31, 2017 decreased $8.6 million, or 38.9%, as compared with the fiscal
year ended March 31, 2016, net of $2.2 million contributed by acquisitions. Excluding the impact of acquisitions, the decrease
was attributable to the impact of decreased net revenue, restructuring and realignment costs ($7.1 million), a pension plan
curtailment benefit in the prior year that did not recur ($4.8 million) and inventory write-offs ($0.4 million).
For additional information on segments, see Note 18 to our consolidated financial statements included in Item 8 of this
Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Analysis
(amounts in thousands)
Fiscal Years Ended March 31,
2017
2018
2016
Net cash provided by operating activities from continuing operations
Net cash used in investing activities from continuing operations
Net cash (used in) provided by financing activities
$
57,384 $
(3,035 )
(51,521 )
39,361 $
(23,475)
(15,318)
37,757
(108,474 )
74,694
Existing cash, cash generated by operations and borrowings available under our Revolving Credit Facility are our primary
sources of short-term liquidity. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis,
29
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 equivalents and bank time deposits) at March 31, 2018 was $11.7 million, as
compared with $23.1 million at March 31, 2017.
For the fiscal year ended March 31, 2018, our cash provided by operating activities from continuing operations was $57.4
million, as compared with $39.4 million and $37.8 million for the fiscal years ended March 31, 2017 and 2016, respectively.
Cash flows from working capital increased for the fiscal year ended March 31, 2018 due to lower prepaid expenses and other
current assets ($7.7 million), higher accounts payable and other current liabilities ($6.3 million) and lower inventories ($1.0
million) and, partially offset by higher accounts receivable ($2.7 million). Cash flows from working capital increased for the
fiscal year ended March 31, 2017 due to higher accounts payable and other current liabilities ($5.7 million), partially offset by
higher accounts receivable ($5.0 million) and higher prepaid expenses and other current assets ($0.8 million). Cash flows from
working capital increased for the fiscal year ended March 31, 2016, due primarily to lower inventories ($4.6 million), higher
accounts payable and other current liabilities ($3.1 million) and lower accounts receivable ($0.9 million), partially offset by
higher prepaid expenses and other current assets ($4.7 million).
Cash flows used in investing activities from continuing operations during the fiscal year ended March 31, 2018 were $3.0
million as compared with $23.5 million and $108.5 million for the fiscal years ended March 31, 2017 and 2016, respectively.
Capital expenditures during the fiscal years ended March 31, 2018, 2017 and 2016 were $5.5 million, $6.9 million and $9.3
million, respectively. Our capital expenditures are focused on capacity expansion, continuous improvement, automation and
consolidation of manufacturing facilities. As discussed in Note 2 to our consolidated financial statements included in Item 8 of
this Annual Report, during the fiscal year ended March 31, 2017 we acquired Greco Aluminum Railings for $28.2 million, net of
cash acquired. During the fiscal year ended March 31, 2016 we acquired Strathmore for $68.8 million, Deacon for $12.6 million
and Leak Freeze for $16.3 million
Cash flows used in financing activities during the fiscal years ended March 31, 2018 and 2017 were $51.5 million and
$15.3 million, respectively, as compared with cash provided by financing activities of $74.7 million for the fiscal year ended
March 31, 2016. Cash outflows during the fiscal year ended March 31, 2018 and 2017 resulted primarily from $49.2 million and
$16.5 million, respectively, in repayments on our lines of credit (as discussed in Note 8 to our consolidated financial statements
included in Item 8 of this Annual Report). Cash inflows during the fiscal year ended March 31, 2016 resulted primarily from
$179.0 million of borrowings on our Revolving Credit Facility, which we used to repay $116.1 million on amounts outstanding
under the Strathmore Acquisition Term Loan and the RectorSeal Line of Credit and fund the acquisition of Leak Freeze, and a
contribution of $13.0 million from Capital Southwest in connection with the Share Distribution.
We believe that available cash and cash equivalents, cash flows generated through operations and cash available under our
Revolving Credit Facility will be sufficient to meet our liquidity needs, including capital expenditures, for at least the next 12
months.
Acquisitions and Dispositions
We regularly evaluate acquisition opportunities of various sizes. The cost and terms of any financing to be raised in
conjunction with any acquisition, including our ability to raise capital, is a critical consideration in any such evaluation. Note 2
to our consolidated financial statements included in Item 8 of this Annual Report contains a discussion of our acquisitions.
Financing
Credit Facilities
See Note 8 to our consolidated financial statements included in Item 8 of this Annual Report for a discussion of our
indebtedness. We were in compliance with all covenants contained in our credit facility as of March 31, 2018.
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 consolidated financial statements included in Item 8 and
in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of this Annual Report.
30
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2018, 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.
CONTRACTUAL OBLIGATIONS
The following table presents a summary of our contractual obligations at March 31, 2018 (in thousands):
Long-term debt obligations, principal (2)
Long-term debt obligations, interest (2)
Operating lease obligations (3)
Purchase obligations (4)
Other long-term liabilities (5)
Total (6)
Payments due by Period (1)
< 1 Year
1-3 Years
3-5 Years
> 5 Years
$
$
561 $
1,223
2,344
28,768
798
33,694 $
1,122 $
2,364
3,971
1,417
220
9,094 $
13,122 $
1,442
1,260
—
—
15,824 $
9,215 $
3,678
3,118
—
—
16,011 $
Total
24,020
8,707
10,693
30,185
1,018
74,623
(1) The less than one-year category represents the fiscal year ended March 31, 2019, the 1-3 years category represents fiscal years ending
March 31, 2020 and 2021, the 3-5 years category represents fiscal years ending March 31, 2022 and 2023 and the greater than five
years category represents fiscal years ending March 31, 2024 and thereafter.
(2) Amounts include principal and interest cash payments through the maturity of the outstanding debt obligations. See Note 8 to our
consolidated financial statements included in Item 8 of this Annual Report.
(3) Sales taxes, value added taxes and goods and services taxes included as part of recurring lease payments are excluded from the
amounts shown above.
(4) Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding and specify all significant
terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.
(5) Amounts primarily include deferred consideration payable due to acquisitions and future payments under outstanding deferred
compensation awards. The liability for retirement benefits payable related to our defined benefit pension plans is excluded from the
contractual obligations table as it does not represent expected liquidity requirements.
(6) Operating lease and purchase obligations denominated in foreign currencies are projected based on the exchange rate in effect on
March 31, 2018. Excludes amounts that have been eliminated in our consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
The process of preparing financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions
to determine reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of related contingent assets
and liabilities. These estimates and assumptions are based upon information available at the time of the estimates or assumptions,
including our historical experience, where relevant. The most significant estimates made by management include: timing and
amount of revenue recognition; deferred taxes and tax reserves; pension benefits; and valuation of goodwill and indefinite-lived
intangible assets, both at the time of initial acquisition, as well as part of recurring impairment analyses, as applicable. The
significant estimates are reviewed at least annually, if not quarterly, by management. Because of the uncertainty of factors
surrounding the estimates, assumptions and judgments used in the preparation of our financial statements, actual results may
differ from the estimates, and the difference may be material.
Our critical accounting policies are those policies that are both most important to our financial condition and results of
operations and require the most difficult, subjective or complex judgments on the part of management in their application, often
as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following
represent our critical accounting policies. For a summary of all of our significant accounting policies, see Note 1 to our
consolidated financial statements included in Item 8 of this Annual Report. Management and our external auditors have discussed
our critical accounting estimates and policies with the Audit Committee of our Board of Directors.
31
Revenue Recognition
We generally recognize revenue upon shipment of product, at which time title and risk of loss pass to the customer.
Additionally, we require that all of the following circumstances are satisfied: (a) persuasive evidence of an arrangement exists,
(b) price is fixed or determinable, (c) collectability is reasonably assured and (d) delivery has occurred or services have been
rendered. Net revenues represent gross revenues invoiced to customers less certain related charges for contractual discounts or
rebates. Discounts provided to customers at the point of sale are recognized as reductions in revenue as the products are sold.
Rebate amounts are recorded as a reduction of revenue, at least quarterly, using estimates of customer participation and
performance. Freight charges billed to customers are included in net revenues and the related shipping costs are included in cost
of revenues in our consolidated statements of operations.
Deferred Taxes and Tax Reserves
Deferred tax assets and liabilities are determined based on temporary differences between the financial statement carrying
amounts and the tax basis of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the
differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Based on the evaluation of available evidence, both positive and negative,
we recognize future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that these
benefits are more likely than not to be realized. We base our judgment of the recoverability of our deferred tax assets primarily
on historical earnings, our estimate of current and expected future earnings using historical and projected future operating results,
and prudent and feasible tax planning strategies.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may
result in proposed assessments. Significant judgment is required in determining income tax provisions and evaluating tax
positions. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various taxing
authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and
related interest and penalties as deemed appropriate. Tax benefits recognized in the financial statements from uncertain tax
positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. For the fiscal year ended March 31, 2018, we had a net decrease in our uncertain tax position of $0.1 million. This
included settlements of $0.7 million, an increase of $0.6 million and an additional $0.3 million in interest and penalties in income
tax expense. For the fiscal year ended March 31, 2017, we recognized an uncertain tax position in the amount of $2.0 million,
and we recognized $0.4 million in interest and penalties in income tax expense. For the fiscal year ended March 31, 2016, we
recognized an uncertain tax position in the amount of $0.9 million and we recognized $0.4 million in interest and penalties in
income tax expense. Our liability for uncertain tax positions contains uncertainties as management is required to make
assumptions and apply judgments to estimate exposures associated with our tax positions.
We are currently under audit for our U.S. federal income tax return for the year ended March 31, 2016. As this audit just
began, we have not been notified of any potential adjustments.
While we believe we have adequately provided for any reasonably foreseeable outcome related to these matters, our future
results may include favorable or unfavorable adjustments to our estimated tax liabilities. To the extent that the expected tax
outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such
determination is made.
Pension Benefits
Certain of our U.S. employees hired prior to January 1, 2015 participate in a qualified defined benefit pension plan (the
“Qualified Plan”). The Qualified Plan is closed to any employees hired or re-hired on or after January 1, 2015. The Qualified
Plan was amended to freeze benefit accruals and to modify certain ancillary benefits effective as of September 30, 2015. The
assets, liabilities and expenses we recognize and disclosures we make about plan actuarial and financial information are dependent
on the assumptions and estimates used in calculating such amounts. The assumptions include factors such as discount rates,
health care cost trend rates, inflation, expected rates of return on plan assets, retirement rates, mortality rates, turnover and other
factors. We maintain an unfunded retirement restoration plan (the “Restoration Plan”) that is a non-qualified plan providing for
the payment to participating employees, upon retirement, of an amount equal to the difference between the maximum annual
payment permissible under the Qualified Plan pursuant to federal limitations and the amount that would otherwise have been
32
payable under the Qualified Plan. Consistent with the Qualified Plan, the Restoration Plan is closed to any employees hired or
re-hired on or after January 1, 2015 and was amended effective September 30, 2015 to freeze benefit accruals and to modify
certain ancillary benefits. We also maintain a registered defined benefit pension plan (the "Canadian Plan") that covers all of our
employees based at our facility in Alberta, Canada, which is not material to our overall pension benefits and obligations.
The assumptions utilized to compute expense and benefit obligations are shown in Note 13 to our consolidated financial
statements included in Item 8 of this Annual Report. These assumptions are assessed at least annually in consultation with
independent actuaries as of March 31 and adjustments are made as needed. We evaluate prevailing market conditions, including
appropriate rates of return, interest rates and medical inflation (health care cost trend) rates. We ensure that our significant
assumptions are within the reasonable range relative to market data. The methodology to set our significant assumptions includes:
• Discount rates are estimated using high quality corporate bond yields with a duration matching the expected benefit
payments. The discount rate is obtained from a universe of Aa-rated non-callable bonds across the full maturity spectrum
to establish a weighted average discount rate. Our discount rate assumptions are impacted by changes in general
economic and market conditions that affect interest rates on long-term high-quality debt securities, as well as the duration
of our plans’ liabilities.
• The expected rates of return on plan assets are derived from reviews of asset allocation strategies, expected future
experience for trust asset returns, risks and other factors adjusted for our specific investment strategy. These rates are
impacted by changes in general market conditions, but because they are long-term in nature, short-term market changes
do not significantly impact the rates. Changes to our target asset allocation also impact these rates.
Depending on the assumptions used, pension expense could vary within a range of outcomes and have a material effect on
reported earnings. In addition, the assumptions can materially affect benefit obligations and future cash funding. Actual results
in any given year may differ from those estimated because of economic and other factors.
We evaluate the funded status of the Qualified Plan using current assumptions and determine the appropriate funding level
considering applicable regulatory requirements, tax deductibility, reporting considerations, cash flow requirements and other
factors.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the aggregate purchase price over the fair value of identifiable net assets acquired in a
business combination. We test goodwill at least annually for impairment at the reporting unit level, which is an operating segment
or one level below an operating segment. Goodwill is tested for impairment more frequently if conditions arise or events occur
that indicate that the fair value of the reporting unit is lower than the carrying value of that reporting unit. Goodwill is recorded
in three reporting units.
We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is
less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.
Qualitative assessments use an evaluation of events and circumstances such as macroeconomic conditions, industry and market
considerations, cost factors, financial performance factors, entity specific events and changes in carrying value to determine
whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill.
If a reporting unit fails the qualitative assessment, then valuation models and other relevant data are used to estimate the
reporting unit’s fair value. The valuation models require the input of subjective assumptions. We use an income approach for
impairment testing of goodwill using a discounted cash flow method. Significant estimates include future revenue and expense
projections, growth estimates made to calculate terminal value, and a discount rate that approximates our weighted average cost
of capital. We perform qualitative and quantitative assessments to test asset carrying values for impairment at January 31, which
is the annual impairment testing date.
For purposes of completing the annual goodwill impairment test for fiscal year ended March 31, 2018, a qualitative
assessment was utilized to assess the recoverability of goodwill for our reporting units. The qualitative assessments were
performed using an evaluation of events and circumstances as noted above. Additionally, management performed a quantitative
assessment on two of our reporting units. Based on the current estimate of fair value for both of these reporting units, we
33
determined that substantial excess fair value over the current carrying value exists. There were no goodwill impairment losses
recognized for the fiscal years ended March 31, 2018, 2017 or 2016.
We have indefinite-lived intangible assets in the form of trademarks and license agreements. We review these intangible
assets at least annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount may
not be recoverable. Significant assumptions used in the impairment test include the discount rate, royalty rate, future projections
and terminal value growth rate. These inputs are considered non-recurring level three inputs within the fair value hierarchy. An
impairment loss would be recognized when estimated future cash flows are less than their carrying amount. We recorded
impairment losses on intangible assets (excluding those related to discontinued operations) of $0.0, $0.2 million and $0.0 for the
fiscal years ended March 31, 2018, 2017 and 2016, respectively, for continuing operations.
ACCOUNTING DEVELOPMENTS
We have presented the information about accounting pronouncements not yet implemented in Note 1 to our consolidated
financial statements included in Item 8 of this Annual Report.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely
affect our consolidated financial position and results of operations. We seek to minimize these risks through regular operating
and financing activities, and when deemed appropriate, through the use of interest rate swaps. It is our policy to enter into interest
rate swaps only to the extent considered necessary to meet our risk management objectives. We do not purchase, hold or sell
derivative financial instruments for trading or speculative purposes.
Variable Rate Indebtedness
We are subject to interest rate risk on our variable rate indebtedness. Fluctuations in interest rates have a direct effect on
interest expense associated with our outstanding indebtedness. As of March 31, 2018, we had $12.0 million in outstanding
variable rate indebtedness, after consideration of the interest rate swap. We manage, or hedge, interest rate risks related to our
borrowings by means of interest rate swap agreements. At March 31, 2018, we had an interest rate swap agreement that covered
50% of the $24.0 million of our total outstanding indebtedness. At March 31, 2018, the unhedged variable rate indebtedness of
$12.0 million had a weighted average interest rate of 3.13%. Each quarter point change in interest rates would result in a change
of less than $0.1 million 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 British
pound, Canadian dollar and Australian dollar. Foreign currency exposures arise from translation of foreign-denominated assets
and liabilities into U.S. dollars and from transactions denominated in a currency other than a non-U.S. operation’s functional
currency. We realized net gains (losses) associated with foreign currency translation of $3.3 million, ($2.9) million and ($1.4)
million for the fiscal years ended March 31, 2018, 2017 and 2016, respectively, which are included in accumulated other
comprehensive income (loss). We recognized foreign currency transaction net (losses) gains of ($0.4) million, $1.1 million and
($0.1) million for the fiscal years ended March 31, 2018, 2017 and 2016, respectively, which are included in other income
(expense), net on our consolidated statements of operations.
Based on a sensitivity analysis at March 31, 2018, a 10% change in the foreign currency exchange rates for the fiscal year
ended March 31, 2018 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.
34
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
CSW Industrials, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of CSW Industrials, Inc. (a Delaware corporation) and
subsidiaries (the “Company”) as of March 31, 2018 and 2017, the related consolidated statements of operations, comprehensive
(loss) income, equity and cash flows for each of the three years in the period ended March 31, 2018, and the related notes
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of March 31, 2018 and 2017, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 2018, in conformity with accounting principles generally accepted in
the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of March 31, 2018, based on criteria established in the
2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”), and our report dated May 30, 2018 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2015.
Dallas, Texas
May 30, 2018
35
CSW INDUSTRIALS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Bank time deposits
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Current assets, discontinued operations
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Other assets
Noncurrent assets, discontinued operations
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued and other current liabilities
Current portion of long-term debt
Current liabilities, discontinued operations
Total current liabilities
Long-term debt
Retirement benefits payable
Other long-term liabilities
Total liabilities
Equity:
Common shares, $0.01 par value
Shares authorized – 50,000
Shares issued – 15,957 and 15,846, respectively
Preferred shares, $0.01 par value
Shares authorized – 10,000
Shares issued – 0
Additional paid-in capital
Treasury shares, at cost (80 and 29 shares, respectively)
Retained earnings
Accumulated other comprehensive loss
Total equity
Total liabilities and equity
$
$
$
March 31,
2018
2017
11,706 $
—
63,383
42,974
7,077
2,427
127,567
54,473
81,764
53,054
23,958
—
340,816 $
16,826 $
23,501
561
3,966
44,854
23,459
2,017
4,721
75,051
23,146
1,776
59,831
43,665
6,722
11,906
147,046
56,812
80,863
59,312
16,011
38,383
398,427
10,372
22,382
561
5,184
38,499
72,646
1,464
13,380
125,989
158
157
—
—
42,684
(3,252)
233,650
(7,475)
265,765
340,816 $
38,701
(1,011)
245,026
(10,435)
272,438
398,427
$
See accompanying notes to consolidated financial statements.
36
CSW INDUSTRIALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
2018
2017
2016
Fiscal Years Ended March 31,
Revenues, net
Cost of revenues
Gross profit
Selling, general and administrative expense
Impairment loss
Operating income
Interest expense, net
Other (expense) income, net
Income before income taxes
Provision for income taxes
Income from continuing operations
(Loss) income from discontinued operations
Net (loss) income
Basic earnings (loss) per common share:
Continuing operations
Discontinued operations
Net (loss) income
Diluted earnings (loss) per common share:
Continuing operations
Discontinued operations
Net (loss) income
$
$
$
$
$
$
326,222 $
(178,306 )
147,916
(97,202 )
—
50,714
(2,317 )
(150 )
48,247
(15,565 )
32,682
(44,564 )
(11,882 ) $
2.09 $
(2.85 )
(0.76 ) $
2.09 $
(2.85 )
(0.76 ) $
287,460 $
(158,529 )
128,931
(94,490 )
(1,315 )
33,126
(2,695 )
1,729
32,160
(14,360 )
17,800
(6,729 )
11,071 $
1.13 $
(0.43 )
0.70 $
1.12 $
(0.42 )
0.70 $
266,917
(132,250 )
134,667
(88,472 )
—
46,195
(3,036 )
(186 )
42,973
(19,166 )
23,807
1,664
25,471
1.52
0.11
1.63
1.52
0.10
1.62
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Amounts in thousands)
Net (loss) income
Other comprehensive income (loss):
Foreign currency translation adjustments
Cash flow hedging activity, net of taxes of $(101), $(441) and $8,
respectively
Pension and other post retirement effects, net of taxes of $337, $311
and $(2,145), respectively
Other comprehensive income (loss)
Comprehensive (loss) income
Fiscal Years Ended March 31,
2017
2016
2018
$
(11,882) $
11,071 $
25,471
3,295
294
(629)
2,960
$
(8,922) $
(2,884)
(1,371)
819
(15)
(672)
(2,737)
8,334 $
3,981
2,595
28,066
See accompanying notes to consolidated financial statements.
37
(Amounts in thousands)
March 31, 2015
Share-based and other
executive compensation
Stock activity under stock
plans
Tax benefit associated with
share-based compensation
Net Income
Dividends
Other comprehensive income,
net of tax
Effects of Share Distribution
and contributions from Capital
Southwest
Balance at March 31, 2016
Share-based and other
executive compensation
Stock activity under stock
plans
Tax benefit associated with
share-based compensation
Net income
Other comprehensive income,
net of tax
Balance at March 31, 2017
Adoption of ASU 2016-09
Share-based and other
executive compensation
Stock activity under stock
plans
Repurchase of common shares
Net loss
Other comprehensive income,
net of tax
Balance at March 31, 2018
CSW INDUSTRIALS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
Common
Stock
Treasury
Shares
$
— $
— $
Additional
Paid-In
Capital
Retained
Earnings
— $ 208,784 $
Net
Investment
of Capital
Southwest
Accumulated
Other
Comprehensive
Loss
Total
Equity
(10,293 ) $ 204,601
—
—
—
—
—
—
—
—
—
—
2,231
96
212
—
—
—
—
—
25,471
(300 )
—
—
—
—
6,110 $
—
—
—
—
—
—
—
—
2,231
96
—
—
—
212
25,471
(300 )
2,595
2,595
156
156 $
$
—
— $
29,058
31,597 $ 233,955 $
—
(6,110 )
— $
—
23,104
(7,698 ) $ 258,010
—
—
4,641
1
(1,011 )
2,169
—
—
—
—
—
157 $
—
—
1
—
—
—
—
—
294
—
—
11,071
—
—
(1,011 ) $
—
38,701 $ 245,026 $
(506 )
506
—
4,161
—
(1,061 )
(1,180 )
—
328
—
—
—
—
(11,882 )
$
—
158 $
$
—
—
—
(3,252 ) $
42,684 $ 233,650 $
—
—
—
—
—
— $
—
—
—
—
—
—
— $
—
—
4,641
1,159
—
—
294
11,071
(2,737 )
(2,737 )
(10,435 ) $ 272,438
—
—
—
4,161
—
—
—
(732 )
(1,180 )
(11,882 )
2,960
2,960
(7,475 ) $ 265,765
See accompanying notes to consolidated financial statements.
38
CSW INDUSTRIALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash flows from operating activities:
Net (loss) income
Less: (Loss) income from discontinued operations
Income from continuing operations
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Depreciation
Amortization of intangible and other assets
Provision for inventory reserves
Provision for doubtful accounts, net of recoveries
Share-based and other executive compensation
Acquisition-related non-cash gain
Net (gain) loss on disposals of property, plant and equipment
Pension plan curtailment benefit
Net pension (benefit) expense
Impairment of assets
Net deferred taxes
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Other assets
Accounts payable and other current liabilities
Retirement benefits payable and other liabilities
Net cash provided by operating activities, continuing operations
Net cash (used in) provided by operating activities, discontinued operations
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from sale of assets held for investment
Proceeds from sale of assets
Net change in bank time deposits
Cash paid for acquisitions, net of cash acquired
Net cash used in investing activities, continuing operations
Net cash used in investing activities, discontinued operations
Net cash used in investing activities
Cash flows from financing activities:
Borrowings on lines of credit
Repayments on lines of credit
Payments of deferred loan costs
39
Fiscal Years Ended March 31,
2018
2017
2016
$ (11,882) $ 11,071 $ 25,471
1,664
(44,564) (6,729)
32,682
17,800
23,807
7,651
7,282
235
(457)
4,161
—
(70)
—
(1,062)
7,470
6,284
167
131
4,642
(376)
221
—
(1,092)
—
1,640
1,315
464
(2,698)
992
7,651
(106
6,263
(6,780)
(5,028)
214
(793
(112)
5,669
2,385
6,507
5,231
—
(282)
2,231
(1,950)
56
(8,020)
3,506
—
7,262
884
4,573
(4,742)
(3,211)
3,082
(1,177)
57,384
(14,228)
39,361
(325)
37,757
3,773
43,156
39,036
41,530
(5,534)
547
92
1,860
(6,869
—
605
10,968
(9,306)
—
46
(1,978)
— (28,179) (97,236)
(3,035) (23,475) (108,474)
(1,747
(1,510) (2,493)
(4,545) (25,968) (110,221
—
(49,187)
(421)
— 179,040
(16,476 ) (116,061)
(1,081)
—
Purchase of treasury shares
Cash contribution from Capital Southwest
Proceeds from stock option activity
Dividends paid to Capital Southwest
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental non-cash disclosure:
Cash paid during the year for interest
Cash paid during the year for income taxes
Pension plan assets contributed by Capital Southwest
(2,241)
(1,011)
—
—
328
—
—
2,169
—
(51,521) (15,318)
1,470
(591)
(11,440)
23,146
(2,841)
25,987
13,000
96
(300)
74,694
(464)
5,539
20,448
$ 11,706
$ 23,146
$ 25,987
$
2,118 $ 2,623 $ 3,074
9,673
9,793
18,298
—
—
10,357
See accompanying notes to consolidated financial statements.
40
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CSW Industrials, Inc. (“CSWI,” the “Company,” “we,” “our” or “us”) is a diversified industrial growth company with well-
established, scalable platforms and domain expertise across two segments: Industrial Products and Specialty Chemicals. Our
broad portfolio of leading products provides performance optimizing solutions to our customers. Our products include
mechanical products for heating, ventilating and air conditioning (“HVAC”) and refrigeration applications, sealants and high-
performance specialty lubricants. Drawing on our innovative and proven technologies, we seek to deliver solutions to our
professional customers that require superior performance and reliability. Our diverse product portfolio includes more than 100
highly respected industrial brands including RectorSeal No. 5™ thread sealants, KOPR KOTE™ anti-seize lubricants, KATS®
Coatings, Safe-T-Switch® condensate overflow shutoff devices, Air Sentry® breathers, Deacon® high temperature sealants, AC
Leak Freeze® to stop refrigerant leaks and Greco Aluminum Railings®.
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, architecturally-specified building products, industrial, plumbing, energy, rail, mining and
other general industrial markets.
The Share Distribution – On September 30, 2015, Capital Southwest Corporation (“Capital Southwest”) spun-off certain
of its industrial products, coatings, sealants and adhesives and specialty chemicals businesses by means of a distribution of the
outstanding shares of common stock of CSWI on a pro rata basis to holders of Capital Southwest common stock (the “Share
Distribution”). CSWI became an independent, publicly traded company at the time of the Share Distribution.
Restructuring – During the fiscal year ended March 31, 2017, we initiated a restructuring program related to our Industrial
Products segment. The program was initiated in response to excess capacity, which caused us to perform a facility rationalization
analysis. The restructuring program is complete and no additional costs are expected to be incurred. There were other costs in
the prior years, which are now presented as part of discontinued operations. Restructuring charges are as follows:
(in thousands)
For the year ended March 31, 2018
Cost of revenues
Selling, general and administrative expense
Total
Inception to Date Restructuring Charges
Cost of revenues
Selling, general and administrative expense
Total
Severance/
Retention
Asset
Write-down Other (a)
Total
$
$
$
$
— $
—
— $
291 $
—
291 $
69 $
—
69 $
69 $
—
69 $
163 $
—
163 $
496 $
—
496 $
232
—
232
856
—
856
(a) Other consisted of moving costs related to relocation of manufacturing activities, consulting fees for production and efficiency
support, recruiting fees to increase staff in locations where production is being relocated and duplicate and inefficient labor incurred
during the transition and relocation. These charges were expensed as incurred.
Basis of Presentation – CSWI began operations on September 30, 2015 as a result of the Share Distribution. With the
exception of cash funded at inception and the contributed capital stock of Capital Southwest, we did not own any material assets
prior to the Share Distribution. The historical financial position, results of operations and cash flows included in this Annual
Report on Form 10-K for the fiscal year ended March 31, 2018 (“Annual Report”) represent the consolidated financial statements
of CSWI. Equity accounts presented in the balance sheet as of March 31, 2016 and for all subsequent periods represent the equity
of CSWI. The consolidated financial statements have been prepared on a standalone basis and are derived from the underlying
accounting records of the underlying businesses in conformity with United States (“U.S.”) generally accepted accounting
principles (“GAAP”).
41
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include all revenues, costs, assets and liabilities directly attributable to CSWI. All
significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates – The process of preparing financial statements in conformity with U.S. GAAP requires us to make
estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses. We believe our
estimates and assumptions are reasonable; however, actual results may differ materially from such estimates. The most significant
estimates and assumptions are used in determining:
• Timing and amount of revenue recognition;
• Deferred taxes and tax reserves;
• Pension benefits; and
• Valuation of goodwill and indefinite-lived intangible assets.
Cash and Cash Equivalents – We consider all highly liquid instruments purchased with original maturities of three months
or less and money market accounts to be cash equivalents. We maintain our cash and cash equivalents at financial institutions
for which the combined account balances in individual institutions may exceed insurance coverage and, as a result, there is a
concentration of credit risk related to amounts on deposit in excess of insurance coverage. We had deposits in domestic banks of
$4.0 million and $0.4 million at March 31, 2018 and 2017, respectively, and balances of $7.7 million and $22.2 million were held
in foreign currencies in foreign banks at March 31, 2018 and 2017, respectively.
Bank Time Deposits – Bank time deposits include investments with maturities of over three months that are redeemable
within one year of the fiscal year end without significant penalty. Our bank time deposits of $0.0 and $1.8 million as of March 31,
2018 and 2017, respectively, were certificates of deposit held in Canada and the United Kingdom.
Allowance for Doubtful Accounts – The allowance for doubtful accounts is established based on estimates of the amount of
uncollectible accounts receivable, which is determined principally based upon the aging of the accounts receivable, but also
customer credit history, industry and market segment information, economic trends and conditions and credit reports. Customer
credit issues, customer bankruptcies or general economic conditions may also impact our estimates. Credit risks are mitigated
by the diversity of our customer base across different geographic regions and end markets.
Inventories and Related Reserves – Inventories are stated at the lower of cost or market and include raw materials, supplies,
direct labor and manufacturing overhead. Cost is determined using the last-in, first-out (“LIFO”) method for valuing inventories
at our primary domestic operations. Our foreign subsidiaries use either the first-in, first out method or the weighted average cost
method to value inventory. Foreign inventories represent approximately 9% and 6% of total inventories as of March 31, 2018
and 2017, respectively.
Reserves are provided for slow-moving or excess and obsolete inventory based on the difference between the cost of the
inventory and its net realizable value and by reviewing quantities on hand in comparison with historical and expected future
usage. In estimating the reserve for excess or slow-moving inventory, management considers factors such as product aging,
current and future customer demand and market conditions.
Property, Plant and Equipment – Property, plant and equipment are stated at cost and depreciated using the straight-line
method over the estimated useful lives of the individual assets. When property, plant and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the accounts, and the resulting gain or loss is
included in income from operations for the period. Generally, the estimated useful lives of assets are:
Land improvements
Buildings and improvements
Plant, office and lab equipment
5
7
5
to 40 years
to 40 years
to 10 years
We review property, plant and equipment for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable.
42
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Repairs and maintenance costs are expensed as incurred, and significant improvements that either extend the useful life or
increase the capacity or efficiency of property and equipment are capitalized and depreciated.
Valuation of Goodwill and Intangible Assets – Goodwill represents the excess of the aggregate purchase price over the fair
value of identifiable net assets acquired in a business combination. We test goodwill at least annually for impairment. We first
assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its
carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Qualitative
assessments use an evaluation of events and circumstances such as macroeconomic conditions, industry and market
considerations, cost factors, financial performance factors, entity-specific events and changes in carrying value to determine
whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill.
If a reporting unit fails the qualitative assessment, then valuation models and other relevant data are used to estimate the
reporting unit’s fair value. The valuation models require the input of subjective assumptions. We use an income approach for
impairment testing of goodwill and indefinite-lived intangible assets, using a discounted cash flow method. Estimates of future
revenue and expense are made for five years, growth estimates are made to calculate terminal value and a discount rate is used
that approximates our weighted average cost of capital. We perform qualitative or quantitative assessments to test asset carrying
values for impairment at January 31, which is the annual impairment testing date. No impairment loss was recognized as a result
of the impairment tests for the fiscal years ended March 31, 2018, 2017 and 2016.
We have intangible assets consisting of patents, trademarks, customer lists and non-compete agreements. Definite-lived
intangible assets are assessed for impairment whenever events or changes in circumstances indicate the carrying amount may not
be recoverable. In addition, we have other trademarks and license agreements that are considered to have indefinite lives. We
review indefinite-lived intangible assets at least annually for impairment, or whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Significant assumptions used in the impairment test include the discount rate,
royalty rate, future projections and terminal value growth rate. These inputs are considered non-recurring level three inputs within
the fair value hierarchy. An impairment loss would be recognized when estimated future cash flows are less than their carrying
amount. We recorded an impairment of intangible assets of continuing operations of $0.0, $0.2 million and $0.0 for the fiscal
years ended March 31, 2018, 2017 and 2016, respectively. See Note 3 for discussion of impairment of intangible assets of
discontinued operations.
Property Held for Investment – One of our non-operating subsidiaries holds and manages certain non-operating properties.
Properties are valued at lower of cost or market and disposed of as opportunities arise to maximize value.
Deferred Loan Costs – Deferred loan costs, which are reported in other assets and consist of fees and other expenses
associated with debt financing, are amortized over the term of the associated debt using the effective interest method.
Fair Values of Financial Instruments – Our financial instruments are presented at fair value in our consolidated balance
sheets, with the exception of our long-term debt, as discussed in Note 8. Fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where
available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where
observable prices or inputs are not available, valuation models may be applied.
Assets and liabilities recorded at fair value in our consolidated balance sheets are categorized based upon the level of
judgment associated with the inputs used to measure their fair values. Hierarchical levels, as defined by Accounting Standards
Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” are directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and liabilities. An asset or a liability’s categorization within the fair
value hierarchy is based on the lowest level of significant input to its valuation. Hierarchical levels are as follows:
Level I – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level II – Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or
liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated
life.
43
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level III – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability
at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the
inputs to the model.
Recurring fair value measurements are limited to investments in derivative instruments and reserves for contingent
consideration. The fair value measurements of our derivative instruments are determined using models that maximize the use of
the observable market inputs including interest rate curves and both forward and spot prices for currencies, and are classified as
Level II under the fair value hierarchy. The fair values of our derivative instruments are included in Note 9. The fair value
measurements of our reserves for contingent consideration were classified as Level III and generally determined using a weighted
average probability model based primarily on projected net revenues.
Derivative Instruments and Hedge Accounting – We do not use derivative instruments for trading or speculative purposes.
We enter into interest rate swap agreements for the purpose of hedging our cash flow exposure to floating interest rates on certain
portions of our debt. All derivative instruments are recognized on the balance sheet at their fair values. Changes in the fair value
of a designated interest rate swap are recorded in other comprehensive loss until earnings are affected by the underlying hedged
item. Any ineffective portion of the gain or loss is immediately recognized in earnings. Upon settlement, realized gains and losses
are recognized in interest expense in the consolidated statements of operations.
We discontinue hedge accounting when (1) we deem the hedge to be ineffective and determine that the designation of the
derivative as a hedging instrument is no longer appropriate; (2) the derivative matures, terminates or is sold; or (3) occurrence of
the contracted or committed transaction is no longer probable or will not occur in the originally expected period. When hedge
accounting is discontinued and the derivative remains outstanding, we carry the derivative at its estimated fair value on the balance
sheet, recognizing changes in the fair value in current period earnings. If a cash flow hedge becomes ineffective, any deferred
gains or losses remain in accumulated other comprehensive loss until the underlying hedged item is recognized. If it becomes
probable that a hedged forecasted transaction will not occur, deferred gains or losses on the hedging instrument are recognized in
earnings immediately.
We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial
instruments. We perform credit evaluations of our counterparties under forward exchange contracts and interest rate swap
agreements and expect all counterparties to meet their obligations. If necessary, we adjust the values of our derivative contracts
for our or our counterparties’ credit risk.
Pension Obligations – Determination of pension benefit obligations is based on estimates made by management in
consultation with independent actuaries. Inherent in these valuations are assumptions including discount rates, expected rates of
return on plan assets, retirement rates, mortality rates and rates of compensation increase and other factors, all of which are
reviewed annually and updated if necessary. Current market conditions, including changes in rates of return, interest rates and
medical inflation rates, are considered in selecting these assumptions.
• Discount rates are estimated using high quality corporate bond yields with a duration matching the expected benefit
payments. The discount rate is obtained from a universe of Aa-rated non-callable bonds across the full maturity spectrum
to establish a weighted average discount rate. Our discount rate assumptions are impacted by changes in general
economic and market conditions that affect interest rates on long-term high-quality debt securities, as well as the duration
of our plans’ liabilities.
• The expected rates of return on plan assets are derived from reviews of asset allocation strategies, expected future
experience for trust asset returns, risks and other factors adjusted for our specific investment strategy. These rates are
impacted by changes in general market conditions, but because they are long-term in nature, short-term market changes
do not significantly impact the rates. Changes to our target asset allocation also impact these rates.
Actuarial gains and losses and prior service costs are recognized in accumulated other comprehensive loss as they arise,
and we amortize these costs into net pension expense over the remaining expected service period.
We used a measurement date of March 31 for all periods presented.
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CSW INDUSTRIALS, INC.
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Revenue Recognition – We generally recognize revenue upon shipment of product, at which time title and risk of loss pass
to the customer. Additionally, we require that all of the following circumstances are satisfied: a) persuasive evidence of an
arrangement exists, b) price is fixed or determinable, c) collectability is reasonably assured and d) delivery has occurred or
services have been rendered. Net revenues represent gross revenues invoiced to customers less certain related charges for
contractual discounts or rebates. Revenues for certain long-term contracts are recorded on the percentage of completion method
with progress measured on a cost-to-cost basis, and represent less than 6% of annual net sales. Discounts provided to customers
at the point of sale are recognized as reductions in revenue as the products are sold. Rebate amounts are recorded as a reduction
of revenue at least quarterly using estimates of customer participation and performance. Freight charges billed to customers are
included in net revenues and the related shipping costs are included in cost of revenues in our consolidated statements of
operations.
Research and Development ("R&D") – R&D costs are expensed as incurred. Costs incurred for R&D primarily include
salaries and benefits and consumable supplies, as well as rent, professional fees, utilities and the depreciation of property and
equipment used in R&D activities. R&D costs included in selling, general and administrative expense were $4.6 million, $4.8
million and $4.5 million for the fiscal years ended March 31, 2018, 2017 and 2016, respectively.
Share-based Compensation – Share-based compensation is measured at the grant-date fair value. The exercise price of
stock option awards and the fair value of restricted share awards are set at the closing price of our common stock on the Nasdaq
Global Select Market on the date of grant, which is the date such grants are authorized by our Board of Directors. The fair value
of performance-based restricted share awards is determined using a Monte Carlo simulation model incorporating all possible
outcomes against a defined peer group. The fair value of share-based payment arrangements is amortized on a straight-line basis
to compensation expense over the period in which the restrictions lapse based on the expected number of shares that will vest.
To cover the exercise of options and vesting of restricted shares, we generally issue new shares from our authorized but unissued
share pool, although we may instead issue treasury shares in certain circumstances.
Income Taxes, Deferred Taxes, Tax Valuation Allowances and Tax Reserves – We apply the liability method in accounting
and reporting for income taxes. Under the liability approach, deferred tax assets and liabilities are determined based upon the
difference between the financial statement carrying amounts and the tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax rates expected to be in effect when these differences are expected to reverse.
The effect on deferred tax assets and liabilities resulting from a change in tax rates is recognized in the period that includes the
enactment date. The deferred income tax assets are adjusted by a valuation allowance, if necessary, to recognize future tax
benefits only to the extent, based on available evidence, that it is more likely than not to be realized. This analysis is performed
on a jurisdictional basis and reflects our ability to utilize these deferred tax assets through a review of past, current and estimated
future taxable income in addition to the establishment of viable tax strategies that will result in the utilization of the deferred
assets.
We recognize income tax related interest and penalties, if any, as a component of income tax expense.
Unremitted Earnings – We consider the earnings of non-U.S. subsidiaries to be indefinitely invested outside the U.S. on
the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific
plans for reinvestment of those subsidiary earnings. Should we decide to repatriate foreign earnings, a deferred tax liability will
be recorded and our income tax provision will be adjusted in the period we determined that the earnings will no longer be
indefinitely invested outside the U.S. We provide deferred taxes for the temporary differences associated with our investment in
foreign subsidiaries that have a financial reporting basis that exceeds tax basis, unless we can assert permanent reinvestment in
foreign jurisdictions. Financial reporting basis and tax basis differences in investments in foreign subsidiaries consist of both
unremitted earnings and losses, as well as foreign currency translation adjustments.
Uncertain Tax Positions – We establish income tax liabilities to remove some or all of the income tax benefit of any of our
income tax positions based upon one of the following: (1) the tax position is not “more likely than not” to be sustained, (2) the
tax position is “more likely than not” to be sustained, but for a lesser amount or (3) the tax position is “more likely than not” to
be sustained, but not in the financial period in which the tax position was originally taken. The amount of income taxes we pay
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is subject to ongoing audits by federal, state, and foreign taxing authorities, which often result in proposed assessments. We
establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various taxing authorities.
The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest
and penalties as deemed appropriate.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and
presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant
information. The tax benefits recognized in the financial statements from such a position are measured based on the largest
benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Earnings Per Share – We use the two-class method of calculating earnings per share, which determines earnings per share
for each class of common stock and participating security as if all earnings of the period had been distributed. If the holders of
restricted stock awards are entitled to vote and receive dividends during the restriction period, unvested shares of restricted stock
qualify as participating securities and, accordingly, are included in the basic computation of earnings per share. Our unvested
restricted shares participate on an equal basis with common shares; therefore, there is no difference in undistributed earnings
allocated to each participating security. Accordingly, the presentation in Note 10 is prepared on a combined basis and is presented
as earnings per common share. Diluted earnings per share is based on the weighted average number of shares as determined for
basic earnings per share plus shares potentially issuable in conjunction with stock options.
Foreign Currency Translation – Assets and liabilities of our foreign subsidiaries are translated to U.S. dollars at exchange
rates prevailing at the balance sheet date, while income and expenses are translated at average rates for each month. Translation
gains and losses are reported as a component of accumulated other comprehensive loss. Transactional currency gains and losses
arising from transactions in currencies other than our sites’ functional currencies are included in our consolidated statements of
operations.
Transaction and translation gains and losses arising from intercompany balances are reported as a component of
accumulated other comprehensive loss when the underlying transaction stems from a long-term equity investment or from debt
designated as not due in the foreseeable future. Otherwise, we recognize transaction gains and losses arising from intercompany
transactions as a component of income.
Discontinued Operations and Segment Realignment – During the third quarter of the fiscal year ended March 31, 2018, we
committed to a plan to divest our Strathmore products business (the "Coatings business"). This determination resulted in the
reclassification of the assets and liabilities comprising that business to assets held-for-sale, and a corresponding adjustment to our
consolidated statements of operations to reflect discontinued operations for all periods presented.
Additionally, as a result of our decision to divest the Coatings business, we realigned our reportable segments to better align
our resources to support our ongoing business strategy. We retained the Industrial Products Segment and combined the non-
coatings business lines of our historical Coatings, Sealants & Adhesives Segment into our Specialty Chemicals Segment. The
reportable segment realignment is consistent with the manner in which our Chief Operating Decision Maker evaluates
performance and makes resource allocation decisions, subsequent to the decision to divest the Coatings business. Historical
segment information has been adjusted to reflect the effect of this change. Our segment information is more fully disclosed in
Note 18. Historical information also reflects discontinued operations presentation for the portion of our business meeting the
held-for-sale criteria as described in Note 3.
We conduct our operations through two business segments based on type of product and how we manage the business. The
products for our segments are distributed both domestically and internationally. For decision-making purposes, our Chief
Executive Officer and other members of senior executive management use 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:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•
Industrial Products includes specialty mechanical products, fire and smoke protection products, architecturally-specified
building products and storage, filtration and application equipment for use with our specialty chemicals and other
products for general industrial application.
• Specialty Chemicals includes pipe thread sealants, firestopping sealants and caulks and adhesives/solvent cements,
lubricants and greases, drilling compounds, anti-seize compounds, chemical formulations and degreasers and cleaners.
Intersegment sales and transfers are recorded at cost plus a profit margin, with the sales and related margin on such sales
eliminated in consolidation. We do not allocate interest expense, interest income or other (expense) income, net to our segments.
Our corporate headquarters does not constitute a separate segment. The Eliminations and Other segment information is included
to reconcile segment data to the consolidated financial statements and includes assets and expenses primarily related to corporate
functions and excess non-operating properties.
Accounting Developments
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which has been subsequently amended with additional
ASUs including ASU No. 2016-12 and ASU No. 2016-20, issued in May and December 2016, respectively. ASU No. 2014-09,
as amended, supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605).” The standard is principle-
based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company
should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. There are also expanded disclosure
requirements in this ASU. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year. As a result,
public entities will apply the new standard for annual reporting periods beginning after December 15, 2017, including interim
periods within those reporting periods. In 2017, we identified the relevant revenue streams and documented the procedures and
control changes required to address the impacts that ASU 2014-09 may have on our business, as well as trained appropriate
personnel on the procedures and controls going into effect April 1, 2018. From the analysis performed, two main revenue streams
were identified from contracts with customers: (1) book and ship and (2) long-term contracts. Our revenue recognition
methodology does not materially change following the adoption of the new standard as approximately 95% of our annual revenue
is derived from book and ship sales. As of March 31, 2018, we have completed our impact assessment for the implementation of
the new revenue recognition guidance. In addition, we will elect to apply certain of the permitted practical expedients within the
revenue recognition guidance. We will adopt the new guidance effective April 1, 2018 using the modified retrospective approach
and will recognize the cumulative effect of initially applying the guidance as an adjustment to opening retained earnings effective
April 1, 2018. We have evaluated the impact of this ASU and have estimated the impact to be ($0.7) million adjustment to
opening retained earnings upon adoption.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Subtopic 330): Simplifying the Measurement of Inventory.”
This ASU simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net
realizable value. Entities will continue to apply their existing impairment models to inventories that are accounted for using LIFO
and retail inventory method. This ASU was effective for annual periods, including interim periods within those annual periods,
beginning after December 15, 2016. We adopted the amendments of this ASU April 1, 2017. The adoption of this ASU did not
impact our consolidated financial condition and results of operations.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about
leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the
lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition,
measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from
previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning
after December 15, 2018 using the modified retrospective application of adoption. Early adoption is permitted. We are currently
evaluating the impact of ASU No. 2016-02 on our consolidated financial condition and results of operations.
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CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718),” which simplifies
the accounting for share-based compensation. The areas for simplification in this ASU involve several aspects of the accounting
for share-based payment transactions, including the income tax consequences, classification of awards as either equity or
liabilities and classification on the statement of cash flows. This ASU is effective for annual periods, including interim periods
within those annual periods, beginning after December 15, 2016. We adopted the amendments within this ASU effective April
1, 2017. The resulting impact was a decrease in additional paid in capital and an increase in retained earnings of $0.5 million.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) – Classification of Certain
Cash Receipts and Cash Payments,” which clarifies how entities should classify certain cash receipts and cash payments on the
statement of cash flows and how the predominance principle should be applied when cash receipts and cash payments have
aspects of more than one class of cash flows. The new guidance should be applied on a retrospective basis for each period
presented. ASU No. 2016-15 is effective for annual periods, including interim periods within those annual periods, beginning
after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU No. 2016-15 to have a material
impact on our consolidated financial condition and results of operations.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other
Than Inventory,” to improve the accounting for the income tax consequences arising from these types of transfers. This ASU
aligns the recognition of the income tax consequences with International Financial Reporting Standards. Specifically,
International Accounting Standards No. 12, “Income Taxes,” requires recognition of current and deferred income taxes resulting
from an intra-entity transfer of any asset (including inventory) when the transfer occurs. This ASU is effective for annual periods,
including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We do
not expect the adoption of ASU No. 2016-16 to have a material impact on our consolidated financial condition and results of
operations.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a
consensus of the FASB Emerging Issues Task Force)," which requires that amounts generally described as restricted cash and
restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-
period total amounts shown on the statement of cash flows. This ASU is effective for annual periods, including interim periods
within those annual periods, beginning after December 15, 2017. Early adoption is permitted. CSWI does not have restricted
cash and restricted cash equivalents, as such the amendments in this ASU will not impact our consolidated financial condition
and results of operations.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a
Business," to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this ASU require
that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable
asset or a group of similar identifiable assets, the set of assets is not a business. This ASU is effective for annual periods, including
interim periods within those annual periods, beginning after December 15, 2017. The amendments in this ASU should be applied
prospectively on or after the effective date, however early adoption is permitted. We do not expect the adoption of ASU No. 2017-
01 to have a material impact on our consolidated financial condition and results of operations.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment," which modifies the concept of impairment from the condition that exists when the carrying amount
of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its
fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning
the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business
combination. The amendments in this ASU should be adopted for annual or any interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on
testing dates after January 1, 2017. The adoption of ASU No. 2017-04 will only impact our consolidated financial condition and
results of operations to the extent that we incur a future goodwill impairment.
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CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2017, the FASB issued ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which requires that an employer
disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit
guidance on how to present the service cost component and the other components of net benefit cost in the income statement and
allow only the service cost component of net benefit cost to be eligible for capitalization. This ASU is effective for annual periods,
including interim periods within those annual periods, beginning after December 15, 2017. The amendments in this ASU should
be applied retrospectively on or after the effective date, however early adoption is permitted as of the beginning of an annual
period for which financial statements (interim or annual) have not been issued or made available for issuance. We, in partnership
with our actuaries, are currently evaluating the impact of ASU No. 2017-07 on our consolidated financial condition and results
of operations.
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted improvements of
Accounting for Hedging Activities." The purpose of this ASU is to better align a company's risk management activities and
financial reporting for hedging relationships. Additionally, this ASU simplifies the hedge accounting requirements and improves
the disclosures of hedging arrangements. This ASU is effective for annual periods, including interim periods within those annual
periods, beginning after December 15, 2018. We are currently evaluating the impact of ASU No. 2017-12 on our consolidated
financial condition and results of operations.
On December 22, 2017, the President of the U.S. signed new tax legislation, commonly referred to as the Tax Cuts and Jobs
Act (the "Act"). The Act significantly changes U.S. income tax law, including reduction of the corporate income tax rate to 21%,
creation of a territorial tax system (with a one-time mandatory tax on previously deferred foreign earnings), broadening of the
tax base and allowing for immediate capital expensing of certain qualified property. It also requires companies to pay minimum
taxes on foreign earnings and subjects certain payments from corporations to foreign related parties to additional taxes. ASC 740,
“Accounting for Income Taxes,” requires companies to recognize the effect of tax law changes in the period of enactment even
though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other
provisions, January 1, 2018. Though certain key aspects of the new law are effective January 1, 2018 and have an immediate
accounting effect, other significant provisions are not effective or may not result in accounting effects for March 31 fiscal year
companies until April 1, 2018. The Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (“SAB”)
118 to provide guidance for companies that are not able to complete their accounting for the income tax effects of the Act in the
period of enactment. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act
enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect
the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a
company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate,
it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be
included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were
in effect immediately before the enactment of the Tax Act. Companies with fiscal years that end on a date other than December
31 will need to use a blended tax rate as the new rate is administratively effective at the beginning of their fiscal year. We have
adopted the provisions of the Act, as it is applicable, in the quarter ended December 31, 2017. The following provisional
adjustments have been recorded:
• The Deemed Repatriation Transition Tax ("Transition Tax") is a tax on previously untaxed accumulated and current
earnings and profits ("E&P") of certain of our foreign subsidiaries. To assess the amount of the Transition Tax, we must
determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount
of non-U.S. income taxes paid on such earnings. We are able to make a reasonable estimate of the Transition Tax;
however, we are continuing to review additional information regarding our accumulated E&P and non-U.S. income taxes
paid to more precisely compute the amount of the Transition Tax. In addition, based on current state tax law, we estimate
the state impact of the Transition Tax to be insignificant. This estimate will be revised based on a calculation of our final
Transition Tax as well as any updated guidance on state treatment of the deemed repatriation.
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CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• While we have not yet completed all of the computations necessary or completed a detailed inventory of our expenditures
that qualify for immediate expensing, we have recorded a provisional benefit based on our current intent to fully expense
all qualifying expenditures.
Because of the complexity of the new Global Intangible Low-Taxed Income ("GILTI") tax rules, we are continuing to
evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, we are allowed to make an accounting
policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period
expense when incurred (the “period cost method”) or (2) factoring such amounts into measurement of our deferred taxes (the
“deferred method”). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on
analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI
and, if so, what the impact is expected to be. We are not currently able to reasonably estimate the effect of the new GILTI tax
rules on future U.S. inclusions in taxable income as the expected future impact of this provision of the Tax Act depends on our
current structure and business. Therefore, we have not made any adjustments related to potential GILTI tax in our financial
statements and have not made a policy decision regarding whether to record deferred taxes on GILTI. We anticipate that additional
clarification and evaluation of these rules will occur during fiscal year 2019 and, if the GILTI tax rules have an impact to our
provision for income taxes, an estimate will be recorded as soon as a reliable estimate can be formed.
In February 2018, the FASB issued ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income." The amendments in this ASU allow a reclassification from accumulated other comprehensive income
to retained earnings for stranded tax effects resulting from the Act. Consequently, the amendments eliminate the stranded tax
effects resulting from the Act and will improve the usefulness of information reported to financial statement users. However,
because the amendments only relate to the reclassification of the income tax effects of the Act, the underlying guidance that
requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The
amendments in this ASU also require certain disclosures about stranded tax effects. This ASU is effective for annual periods,
including interim periods within those annual periods, beginning after December 15, 2018. We are currently evaluating the impact
of ASU No. 2018-02 on our consolidated financial condition and results of operations.
2. ACQUISITIONS
Greco Aluminum Railings
On February 28, 2017, we acquired the equity of Greco Aluminum Railings (“Greco”), based in Windsor, Ontario, Canada,
for $28.2 million, net of cash acquired, funded through our revolving credit facility. Greco is a leading manufacturer of high-
quality engineered railing and safety systems for multi-family and commercial structures in the U.S. and Canada. The excess of
the purchase price over the fair value of the identifiable assets acquired was $13.8 million allocated to goodwill. Goodwill
represents the value expected to be obtained from a more extensive portfolio of architecturally-specified building products, which
help make buildings safer and more aesthetically pleasing, while enabling compliance with building codes and leveraging our
larger distributor network. The preliminary allocation of the fair value of the net assets acquired included customer lists,
trademarks, non-compete agreements and a favorable leasehold of $10.3 million, $1.0 million, $0.8 million and $0.1 million,
respectively, as well as property, plant and equipment and inventory of $0.8 million and $0.5 million, respectively, net of a
deferred tax liability of $3.4 million. Customer lists, the non-compete agreement and the favorable leasehold are being amortized
over 15 years, five years and approximately 9 years (remaining life of the leasehold), respectively, while trademarks and goodwill
are not being amortized. Greco activity has been included in our Industrial Products segment since the acquisition date. No pro
forma information has been provided due to immateriality.
AC Leak Freeze
On December 16, 2015, we acquired substantially all of the assets of AC Leak Freeze™ (“Leak Freeze”), based in
Baltimore, Maryland for $16.3 million in cash funded by borrowings under CSWI’s Revolving Credit Facility (discussed in Note
8). Leak Freeze is a leading manufacturer of original equipment manufacturer-approved air conditioning and refrigerant leak
repair solutions. The excess of the purchase price over the fair value of the identifiable assets acquired was $5.7 million and was
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CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained
from a more extensive specialty chemical product portfolio for the HVAC market and leveraging our larger distributor network.
The allocation of the fair value of the assets acquired included customer lists, trademarks and trade names and a non-compete
agreement of $8.1 million, $1.4 million and $0.2 million, respectively, as well as inventory in the amount of $0.7 million.
Customer lists and the non-compete agreement are being amortized over 10 years and five years, respectively, while trademarks
and trade names and goodwill are not being amortized. Leak Freeze activity has been included in our Specialty Chemicals segment
since the acquisition date. No pro forma information has been provided due to immateriality.
Deacon Industries, Inc.
On October 1, 2015, we acquired substantially all of the assets of Deacon Industries, Inc. (“Deacon”), based in Washington,
Pennsylvania for $12.6 million. The acquisition was funded by $11.0 million of borrowings under a line of credit and $1.1
million cash on hand. The remaining $0.5 million of the purchase price represents a payment contingent upon the achievement
of certain performance metrics during the fiscal year ended March 31, 2017. This liability was reduced to $0.0 during the quarter
ended December 31, 2016 based on expected achievement of performance metrics. Deacon is a leading manufacturer of high
temperature sealants and injectable packings with applications in a variety of industrial end markets, both on an emergency and
maintenance basis. The excess of the purchase price over the fair value of the identifiable assets acquired was $4.1 million and
was allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be
obtained from a more extensive sealant and injectable packing product portfolio and leveraging our larger distributor network.
The allocation of the fair value of the assets acquired included customer lists, know-how, trademarks and trade names and a non-
compete agreement of $2.9 million, $2.6 million, $1.1 million, and $0.1 million, respectively, as well as property, plant, and
equipment and inventory in the amounts of $0.9 million and $0.5 million, respectively. Customer lists, know-how and the non-
compete agreement are being amortized over 15 years, 10 years and five years, respectively, while trademarks and trade names
and goodwill are not being amortized. Deacon activity was historically included in our Coatings, Sealants & Adhesives segment
since the acquisition date and is now reflected within our Specialty Chemicals segment due to our segment realignment. No pro
forma information has been provided due to immateriality.
3. DISCONTINUED OPERATIONS
During the third quarter of fiscal year ended March 31, 2018, we commenced a process to divest our Coatings business to
allow us to focus resources on our core growth platforms. Our Coatings business manufactures specialized industrial coatings
products including urethanes, epoxies, acrylics and alkyds. The Coatings business meets the held-for-sale criteria under ASC
360, "Property, Plant and Equipment," and accordingly, we have classified and accounted for the assets and liabilities of the
Coatings business as held-for-sale in the accompanying consolidated balance sheets and as discontinued operations, net of tax in
the accompanying consolidated statements of operations and cash flows. We estimated that the fair value of the business was
less than carrying value, resulting in an estimated $46.0 million impairment charge recorded during the third quarter of the fiscal
year ended March 31, 2018. We completed an initial assessment of the assets and liabilities of the Coatings business and recorded
the impairment based on our best estimates as of the date of issuance of financial results for the third quarter of the fiscal year
ended March 31, 2018. No adjustments to previously recorded estimates have been made subsequently.
Summarized selected financial information for Strathmore for the fiscal years ended March 31, 2018, 2017 and 2016, is
presented in the following table:
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CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Revenues, net
Impairment expense
(Loss) income from discontinued operations before income taxes
Income tax benefit
(Loss) income from discontinued operations
Fiscal Years Ended March 31,
$
2018
23,153 $
(46,007 )
2017
39,624 $
(2,800 )
(61,164 )
16,600
(10,616 )
3,887
$
(44,564 ) $
(6,729 ) $
2016
52,688
—
1,253
411
1,664
The assets and liabilities of discontinued operations are stated separately as of March 31, 2018 and 2017, respectively, in
the consolidated balance sheets and are comprised of the following items:
(in thousands)
Assets
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets (a)
Total current assets
Property, plant and equipment, net
Intangible assets
Total non-current assets
Total assets
Liabilities
Accounts payable, accrued and other expenses
Fiscal Years Ended March 31,
2018
2017
$
$
$
2,259 $
—
168
2,427
—
—
—
2,427 $
3,951
6,736
1,219
11,906
7,085
31,298
38,383
50,289
3,966 $
5,184
(a) The assets and liabilities of the Coatings business reside in a disregarded entity for tax purposes. Accordingly, the tax attributes
associated with the operations of our Coatings business will ultimately flow through to the corporate parent, which files a consolidated
federal return. Therefore, the operating losses and impairment losses attributable to the Coatings business and any corresponding
deferred tax assets or liabilities are expected to be substantially realized by the corporate parent. These amounts have therefore been
reflected as assets of our continuing operations and have not been allocated or attributed to the balances of assets or liabilities disclosed
above. We continue to evaluate the ultimate realizability of all deferred tax assets, and the specific realization of tax assets pertaining
to the Coatings business to be disposed could be impacted by the structure of a future sale transaction or other factors impacting or
related to the actual disposition of the Coatings business in future periods. Tax expense has been attributed to discontinued operations
and includes an estimate of all relevant tax characteristics pertaining to the disposed Coatings business, including the effects resulting
from the enactment of the Tax Cuts and Jobs Act. We will continue to evaluate any potential tax consequences of a potential sale
transaction and will disclose or record any corresponding impacts in the period in which the impact can be reliably quantified.
52
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the fiscal years ended March 31, 2018 and 2017 were as follows (in
thousands):
Balance at March 31, 2016
Acquisition of Greco
Currency translation
Balance at March 31, 2017
Purchase price adjustment for Greco
Currency translation
Balance at March 31, 2018
Industrial
Products
Specialty
Chemicals
Total
$
$
$
36,194 $
13,619
(513 )
49,300 $
152
749
50,201 $
31,563 $
—
—
31,563 $
—
—
31,563 $
67,757
13,619
(513)
80,863
152
749
81,764
The following table provides information about out intangible assets for the fiscal years ended March 31, 2018 and 2017
(in thousands, except years):
March 31, 2018
March 31, 2017
Wtd Avg Life
(Years)
Ending Gross
Amount
Accumulated
Amortization
Ending Gross
Amount
Accumulated
Amortization
Finite-lived intangible assets:
Patents (a)
Customer lists and amortized trademarks
Non-compete agreements
Other
11
12
5
10
Trade names and trademarks not being
amortized:
$
$
$
9,489 $
58,161
1,713
5,016
74,379 $
(5,564 ) $
(24,812 )
(762 )
(1,529 )
(32,667 ) $
9,576 $
57,421
1,469
4,849
73,315 $
(4,779 )
(19,523 )
(194 )
(828 )
(25,324 )
11,342
$
—
$
11,321
$
—
(a) During the fiscal years ended March 31, 2018 and 2017, we wrote off $0.0 and $4.0 million of intangible assets that were fully
amortized.
Amortization expense for the fiscal years ended March 31, 2018, 2017 and 2016 was $7.1 million, $6.1 million and $5.2
million, respectively. The following table presents the estimated future amortization of finite-lived intangible assets for the next
five fiscal years ending March 31 (in thousands):
2019
2020
2021
2022
2023
$
5,766
5,530
4,637
4,463
3,885
5. SPIN-OFF EXECUTIVE COMPENSATION
On August 28, 2014, the board of directors of Capital Southwest (our former parent company) adopted an executive
compensation plan consisting of grants of nonqualified stock options, restricted stock and cash incentive awards (the “Spin-Off
Compensation Plan”) to executive officers of Capital Southwest, which included Joseph Armes, our current Chief Executive
Officer, and Kelly Tacke, our former Chief Financial Officer. Under the Spin-Off Compensation Plan, certain Capital Southwest
executive officers were eligible to receive an amount equal to 6.0% of the aggregate appreciation in Capital Southwest’s share
price from the adoption of the Spin-Off Compensation Plan to the “trigger event date” (later determined by Capital Southwest’s
53
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
board to be December 29, 2015). The nonqualified stock options became exercisable and the restricted stock and the cash
incentive awards vested ratably in three annual tranches beginning on December 29, 2015.
Effective with the Share Distribution, CSWI entered into an Employee Matters Agreement with Capital Southwest. Under
this agreement, Capital Southwest retained the obligation to fund the cash incentive awards granted under the Spin-Off Executive
Compensation Plan, and all liabilities with respect to such cash incentive awards remained liabilities of Capital Southwest.
The final tranche of awards under the Spin-Off Compensation Plan vested on December 29, 2017. As a result, we will not
recognize any additional executive compensation expense under the Spin-Off Compensation Plan in any future period. During
the fiscal year ended March 31, 2018, we recorded total executive compensation expense for the cash incentive payments of $0.5
million for Mr. Armes and total stock compensation expense of $0.3 million. During the fiscal year ended March 31, 2017, we
recorded total executive compensation expense for the cash incentive payments of $1.9 million for Mr. Armes and Ms. Tacke,
and total stock compensation expense of $1.0 million. Within those amounts were $1.2 million and $1.0 million of cash incentive
and stock compensation expenses, respectively, which were accelerated as a result of the termination of Ms. Tacke’s employment
with CSWI in June 2016. During the fiscal year ended March 31, 2016, we recorded total executive compensation expense for
the cash incentive payments of $1.3 million for Mr. Armes and Ms. Tacke, and total stock compensation expense of $0.3 million.
6. SHARE-BASED COMPENSATION
We maintain the shareholder-approved 2015 Equity and Incentive Compensation Plan (the “2015 Plan”), which provides
for the issuance of up to 1,230,000 shares of CSWI common stock through the grant of stock options, stock appreciation rights,
restricted shares, restricted stock units, performance shares, performance units or other share-based awards, to employees, officers
and non-employee directors, as well as the issuance of conversion awards in connection with the Share Distribution. Additionally,
in September 2015, in connection with the Spin-Off Executive Compensation Plan and Share Distribution, we issued 510,447
shares of common stock to adjust outstanding Capital Southwest equity-based awards to represent both Capital Southwest and
CSWI equity-based awards. These conversion grants were issued on substantially the same terms and conditions as the prior
Capital Southwest equity-based grants. As of March 31, 2018, 929,459 shares were available for issuance under the 2015 Plan.
In connection with the Share Distribution, all stock option and restricted stock awards granted by Capital Southwest,
including awards granted under the Spin-Off Compensation Plan discussed in Note 5, were adjusted and each holder of an award
received both Capital Southwest and CSWI stock options and restricted stock awards.
• Each Capital Southwest stock option was converted into both a Capital Southwest stock option and a CSWI stock option,
with adjustments made to the exercise prices and number of shares subject to each option in order to preserve the
aggregate intrinsic value of the original Capital Southwest stock option as measured immediately before and immediately
after the Share Distribution, subject to rounding. The adjusted Capital Southwest stock options and CSWI stock options
were subject to substantially the same terms, vesting conditions, post-termination exercise rules and other restrictions
that applied to the original Capital Southwest stock options immediately before the Share Distribution. Options generally
expire 10 years from the date of grant and generally vest on or after the first anniversary of the date of grant in five
annual installments. The fair value of stock options was determined using the Black-Scholes pricing model and such
fair value is expensed on a straight-line basis over the requisite service period.
• The Capital Southwest restricted stock awards remained outstanding and the awardees additionally received one share
of CSWI restricted stock for each share of Capital Southwest restricted stock held, which shares are subject to
substantially the same terms, vesting conditions and other restrictions applicable to the Capital Southwest restricted
stock award immediately before the Share Distribution. Restricted Stock awards generally have full voting and dividend
rights, but are restricted with regard to sale or transfer. Unless otherwise specified in the award agreement, the
restrictions do not expire for a minimum of one year and a maximum of five years and are subject to forfeiture during
the restriction period. Typically, restricted share grants have staggered vesting periods over one to five years from the
grant date. The fair value of restricted stock is based on the closing price of common stock on the date of grant and such
fair value is expensed on a straight-line basis over the requisite service period.
54
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The issuance of share-based compensation awards discussed above occurred in conjunction with the Share Distribution
after the market closed on September 30, 2015. We record compensation expense for share-based awards granted by CSWI to
CSWI employees and share-based awards granted by Capital Southwest to employees who are now employed by CSWI.
We recorded share-based compensation as follows for the fiscal years ended March 31, 2018, 2017 and 2016:
(in thousands)
Share-based compensation expense
Related income tax benefit
Net share-based compensation expense
(in thousands)
Share-based compensation expense
Related income tax benefit
Net share-based compensation expense
(in thousands)
Share-based compensation expense
Related income tax benefit
Net share-based compensation expense
Fiscal Year Ended March 31, 2018
Stock Options
Restricted Stock
Total
$
$
178 $
(56 )
122 $
3,482 $
(1,097 )
2,385 $
3,660
(1,153)
2,507
Fiscal Year Ended March 31, 2017
Stock Options
Restricted Stock
Total
$
$
473 $
(166 )
307 $
2,341 $
(819 )
1,522 $
2,814
(985)
1,829
Fiscal Year Ended March 31, 2016
Stock Options
Restricted Stock
750
(263)
487
206 $
(72 )
134 $
Total
956
(335 )
621
$
$
$
$
Stock option activity, which represents outstanding CSWI awards, including conversion awards held by Capital Southwest
employees, is as follows:
Outstanding at April 1, 2017
Exercised
Outstanding at March 31, 2018
Exercisable at March 31, 2018
Outstanding at April 1, 2016
Exercised
Canceled
Outstanding at March 31, 2017
Exercisable at March 31, 2017
Fiscal Year Ended March 31, 2018
Number of
Shares
Weighted
Average Exercise
Price
Remaining
Contractual Life
(Years)
Aggregate
Intrinsic Value
(in Millions)
251,635 $
(19,918)
231,717 $
219,767 $
24.44
16.51
25.12
25.14
6.2 $
6.2 $
4.6
4.4
Fiscal Year Ended March 31, 2017
Number of
Shares
Weighted
Average Exercise
Price
Remaining
Contractual Life
(Years)
Aggregate
Intrinsic Value
(in Millions)
362,513 $
(85,981)
(24,897)
251,635 $
170,412 $
55
24.53
25.23
23.11
24.44
24.12
6.9 $
6.7 $
3.1
2.1
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2018, we had an immaterial amount of unrecognized compensation cost related to non-vested stock options
that will be amortized into net income over the remaining weighted average vesting period of less than 1.0 year. Other than
options granted in conjunction with the Share Distribution to convert existing Capital Southwest options during the fiscal year
ended March 31, 2016, no options have been granted. The intrinsic value of options exercised during the fiscal year ended
March 31, 2018 was $0.5 million. Cash received for options exercised during the fiscal year ended March 31, 2018 was $0.3
million, and the tax benefit received was $0.2 million. The total fair value of stock options vested during the years ended
March 31, 2018, 2017 and 2016 was $0.2 million, $0.7 million and $0.5 million, respectively.
Restricted stock activity, which represents outstanding CSWI awards, including conversion awards held by Capital
Southwest employees is as follows:
Outstanding at April 1, 2017
Granted
Vested
Canceled
Outstanding at March 31, 2018
Number of
Shares
209,489 $
122,919
(89,708)
(27,681)
Weighted
Average
Grant Date
Fair Value
28.20
46.24
23.75
38.53
215,019
$
37.41
During the restriction period, the holders of restricted shares are entitled to vote and, except for conversion awards issued
under the Spin-Off Compensation Plan, receive dividends. At March 31, 2018, we had unrecognized compensation cost related
to unvested restricted shares of $5.2 million, which will be amortized into net income over the remaining weighted average
vesting period of 1.9 years. The total fair value of restricted shares vested during the years ended March 31, 2018 and 2017 was
$4.0 million and $1.8 million, respectively.
Restricted shares granted during the years ended March 31, 2018 and 2017 includes 42,860 and 49,373 shares (at target),
respectively, with performance-based vesting provisions, and vesting ranges from 0-200% and 0-100%, respectively, based on
pre-defined performance targets with market conditions. Performance-based units do not have the rights to vote or receive cash
dividends until vesting. Performance-based restricted shares are earned upon the achievement of performance targets, and are
payable in common shares. Compensation expense is recognized over a 36-month cliff vesting period based on the fair market
value as determined by a Monte Carlo simulation.
7. DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS
Accounts receivable, net consists of the following (in thousands):
Accounts receivable trade
Other receivables
Less: Allowance for doubtful accounts
Accounts receivable, net
March 31,
2018
2017
$
$
62,494 $
1,904
64,398
(1,015)
63,383 $
59,299
1,998
61,297
(1,466 )
59,831
56
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories, net consist of the following (in thousands):
Raw materials and supplies
Work in process
Finished goods
Total inventories
Less: LIFO reserve
Less: Obsolescence reserve
Inventories, net
Property, plant and equipment, net, consist of the following (in thousands):
Land and improvements
Buildings and improvements
Plant, office and laboratory equipment
Construction in progress
Less: Accumulated depreciation
Property, plant and equipment, net
March 31,
2018
2017
21,855 $
3,756
24,561
50,172
(5,511)
(1,687)
42,974 $
18,960
6,271
25,535
50,766
(5,295 )
(1,806 )
43,665
March 31,
2018
2017
3,365 $
44,341
66,230
2,504
116,440
(61,967 )
54,473 $
3,357
43,705
62,563
3,189
112,814
(56,002)
56,812
$
$
$
$
Depreciation of property, plant and equipment was $7.7 million, $7.5 million and $6.5 million for the fiscal years ended
March 31, 2018, 2017 and 2016, respectively. Of these amounts, cost of revenues includes $5.6 million, $5.2 million and $4.3
million, respectively.
Other assets consist of the following (in thousands):
Property held for investment (a)
Deferred income taxes
Retirement assets in excess of benefit obligations
Other
Other assets
March 31,
2018
2017
$
$
8,863 $
7,636
3,334
4,125
23,958 $
9,208
—
2,954
3,849
16,011
(a) As of March 31, 2018 and 2017, $6.2 million and $6.2 million in assets were held for sale, respectively, in the "Elimination and Other"
segment.
57
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued and other current expenses consist of the following (in thousands):
Compensation and related benefits
Rebates and marketing agreements
Non-income taxes
Income taxes payable
Other accrued expenses
Accrued and other current liabilities
Other long-term liabilities consists of the following (in thousands):
Contingent consideration
Deferred income taxes
Other
Other long-term liabilities
8. LONG-TERM DEBT
Debt consists of the following (in thousands):
Revolving Credit Facility, interest rate of 3.13% and 2.23%, respectively
Whitmore term loan, interest rate of 3.88% and 2.98%, respectively
Total debt
Less: Current portion
Long-term debt
Revolving Credit Facility Agreement
March 31,
2018
2017
12,839 $
2,892
741
768
6,261
23,501 $
11,668
2,435
814
868
6,597
22,382
March 31,
2018
2017
— $
2,360
2,361
4,721 $
6,390
3,090
3,900
13,380
March 31,
2018
2017
$
12,000
12,020
24,020
(561)
23,459 $
60,625
12,582
73,207
(561 )
72,646
$
$
$
$
$
$
On December 11, 2015, we entered into a five-year $250.0 million revolving credit facility agreement (“Revolving Credit
Facility”), with an additional $50.0 million accordion feature, with JPMorgan Chase Bank, N.A., as administrative agent, and the
other lenders party thereto. The agreement was amended on September 15, 2017 to allow for multi-currency borrowing with a
$125.0 million sublimit and to extend the original maturity date to September 15, 2022. The interest rate, financial covenants
and all other material provisions of the Amended Credit Agreement were not materially changed by this amendment. Borrowings
under this facility bear interest at the prime rate plus 0.25% or the London Interbank Offered Rate (“LIBOR”) plus 1.25%, which
may be adjusted based on our leverage ratio. We pay a commitment fee of 0.15% for the unutilized portion of the Revolving
Credit Facility. Interest and commitment fees are payable at least quarterly and the outstanding principal balance is due at the
maturity date. The Revolving Credit Facility is secured by substantially all of our assets. As of March 31, 2018 and 2017, we
had $12.0 million and $60.6 million, respectively, in outstanding borrowings under the Revolving Credit Facility, which reduced
our borrowing capacity to $288.0 million and $239.4 million, respectively, inclusive of the accordion feature. The Revolving
Credit Facility contains certain customary restrictive covenants, including a requirement to maintain a minimum fixed charge
coverage of ratio of 1.25 to 1.00 and a maximum leverage ratio of Funded Debt to EBITDA (as defined in the agreement) of 3.00
to 1.00. Covenant compliance is tested quarterly and we were in compliance with all covenants as of March 31, 2018.
58
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Whitmore Term Loan
As of March 31, 2018, Whitmore Manufacturing, LLC (one of our wholly-owned operating subsidiaries) had a secured
term loan outstanding related to a warehouse and corporate office building and the remodel of an existing manufacturing and
R&D facility. The term loan matures on July 31, 2029, with payments of $140,000 due each quarter. Borrowings under the term
loan bear interest at a variable annual rate equal to one-month LIBOR plus 2.0%. As of March 31, 2018 and 2017, Whitmore
had $12.0 million and $12.6 million, respectively, in outstanding borrowings under the term loan. Interest payments under the
Whitmore term loan are hedged under an interest rate swap agreement as described in Note 9.
Future Minimum Debt Payments
Future minimum debt payments are as follows for fiscal years ending March 31 (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
561
561
561
561
12,561
9,215
24,020
Operating Leases
We have entered into non-cancelable operating leases with initial terms in excess of one year for manufacturing and office
facilities. The leases expire at various times through 2026. Future minimum lease payments under these leases for fiscal years
ending March 31 are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
2,344
2,106
1,865
876
384
3,118
10,693
Rental expense under operating leases was $2.5 million, $2.8 million and $2.2 million for the fiscal years ended March 31,
2018, 2017 and 2016, respectively.
9. DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING
We enter into interest rate swap agreements to hedge exposure to floating interest rates on certain portions of our debt. As
of March 31, 2018 and 2017, we had $12.0 million and $43.2 million, respectively, of notional amount in outstanding designated
interest rate swaps with third parties. All interest rate swaps are highly effective. At March 31, 2018, the maximum remaining
length of any interest rate swap contract in place was approximately 11.3 years.
The fair value of interest rate swaps designated as hedging instruments are summarized below (in thousands):
Current derivative liabilities
Non-current derivative liabilities
The impact of changes in the fair value of interest rate swaps is included in Note 17.
59
March 31,
2018
2017
$
88 $
134
199
420
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 17, 2016, we entered into a foreign exchange forward contract, not designated as a hedging instrument, to hedge
our exposure associated with assets denominated in British pounds. The forward contract was settled on September 29, 2016
resulting in a net gain of $0.2 million, which was included in other income (expense), net on our consolidated statement of
operations for the year ended March 31, 2017.
Current derivative assets are reported in our consolidated balance sheets in prepaid expenses and other current assets.
Current and non-current derivative liabilities are reported in our consolidated balance sheets in accrued and other current liabilities
and other long-term liabilities, respectively.
10. EARNINGS PER SHARE
On September 30, 2015, 15.6 million CSWI common shares were distributed to Capital Southwest shareholders in
connection with the Share Distribution. For comparative purposes, and to provide a more meaningful calculation for weighted
average shares, this amount was assumed to be outstanding throughout all periods presented up to and including September 30,
2015 in the calculation of basic weighted average shares. In addition, for the dilutive weighted average share calculations, the
dilutive securities outstanding at September 30, 2015 were also assumed to be outstanding throughout all periods presented up to
and including September 30, 2015.
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings per
share for the fiscal years ended March 31, 2018, 2017 and 2016:
(amounts in thousands, except per share data)
Income from continuing operations
(Loss) income from discontinued operations
Net (loss) income
Weighted average shares:
Common stock
Participating securities
Denominator for basic earnings per common share
Potentially dilutive securities (a)
Denominator for diluted earnings per common share
Basic earnings (loss) per common share:
Continuing operations
Discontinued operations
Net (loss) income
Diluted earnings (loss) per common share:
Continuing operations
Discontinued operations
Net (loss) income
Fiscal Years Ended March 31,
2018
2017
2016
$
$
32,682 $
(44,564 )
(11,882 ) $
17,800 $
(6,729 )
11,071 $
15,671
—
15,671
—
15,671
15,555
218
15,773
66
15,839
$
$
$
$
2.09 $
(2.85 )
(0.76 ) $
2.09 $
(2.85 )
(0.76 ) $
1.13 $
(0.43 )
0.70 $
1.12 $
(0.42 )
0.70 $
23,807
1,664
25,471
15,443
182
15,625
50
15,675
1.52
0.11
1.63
1.52
0.10
1.62
(a) As a result of the net loss for the year ended March 31, 2018, we excluded 180,906 of unvested Restricted Shares from the calculation
of diluted EPS due to their anti-dilutive effect. No shares were excluded as being anti-dilutive for the fiscal years ended March 31,
2017 or 2016.
60
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SHAREHOLDERS' EQUITY
On November 11, 2016, we announced that our Board of Directors authorized a program to repurchase up to $35.0
million of our common stock over the next two years. These 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 its common stock and general market conditions. The program may be
limited or terminated at any time at our discretion without notice. During the fiscal year ended March 31, 2018, 26,544 shares
were repurchased for an aggregate of $1.2 million. No shares were repurchased prior to the fiscal year ended March 31, 2018.
12. FAIR VALUE MEASUREMENTS
The fair value of interest rate swaps discussed in Note 9 are determined using Level II inputs. The carrying value of our
debt, included in Note 8, approximates fair value as it bears interest at floating rates. The carrying amounts of other financial
instruments (i.e., cash and cash equivalents, bank time deposits, accounts receivable, net, accounts payable) approximated their
fair values at March 31, 2018 and 2017 due to their short-term nature.
The fair values of acquisition-related contingent payments are estimated using Level III inputs. The contingent payment
related to the acquisition of the Deacon assets utilized the weighted average probability method using forecasted sales. The most
significant factor in the valuation is projected net revenues resulting from sales of Deacon products. The contingent payment
related to the acquisition of assets from SureSeal utilized the weighted average probability method using forecasted sales and
gross margin. The most significant factor in the valuation was projected net revenues resulting from sales of SureSeal products.
The following table sets forth the changes in fair value of contingent consideration recognized within the selling, general
and administrative expenses of our consolidated statements of operations:
(in millions)
Balance at April 1, 2016
Change due to accretion
Change in estimate
Balance at March 31, 2017
Change in estimate
Payment of contingent consideration
Balance at March 31, 2018
13. RETIREMENT PLANS
Deacon
SureSeal
Total
$
$
$
0.4 $
—
(0.4 )
— $
—
—
— $
5.5 $
0.7
0.2
6.4 $
0.1
(6.5)
— $
5.9
0.7
(0.2)
6.4
0.1
(6.5)
—
We maintain a frozen qualified defined benefit pension plan (the “Qualified Plan”) that covers certain of our U.S.
employees. The Qualified Plan was previously closed to employees hired or re-hired on or after January 1, 2015 and it was also
amended to freeze benefit accruals and to modify certain ancillary benefits provided under the Qualified Plan effective as of
September 30, 2015. Benefits are based on years of service and an average of the highest five consecutive years of compensation
during the last ten years of employment. A remeasurement was performed at September 30, 2015 to reflect the amendment of
the Qualified Plan that froze participation and all future benefit accruals. The freeze of the Qualified Plan as of September 30,
2015 required the immediate recognition of a curtailment gain due to the accelerated recognition of all remaining prior service
costs (benefits) and the decrease in the projected benefit obligation. The freeze of the Qualified Plan reduced net periodic
pension expense for the remainder of fiscal year 2016 based on the remeasurement. The funding policy of the Qualified Plan is
to contribute annual amounts that are currently deductible for federal income tax purposes. No contributions were made during
the fiscal years ended March 31, 2018, 2017 or 2016.
61
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended March 31, 2018, we offered lump sum payments to terminated vested participants, representing
approximately 16% of our liability. Approximately 67% of those participants accepted the lump sum offer for an aggregate
payment of $7.3 million.
We maintain a frozen unfunded retirement restoration plan (the “Restoration Plan”) that is a non-qualified plan providing
for the payment to participating employees, upon retirement, of the difference between the maximum annual payment
permissible under the Qualified Plan pursuant to federal limitations and the amount that would otherwise have been payable
under the Qualified Plan. As with the Qualified Plan, the Restoration Plan was closed to new participants on January 1, 2015
and amended to freeze benefit accruals and to modify certain ancillary benefits effective as of September 30, 2015.
We maintain a registered defined benefit pension plan (the "Canadian Plan") that covers all of our employees based at our
facility in Alberta, Canada. Employees are eligible for membership in the plan following the completion of one year of
employment. Benefits accrue to eligible employees based on years of service and an average of the highest 60 consecutive
months of compensation during the last 10 consecutive years of employment. Benefit eligibility typically occurs upon the first
day of the month following an eligible employee’s reaching age 65, and plan benefits are typically paid monthly in advance for
the lifetime of the participant.
The plans described above (collectively, the "Plans") are presented in aggregate as the impact of the Restoration Plan and
Canadian Plan to our consolidated financial position and results of operations is not material.
The following are assumptions related to the Plans:
Assumptions used to determine benefit obligations:
Discount rate
Rate of compensation increases
Assumptions used to determine net pension expense:
Discount rate
Expected return on plan assets
Rate of compensation increases
March 31,
2018
2017
2016
3.98 %
3.00 %
4.23 %
6.18 %
3.00 %
4.23 %
3.00 %
4.50 %
6.19 %
3.00 %
4.50 %
(a)
4.25 %
7.00 %
(a)
(a) Rate of compensation increase is no longer relevant to the Qualified Plan or Restoration Plan due to freezing benefit accruals. The
rate of compensation increase on the Canadian Plan is 3.0%.
The factors used in determination of these assumptions are described in Note 1.
Net pension (benefit) expense for the Plans was:
(in thousands)
Service cost – benefits earned during the year
Interest cost on projected benefit obligation
Expected return on assets
Net amortization and deferral
Settlement expense
Curtailment benefit
Other adjustment
March 31,
2018
2017
2016
$
58 $
94 $
2,515
(3,927)
30
339
—
—
2,637
(3,723 )
30
—
—
(24 )
2,069
2,739
(3,226)
9
—
(8,020)
—
(6,429 )
Net pension (benefit) expense
$
(985) $
(986 ) $
62
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated prior service costs and the estimated net loss for the Plans that will be amortized from accumulated other
comprehensive loss into pension expense in the fiscal year ended March 31, 2019 is $0 and $28,000, respectively.
The following is a summary of the changes in the Plans' pension obligations:
(in thousands)
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss
Benefits paid
Settlements (b)
Other adjustment (a)
Currency translation impact
Benefit obligation at end of year
Accumulated benefit obligation
March 31,
2018
2017
61,434 $
58
2,515
(73 )
(2,299 )
(7,252 )
—
78
54,461 $
54,197 $
60,561
94
2,637
(2,091)
(2,514)
—
2,815
(68)
61,434
61,132
$
$
$
(a) Reflects amounts associated with the plan assets and obligations of the Canadian Plan that were previously omitted from aggregate
pension disclosures due to immateriality.
(b) Reflects lump-sum payments to terminated vested participants.
The following is a reconciliation of the Plans' assets:
(in thousands)
Fair value of plan assets at beginning of year
Actual return on plan assets
Benefits paid
Company contributions
Settlements (b)
Other adjustment (a)
Currency translation impact
Fair value of plan assets at end of year
March 31,
2018
2017
62,271 $
2,704
(2,193 )
80
(7,252 )
—
65
55,675 $
60,878
1,523
(2,420 )
83
—
2,263
(56 )
62,271
$
$
(a) Reflects amounts associated with the plan assets and obligations of the Canadian Plan that were previously omitted from aggregate
pension disclosures due to immateriality.
(b) Reflects lump-sum payments to terminated vested participants.
We made no contributions to the Qualified Plan in the fiscal year ended March 31, 2018 and do not expect to make any
contributions in the fiscal year ending March 31, 2019. We contributed $0.1 million to the Canadian Plan in the fiscal year
ended March 31, 2018 and estimate that our contribution in the fiscal year ending March 31, 2019 will be $0.1 million.
The following summarizes the net pension asset for the Plans:
63
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Plan assets at fair value
Benefit obligation
Funded status
The following summarizes amounts recognized in the balance sheets for the Plans:
(in thousands)
Noncurrent assets
Current liabilities
Noncurrent liabilities
Funded status
March 31,
2018
2017
55,675 $
(54,461 )
1,214 $
62,271
(61,434 )
837
March 31,
2018
2017
3,334 $
(103 )
(2,017 )
1,214 $
2,955
(654 )
(1,464 )
837
$
$
$
$
The following table presents the change in accumulated other comprehensive loss attributable to the components of the
net cost and the change in the benefit obligation:
March 31,
2018
2017
(in thousands)
Accumulated other comprehensive loss at beginning of year
$
Amortization of net loss
Amortization of prior service credit
Settlements (b)
Net loss arising during the year
Other adjustment (a)
Currency translation impact
(1,901 ) $
26
(5 )
232
(762 )
(107 )
(13 )
Accumulated other comprehensive loss at end of year
$
(2,530 ) $
(1,229)
17
3
—
(63 )
(644 )
15
(1,901)
(a) For fiscal year ended March 31, 2017, amounts are to recognize an adjustment, net of tax, to accumulated other comprehensive loss
associated with the Canadian Plan.
(b) Reflects impact of lump-sum payments to terminated vested participants.
Amounts recorded in accumulated other comprehensive loss consist of:
(in thousands)
Net prior service cost
Net loss
Accumulated other comprehensive loss
March 31,
2018
2017
$
$
$
41
(2,571)
(2,530 ) $
45
(1,946 )
(1,901 )
64
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The current target allocations for plan assets are 15% – 20% equity securities, 75% – 80% for fixed income securities and
0% – 5% for alternatives. The actual asset allocations for the Plans are as follows:
Asset category
Equity securities
Fixed income securities
Other
Cash and cash equivalents
Total
March 31,
2018
2017
15 %
79 %
5 %
1 %
17 %
78 %
4 %
1 %
100 %
100 %
The Plans' assets, shown below, are presented at fair value, as described in Note 1. The fair values of our Plans' assets
were:
March 31, 2018
March 31, 2017
(in thousands)
Asset category
Equity securities (a)
Fixed income securities (b)
Other (c)
Cash and cash equivalents
Total
Total
$ 8,731 $
43,810
2,753
381
$ 55,675 $
III
I
264 $
—
424
381
Hierarchical Levels
II
8,467 $
43,810
2,329
—
1,069 $ 54,606 $
Total
— $ 10,850 $
—
—
—
— $ 62,271 $
48,312
2,760
349
III
Hierarchical Levels
II
I
333 $ 10,517 $
48,312
—
2,267
493
—
349
1,175 $ 61,096 $
—
—
—
—
—
(a) This category includes investment in equity securities of large, medium and small companies and equity investments in foreign
companies. Mutual funds included in this category are valued using the net asset value per unit as of the valuation date.
(b) This category includes investments in investment grade fixed income instruments, primarily U.S. government obligations.
(c) This category includes investments in commodity linked and real estate funds within the U.S. and investments in funds that invest
in a combination of U.S. and non-U.S. equity and Canadian fixed income securities.
The following table summarizes the expected cash benefit payments for the Plans for fiscal years ending March 31 (in
millions):
2019
2020
2021
2022
2023
Thereafter
$
2.6
2.7
2.8
2.9
3.0
15.9
Defined Contribution Plan
Effective October 1, 2015, we began to sponsor a defined contribution plan covering substantially all of our U.S.
employees. Employees may contribute to this plan, and these contributions are matched by us up to 6.0% of eligible earnings.
Additionally, we contribute 3.0% of eligible earnings to employees regardless of their level of participation in the plan, which
is discretionary and subject to adjustment based on profitability. Effective January 1, 2017, the 3.0% discretionary contribution
is contributed following the end of the calendar year. Contributions to the defined contribution plan were $3.6 million and $3.3
million for the years ended March 31, 2018 and 2017, respectively.
65
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Ownership Plan
We sponsor a qualified, non-leveraged employee stock ownership plan (“ESOP”) in which domestic employees are eligible
to participate following the completion of one year of service. The ESOP provides annual discretionary contributions of up to
the maximum amount that is deductible under the Internal Revenue Code. Contributions to the ESOP are invested in our
common stock. A participant’s interest in contributions to the ESOP fully vests after three years of credited service or upon
retirement, permanent disability (each, as defined in the plan document) or death.
We recorded total contributions to the ESOP of $1.6 million, $2.1 million and $1.6 million during the fiscal years ended
March 31, 2018, 2017 and 2016, respectively, based on performance in the prior fiscal year. During the fiscal year ended
March 31, 2018, $1.5 million was recorded to expense based on performance in the fiscal year ended March 31, 2018 and is
expected to be contributed to the ESOP for the during the fiscal year ending March 31, 2019.
The ESOP held 0 and 597,434 shares of Capital Southwest common stock as of March 31, 2018 and 2017, respectively.
The ESOP held 850,940 and 907,748 shares of CSWI common stock as of March 31, 2018 and 2017, respectively.
14. INCOME TAXES
Income from continuing operations before income taxes was comprised of the following (in thousands):
U.S. Federal
Foreign
Income before income taxes
Income tax expense consists of the following (in thousands):
For the year ended:
March 31, 2018
U.S. Federal
State and local
Foreign
Provision for income taxes
March 31, 2017
U.S. Federal
State and local
Foreign
Provision for income taxes
March 31, 2016
U.S. Federal
State and local
Foreign
Provision for income taxes
March 31,
2018
2017
2016
$
$
42,898 $
5,349
48,247 $
29,525 $
2,635
32,160 $
39,727
3,246
42,973
Current
Deferred
Total
$
$
$
$
$
$
9,083 $
3,281
1,303
13,667 $
8,313 $
1,726
1,201
11,240 $
9,560 $
1,348
914
11,822 $
1,915 $
398
(415)
1,898 $
3,384 $
417
(681)
3,120 $
7,645 $
(127)
(174)
7,344 $
10,998
3,679
888
15,565
11,697
2,143
520
14,360
17,205
1,221
740
19,166
66
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense differed from the amounts computed by applying the U.S. federal statutory income tax rate of 31.5%
to income from continuing operations before income taxes as a result of the following (in thousands):
Computed tax expense at statutory rate
Increase (reduction) in income taxes resulting from:
Uncertain tax positions
State and local income taxes, net of federal benefits
Domestic production activity deduction
Other permanent differences
Foreign rate differential
Impact of reduction of federal tax rate
Federal Repatriation Tax, net of tax credit
Other, net
March 31,
2018
2017
2016
$
15,198 $
11,256 $
15,041
269
1,304
(1,238 )
(520 )
(414 )
(1,011 )
1,891
86
15,565 $
1,593
1,529
(545)
646
(444)
—
—
325
14,360 $
1,277
1,049
(420)
1,373
(642)
(107)
—
1,595
19,166
Provision for income taxes continuing operations
$
The effective tax rates for the fiscal years ended March 31, 2018, 2017 and 2016 were 32.3%, 44.7% and 44.6%,
respectively. The current year tax rate was lower, compared to the prior years, as a result of a decrease in the federal statutory
rate, the release of FIN 48 for state voluntary disclosure agreements and a decrease in state and local income taxes. Other items
impacting the effective tax rate include federal repatriation tax under the new U.S. tax reform and an increase in the domestic
production activity deduction.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities at March 31 are presented below (in thousands):
Deferred tax assets:
Accrued expenses
Net operating loss carryforwards
Inventory reserves
Pension and other employee benefits
Accrued compensation
Impairment
Other, net
Deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Property, plant and equipment
Goodwill and intangible assets
Deferred gain
Other, net
Deferred tax liabilities
Net deferred tax assets (liabilities)
67
March 31,
2018
2017
$
106 $
167
837
863
1,693
10,933
883
15,482
(64 )
15,418
$
(4,913 ) $
(4,465 )
(461 )
(303 )
(10,142 )
5,276 $
$
2
565
1,876
3,289
2,621
—
1,485
9,838
(107)
9,731
(6,719)
(5,313)
(783)
(6)
(12,821)
(3,090)
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2018 and 2017, we had $0.2 million and $0.6 million, respectively, in tax effected net operating loss
carryforwards. Net operating loss carryforwards will expire in periods beyond the next 5 years.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at beginning of year
Increases related to prior year tax positions
Increases related to current year tax positions
Settlement
Balance at end of year
March 31,
2018
2017
2,025 $
316
284
(746 )
1,879 $
900
916
730
(521)
2,025
$
$
We have accrued interest and penalties on uncertain tax positions of $0.1 million and $0.2 million, respectively, for the
year ended March 31, 2018 and $0.2 million and $0.2 million, respectively, for the years ended March 31, 2017 and 2016. We
are currently under examination for the fiscal year ended March 31, 2016 for U.S. federal income taxes. We are not under
examination by any U.S. state income taxing authority. Our federal income tax returns for the year ended September 30, 2015
and subsequent years remain subject to examination. Our income tax returns in certain state income tax jurisdictions remain
subject to examination for various periods for the year ended September 30, 2015 and subsequent years.
15. RELATED PARTY TRANSACTIONS
We paid $0.1 million in consulting fees in each of the fiscal years ended March 31, 2018, 2017 and 2016 to a company
owned by a member of our board of directors. The consulting agreement under which these fees were paid was terminated
effective March 31, 2018.
We paid $0.0, $0.0 and $0.2 million in management fees for the fiscal years ended March 31, 2018, 2017 and 2016,
respectively, to a management company subsidiary of Capital Southwest for services rendered during each respective fiscal year.
These amounts are presented in selling, general and administrative expenses in the consolidated statements of operations, and
payments ceased in connection with the Share Distribution.
We paid $0.0, $0.0 and $0.3 million in dividends to Capital Southwest during the fiscal years ended March 31, 2018, 2017
and 2016, respectively. Dividends paid in the fiscal year ended March 31, 2016 were paid prior to the Share Distribution, as
Capital Southwest was our sole shareholder until the Share Distribution.
As of fiscal year ended March 31, 2018 and 2017, 0 and 597,434 shares, respectively, of Capital Southwest stock were held
under our ESOP.
Tax Matters Agreement – We entered into a tax matters agreement with Capital Southwest (the “Tax Matters Agreement”).
The Tax Matters Agreement generally governs our and Capital Southwest’s respective rights, responsibilities and obligations with
respect to taxes in connection with the Share Distribution. The Tax Matters Agreement provides that we will be liable for taxes
incurred by Capital Southwest as a result of our taking or failing to take certain actions that result in the Share Distribution failing
to meet the requirements of a tax-free distribution under the Internal Revenue Code. The Tax Matters Agreement also restricts
our and Capital Southwest’s ability to take actions that could cause the Share Distribution to fail to meet the requirements of a
tax-free distribution under the Code. These restrictions may prevent us and Capital Southwest from entering into transactions that
might be advantageous to us or our stockholders. The term of the Tax Matters Agreement is perpetual, unless the agreement is
terminated by mutual consent of both parties.
Employee Matters Agreement – We entered into an employee matters agreement with Capital Southwest prior to the
Distribution Date (the “Employee Matters Agreement”). The Employee Matters Agreement allocates liabilities and
responsibilities between us and Capital Southwest relating to employee compensation and benefit plans and programs, including
68
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the treatment of certain employment agreements, outstanding annual and long-term incentive awards, and health and welfare
benefit obligations and provide for the cooperation between us and Capital Southwest in the sharing of employee information.
In general, following the Share Distribution, we are responsible for all employment and benefit-related obligations and
liabilities related to those individuals employed by Capital Southwest or one of the contributed businesses prior to the Share
Distribution and whose employment was transferred to us in connection with the Share Distribution. In general, Capital Southwest
is responsible for any employment and benefit-related obligations and liabilities of any employees who continue to be employees
of Capital Southwest following the Share Distribution. The term of the Employee Matters Agreement is perpetual, unless the
agreement is terminated by mutual consent of both parties.
16. CONTINGENCIES
From time to time, we are involved in various claims and legal actions which arise in the ordinary course of business. There
are not any matters pending that we currently believe are reasonably possible of having a material impact to our business,
consolidated financial position, results of operations or cash flows.
17. OTHER COMPREHENSIVE INCOME (LOSS)
The following table provides an analysis of the changes in accumulated other comprehensive income (loss) (in thousands).
Currency translation adjustments:
Balance at beginning of period
Adjustments for foreign currency translation
Balance at end of period
Interest rate swaps:
Balance at beginning of period
Unrealized gains, net of taxes of $(67) and $(261), respectively (a)
Reclassification of losses included in interest expense, net of taxes of $(34) and
$(180), respectively
Other comprehensive income
Balance at end of period
Defined benefit plans:
Balance at beginning of period
Amortization of net prior service benefit, net of taxes of $2 and $(2),
respectively (b)
Amortization of net loss, net of taxes of $(12) and $(7), respectively (b)
Net loss arising during the year, net of taxes of $347 and $42, respectively
Settlement recognition, net of taxes of $107 and $0, respectively
Other adjustment, net of taxes of $0 and $276, respectively (c)
Currency translation impact
Other comprehensive loss
Balance at end of period
Fiscal Years Ended March 31,
2018
2017
$
$
$
$
(8,132 ) $
3,295
(4,837 ) $
(402 ) $
193
101
294
(108 ) $
(5,248 )
(2,884)
(8,132 )
(1,221 )
485
334
819
(402 )
$
(1,901 ) $
(1,229 )
(5 )
26
(762 )
232
(107 )
(13 )
(629 )
(2,530 ) $
$
3
17
(63)
—
(644)
15
(672)
(1,901 )
(a) Unrealized gains are reclassified to earnings as underlying cash interest payments are made. We expect to recognize a loss of less
than $0.1 million, net of deferred taxes, over the next twelve months related to a designated cash flow hedge based on its fair value
as of March 31, 2018.
69
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Amortization of prior service costs and actuarial losses out of accumulated other comprehensive loss are included in the computation
of net periodic pension expense. See Note 13 for additional information.
(c) The other adjustment as of March 31, 2018, relates to the change in the effective tax rate. The other adjustment for the fiscal year
ended March 31, 2017 was to recognize an adjustment, net of tax, to accumulated other comprehensive income associated with the
Canadian Plan.
18. SEGMENTS
As described in Note 1, we conduct our operations through two business segments:
•
Industrial Products; and
• Specialty Chemicals.
The following is a summary of the financial information of our reporting segments reconciled to the amounts reported in
the consolidated financial statements (in thousands). Historical segment information has been retrospectively adjusted to reflect
the decision to divest the Coatings business.
Year ended March 31, 2018
Revenues, net
Operating income
Depreciation and amortization
Year ended March 31, 2017
Revenues, net
Operating income
Depreciation and amortization
Year ended March 31, 2016
Revenues, net
Operating income
Depreciation and amortization
Industrial
Products
Specialty
Chemicals
Subtotal –
Reportable
Segments
Eliminations
and Other
186,483 $
43,984
7,586
139,735 $
18,427
6,679
326,218 $
62,411
14,265
4 $
(11,697 )
668
Industrial
Products
Specialty
Chemicals
Subtotal –
Reportable
Segments
Eliminations
and Other
158,654 $
32,893
6,963
128,714 $
13,508
6,418
287,368 $
46,401
13,381
92 $
(13,275 )
373
Industrial
Products
Specialty
Chemicals
Subtotal –
Reportable
Segments
Eliminations
and Other
138,594 $
31,075
6,530
128,051 $
22,110
5,140
266,645 $
53,185
11,670
272 $
(6,990 )
68
$
$
$
Total
326,222
50,714
14,933
Total
287,460
33,126
13,754
Total
266,917
46,195
11,738
During the year ended March 31, 2018, we recorded restructuring charges of $0.2 million in our Industrial Products segment.
As noted in Note 1, the program was complete as of March 31, 2018. During the year ended March 31, 2017, we recorded
restructuring charges of $0.4 million in our Industrial Products segment.
During the year ended March 31, 2016, we recorded pension plan curtailment benefits of $3.2 million and $4.8 million in
our Industrial Products and Specialty Chemicals segments, respectively.
70
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total Assets
March 31, 2018
March 31, 2017
March 31, 2016
Industrial
Products
Specialty
Chemicals
Subtotal –
Reportable
Segments
Eliminations
and Other
$
170,847 $
171,147
154,583
143,733 $
208,126
227,166
314,580 $
379,273
381,749
26,236 $
19,154
10,922
Total
340,816
398,427
392,671
Geographic information – We attribute sales to different geographic areas based on the destination of the product or service
delivery. Long-lived assets are classified based on the geographic area in which the assets are located and exclude deferred taxes.
No individual country, except for the U.S., accounted for more than 10% of consolidated net revenues or total long-lived assets.
Sales and long-lived assets by geographic area are as follows (in thousands, except percent data):
U.S.
Non-U.S. (a)
Revenues, net
For the Years Ended March 31,
2018
268,201
58,021
326,222
$
$
82.2 % $
17.8 %
100.0 % $
2017
239,657
47,803
287,460
83.4% $
16.6%
100.0% $
2016
205,027
61,890
266,917
76.8 %
23.2 %
100.0 %
(a) No individual country within this group represents 10% or more of consolidated totals for any period presented.
As of March 31,
U.S.
Non-U.S.
Long-lived assets (a)
2018
178,010
27,603
205,613
$
$
86.6 % $
13.4 %
100.0 % $
2017
185,472
27,526
212,998
87.1% $
12.9%
100.0% $
2016
180,148
12,990
193,138
93.3 %
6.7 %
100.0 %
(a) Long-lived assets consist primarily of property, plant and equipment, intangible assets, goodwill and other assets, net of deferred
taxes.
Major customer information – We have a large number of customers across our locations and do not believe that we have
sales to any individual customer that represented 10% or more of consolidated net revenues for any of the fiscal years presented.
71
CSW INDUSTRIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents a summary of the unaudited quarterly data for the fiscal years ended March 31, 2018 and 2017
(amounts in millions, except per share data):
Quarter
4th
3rd
2nd
1st
Fiscal Year Ended March 31, 2018
Revenues, net
Gross profit
Income before income taxes
Income from continuing operations
Loss from discontinued operations
Net income (loss)
Basic earnings (loss) per common share (a):
Continuing operations
Discontinued operations
Net income (loss)
Diluted earnings (loss) per common share (a):
Continuing operations
Discontinued operations
Net income (loss)
Quarter
Revenues, net
Gross profit
Income before income taxes
Income from continuing operations
Loss from discontinued operations
Net income (loss)
Basic earnings (loss) per common share (a):
Continuing operations
Discontinued operations
Net income
Diluted earnings (loss) per common share (a):
Continuing operations
Discontinued operations
Net income
$
$
$
$
$
$
$
$
$
$
83.5 $
36.1
9.8
10.6
(4.3 )
6.3
0.68 $
(0.28 )
0.40 $
0.68 $
(0.28 )
0.40 $
69.0 $
30.2
7.8
2.6
(36.7 )
(34.0 )
0.17 $
(2.34 )
(2.17 ) $
0.17 $
(2.34 )
(2.17 ) $
84.4 $
39.7
14.5
9.2
(1.8)
7.3
0.58 $
(0.12)
0.46 $
0.57 $
(0.11)
0.46 $
89.3
41.9
16.1
10.3
(1.8)
8.5
0.65
(0.12)
0.53
0.65
(0.12)
0.53
Fiscal Year Ended March 31, 2017
4th
3rd
2nd
1st
76.4 $
30.4
5.8
3.3
(0.5 )
2.8
0.21 $
(0.04 )
0.17 $
0.21 $
(0.04 )
0.17 $
65.3 $
27.4
5.0
1.9
(1.5 )
0.4
0.12 $
(0.09 )
0.03 $
0.12 $
(0.09 )
0.03 $
70.9 $
34.9
12.5
7.3
(3.5)
3.8
0.47 $
(0.23)
0.24 $
0.47 $
(0.23)
0.24 $
74.9
36.2
8.9
5.3
(1.2)
4.1
0.34
(0.08)
0.26
0.33
(0.07)
0.26
(a) Net earnings per common share is computed independently for each of the quarters presented. The sum of the quarters may not equal
the total year amount due to the impact of changes in weighted average quarterly shares outstanding.
Significant pre-tax adjustments recorded in the quarter ended March 31, 2018 included severance for our chief operating
officer ($0.4 million). Significant pre-tax adjustments recorded in the fourth quarter ended March 31, 2017 included restructuring
and realignment ($3.4 million), implementation costs related to design of our internal controls framework ($0.5 million),
transaction costs incurred related to our acquisition of Greco ($0.4 million) and trademark impairments ($0.2 million).
72
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
73
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) are designed to ensure that the information, which we are required to disclose in the reports that we file or
submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the United
States ("U.S.") Securities and Exchange Commission's ("SEC") rules and forms, and that such information is accumulated and
communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
In connection with the preparation of this Annual Report on Form 10-K ("Annual Report") for the year ended March 31,
2018, our management, under the supervision and with the participation of our Principal Executive Officer and our Principal
Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures as of March 31, 2018 as required by Rule 13a-15(b) under the Exchange Act. Based on this evaluation, our Principal
Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at the
reasonable assurance level as of March 31, 2018.
Management’s Report on Internal Control Over Financial Reporting
Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial
Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Internal
control over financial reporting includes policies and procedures that: (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our
receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or
that the degree of compliance with the policies or procedures may not deteriorate.
Under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, our
management conducted an assessment of our internal control over financial reporting as of March 31, 2018, based on the criteria
established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, our management has concluded that as of March 31, 2018, our internal control
over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of March 31, 2018, has been audited by Grant Thornton
LLP, our independent registered public accounting firm, as stated in their report, which is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2018 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
74
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
CSW Industrials, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of CSW Industrials, Inc. (a Delaware corporation) and subsidiaries
(the “Company”) as of March 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of March 31, 2018, based on criteria
established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated financial statements of the Company as of and for the year ended March 31, 2018, and our report
dated May 30, 2018 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Dallas, Texas
May 30, 2018
75
ITEM 9B: OTHER INFORMATION
None
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2018.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2018.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2018.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2018.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2018.
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Annual Report on Form 10-K:
PART IV
(1) Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
CSW Industrials, Inc. Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 2018 and 2017
For each of the three years in the period ended March 31, 2018:
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
None.
(3) Exhibits
76
35
36
37
37
38
39
41
EXHIBIT
NUMBER
Exhibit Index
DESCRIPTION
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
21.1*
23.1*
31.1*
Second Amended and Restated Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on August 16, 2017)
Amended and Restated Bylaws of the Company, adopted and effective August 15, 2017 (incorporated by
reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on August 16, 2017)
Tax Matters Agreement dated September 8, 2015 (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form 10, filed on September 9, 2015)
First Amended and Restated Credit Agreement, dated as of September 15, 2017, by and among CSW
Industrials Holdings, Inc., Whitmore Manufacturing, LLC, the other loan parties thereto, the lenders
party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on September 19, 2017)
Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.5 to
Amendment No. 3 to the Company’s Registration Statement on Form 10, filed on August 28, 2015)
Amended and Restated CSW Industrials, Inc. 2015 Equity and Incentive Compensation Plan
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on
December 12, 2016) +
Employment agreement by and between CSW Industrials, Inc. and Joseph Armes, dated October 1, 2015
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed on
February 16, 2016) +
Form of Employee Restricted Stock Award Agreement (time vesting) (incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, filed on February 16, 2016) +
Form of Employee Time Vested Restricted Share Award Agreement (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q, filed on February 8, 2018) +
Form of Employee Restricted Stock Award Agreement (performance vesting) (incorporated by reference
to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, filed on February 16, 2016) +
Form of Employee Time Vested Restricted Stock Unit Award Agreement (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, filed on February 8, 2018) +
Form of Employee Performance Share Award Agreement (incorporated by reference to Exhibit 10.9 to
the Company's Annual Report on Form 10-K, filed on June 14, 2017) +
Form of Non-Employee Director Restricted Stock Award (time vesting) (incorporated by reference to
Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, filed on February 16, 2016) +
Form of Non-Employee Director Time Vested Restricted Share Award Agreement (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q, filed on February 8, 2018) +
Form of Incentive Stock Option Right Award Agreement (replacement award agreement) (incorporated
by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q, filed on February 16,
2016) +
Form of Non-Qualified Stock Option Right Award Agreement (replacement award agreement)
(incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q, filed on
February 16, 2016) +
Form of Restricted Share Award Agreement (replacement award agreement) (incorporated by reference
to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q, filed on February 16, 2016) +
Form of Non-Qualified Stock Option Right Award Agreement (executive compensation plan –
replacement award agreement) (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly
Report on Form 10-Q, filed on February 16, 2016) +
Form of Restricted Share Award Agreement (executive compensation plan – replacement award
agreement) (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q,
filed on February 16, 2016) +
CSW Industrials, Inc. Executive Change in Control and Severance Benefit Plan (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 12, 2016) +
List of subsidiaries of the Company
Consent of Grant Thornton LLP
Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
77
EXHIBIT
NUMBER
31.2*
32.1**
32.2**
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
DESCRIPTION
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith
** Furnished herewith
+ Management contracts and compensatory plans required to be filed as exhibits to this Annual Report on Form 10-K.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized:
Date: May 30, 2018
CSW INDUSTRIALS, INC.
By:
/s/ Joseph B. Armes
Joseph B. Armes
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
Name
Title
Date
/s/ Joseph B. Armes
Chief Executive Officer
May 30, 2018
Joseph B. Armes
(Principal Executive Officer)
/s/ Greggory W. Branning
Chief Financial Officer
May 30, 2018
Greggory W. Branning
(Principal Financial and Accounting Officer)
/s/ Michael R. Gambrell
Michael R. Gambrell
/s/ Terry L. Johnston
Terry L. Johnston
/s/ Linda A. Livingstone
Linda A. Livingstone, Ph.D.
/s/ William F. Quinn
William F. Quinn
/s/ Robert M. Swartz
Robert M. Swartz
/s/ J. Kent Sweezey
J. Kent Sweezey
Director
Director
Director
Director
Director
Director
May 30, 2018
May 30, 2018
May 30, 2018
May 30, 2018
May 30, 2018
May 30, 2018
79
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph B. Armes, certify that:
EXHIBIT 31.1
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended March 31, 2018 of CSW Industrials, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purpose in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: May 30, 2018
/s/ Joseph B. Armes
Joseph B. Armes
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Greggory W. Branning, certify that:
EXHIBIT 31.2
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended March 31, 2018 of CSW Industrials, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purpose in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: May 30, 2018
/s/ Greggory W. Branning
Greggory W. Branning
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
I, Joseph B. Armes, Chief Executive Officer of CSW Industrials, Inc. (the “Company”), certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) the Annual Report on Form 10-K of the Company for the fiscal year ended March 31, 2018, as filed with the
Securities and Exchange Commission on the date hereof (the “Annual Report”), fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Annual Report fairly presents, in all material respects, the consolidated financial
condition and results of operations of the Company.
Date: May 30, 2018
/s/ Joseph B. Armes
Joseph B. Armes
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
I, Greggory W. Branning, Chief Financial Officer of CSW Industrials, Inc. (the “Company”), certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) the Annual Report on Form 10-K of the Company for the fiscal year ended March 31, 2018, as filed with the
Securities and Exchange Commission on the date hereof (the “Annual Report”), fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Annual Report fairly presents, in all material respects, the consolidated financial
condition and results of operations of the Company.
Date: May 30, 2018
/s/ Greggory W. Branning
Greggory W. Branning
Chief Financial Officer
(Principal Financial Officer)
(This page intentionally left blank)
(This page intentionally left blank)
(This page intentionally left blank)
Corporate
Information
BOARD OF DIRECTORS
Joseph B. Armes
Chairman, Chief E xecutive Of f icer and President
Michael R. Gambrell
Former E xecutive Vice President of Dow Chemical
TR ANSFER AGENT
AST
Brooklyn, New York
T (800) 937-5449
w w w.amstock.com
Terry L. Johnston
E xecutive Vice President and Chief Operating Of f icer of the
STOCK LISTING
Commercial Segment of Lennox International, Inc.
NASDAQ Symbol: CSWI
Linda A. Livingstone, Ph.D.
President of Baylor Universit y
William F. Quinn
Former E xecutive Chairman and Founder of
American Beacon Advisors
INDEPENDENT PUBLIC ACCOUNTANTS
Grant Thornton LLP
Dallas, Texas
Robert M. Swartz
Former E xecutive Vice President and Chief Operating Of f icer
CONTACT INFORMATION
CSW Industrials, Inc.
5420 Lyndon B. Johnson Freeway
Suite 500
Dallas, Texas 75240
T (214) 884-3777
F (214) 279-7101
w w w.cswindustrials.com
ANNUAL MEETING
August 14, 2018
Hilton Dallas Lincoln Centre
5410 Lyndon B. Johnson Freeway
Dallas, Texas 75240
of Glazer ’s Inc.
J. Kent Sweezy
Founding Par tner of Turnbridge Capital, LLC
SENIOR LEADERSHIP
Joseph B. Armes*
Chairman, Chief E xecutive Of f icer and President
Greggory W. Branning*
E xecutive Vice President and Chief Financial Of f icer
Luke E. Alverson*
Senior Vice President ,
General Counsel and Secretar y
Craig J. Foster
Senior Vice President , General Manager
Specialt y Chemicals
Don J. Sullivan
Senior Vice President , General Manager
Industrial Produc t s
*Denotes executive of f icer
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CSW Industrials, Inc.
5420 Lyndon B. Johnson Freeway
Suite 500
Dallas, Texas 75240
T (214) 884-3777
www.cswindustrials.com