Resilient
Annual Report
2022 CSW Industrials is a diversified industrial growth company with industry-leading operations in three
segments: Contractor Solutions, Engineered Building Solutions, and Specialized Reliability Solutions.
CSWI provides niche, value-added products with two essential commonalities: performance and reliability.
The primary end markets we serve with our well-known brands include: HVAC/R, plumbing, general
industrial, architecturally-specified building products, energy, mining, and rail.
Demonstrating resilience and delivering exceptional
performance despite unprecedented challenges.
+49.4%
+46.0%
Year-Over-Year Increase in Revenue
FY 2022: $626.4 million
Year-Over-Year Increase in Adjusted EBITA
FY 2022: $133.3 million
+39.2%
Year-Over-Year Increase in Adjusted Operating Income
FY 2022: $101.3 million
+30.3%
Year-Over-Year Increase in Adjusted Earnings Per Share
FY 2022: $4.39
Revenue
Revenue
(in millions)
(in millions)
2022
2022
2021
2021
2020
2020
$626.4
$626.4
$419.2
$419.2
$385.9
$385.9
$101.3
$101.3
Adjusted Operating Income
(in millions)
Adjusted Operating Income
(in millions)
2022
2022
2021
2021
2020
2020
Operating Cash Flow
(in millions)
Operating Cash Flow
(in millions)
2022
2022
2021
2021
2020
2020
$72.8
$72.8
$66.4
$66.4
$69.1
$69.1
$66.2
$66.2
$71.4
$71.4
Total Shareholder Return
Total Shareholder Return
%
150
%
150
120
120
90
90
60
60
30
30
0
0
-30
-30
109.3%
109.3%
35.5%
24.9%
35.5%
24.9%
2019
2019
2020
2020
2021
2021
2022
2022
CSWI
CSWI
RusseII 2000
RusseII 2000
Custom Peer Group
Custom Peer Group
Dear CSWI
Stakeholders,
A Year Like No Other
I am pleased to report that CSW Industrials not only persevered through
multiple challenges but also flourished in fiscal 2022, thanks to the solid
financial foundation we’ve established, the deliberate business practices we’ve
followed, and the strategic plan we’ve executed. Despite a persistent global
pandemic and supply-chain upheaval, we continued our successful track
record of delivering exceptional performance and, for the second consecutive
year, registered record revenue, EBITDA, and earnings per share. Specifically:
z Revenue of $626 million, up nearly 50% over the prior fiscal year. Of the
$207 million in total revenue growth, half resulted from organic growth, with
the remaining half coming from our TRUaire and Shoemaker acquisitions.
z EBITDA of $133 million, or 46% growth over the prior fiscal year.
z EPS of $4.39, a 30% increase over the prior fiscal year.
In addition, we increased our quarterly cash dividend by 13%, to $0.17 per
share. This was our second consecutive annual dividend increase and indicates
confidence in our outlook.
We can attribute our resilience, evidenced by these outstanding accomplishments,
to our diversified business model, disciplined capital allocation, and commitment
to operational excellence, which drove impressive profitability despite a backdrop
of global disruption and turmoil.
Joseph B. Armes
Chairman, CEO
and President
Increased Sales Across All Segments
Our products remain in high demand, and our team continues working hard to meet this demand. As compared to the prior year, sales
increased in all segments driven by volume growth and price increases.
Our Contractor Solutions segment once again set the standard. Our Contractor Solutions team, led by Executive Vice President and
General Manager Don Sullivan, deserves recognition for exceeding our expectations again this year while successfully integrating
acquisitions and managing significant challenges presented by inflation and supply-chain constraints.
Our Engineered Building Solutions and Specialized Reliability Solutions segments also registered significant gains, and we remain
confident in the impressive growth trajectory of those businesses.
Capital Allocation Strategy
We executed on all aspects of our capital allocation strategy during this past fiscal year, investing $44 million with the Shoemaker
Manufacturing acquisition and $16 million in capital expenditures. We returned $23.5 million of cash to our shareholders through
share repurchases and dividends. Subsequent to fiscal year end, our share-repurchase program remains active, and we increased
our quarterly cash dividend by 13%, to $0.17 per share.
Our acquisition strategy remains an important component of our growth plan, with many of our best ideas generated organically from
within our organization. Our capital allocation decisions remain focused on maximizing shareholder value on a risk-adjusted-returns
basis. This disciplined approach favors our current platforms, serving the same customers and end markets, through our extensive
distribution channels. In addition, the strength of our balance sheet provides ample capacity to act decisively and quickly to make
acquisitions as opportunities arise.
Capital expenditures have been focused on enterprise resource planning systems, new product introductions, capacity expansion,
continuous improvement, automation, as well as safety and compliance initiatives. Repurchases of shares under our share-repurchase
programs during fiscal 2021 and 2022 were $14 million, or 126,000 shares, and $7 million, or 115,000 shares, respectively.
A Letter from our Chairman, CEO and President
In December 2021, we completed the acquisition of Shoemaker
Manufacturing, representing our seventh acquisition since the
Company’s 2015 public debut and bringing our aggregate cash
investment in acquisitions to approximately $405 million. The
Shoemaker acquisition further expanded our presence in the
attractive HVAC/R accessory end market, with a domestically-
manufactured product portfolio of grilles, registers, and diffusers
that complements our TRUaire product offerings. We look
forward to having the first full year of its results included our
Contractor Solutions segment in fiscal 2023.
We also completed the formal integration of TRUaire into
RectorSeal. This critical step improves our ability to stock
RectorSeal products in all seven distribution centers across the
United States, providing geographic proximity to better serve our
customers, significantly enhancing our customer-service model.
Our position as a reliable partner for our customers has never
been stronger.
Culture and Corporate Sustainability
We are more committed than ever to treating our team members
well and enhancing our employee-centric culture. Two years ago,
in fiscal 2021, the paramount importance we placed on keeping
employees healthy was successfully demonstrated through the
initiation of COVID-19 protocols for manufacturing team members
and remote-work flexibility for our non-manufacturing employees.
In addition to preserving CSWI team members’ health, we
protected their livelihoods by steadfastly avoiding reductions in
force or pay and maintaining all benefits and profit-sharing plans
without interruption. As the pandemic stretched into fiscal 2022, it
became apparent to team members – as reflected by highly positive
employee engagement survey results – that Company efforts on
their behalf weren’t just temporary but were a demonstration
of our culture and core values of Integrity, Respect, Excellence,
Stewardship, Citizenship, Accountability, and Teamwork. The fact
that this engaged, motivated workforce helped us achieve record
profitability amid massive uncertainty suggests that we’re on the
right track, and this bodes well as we face future challenges.
Providing for a safe, secure, and dignified retirement, along with
our competitive profit-sharing programs, are two ways we strive
to live out our core values and appropriately reward our team
members. CSWI’s domestic employees are eligible to participate in
our Employee Stock Ownership Plan (ESOP), thereby establishing a
direct alignment of interests with our shareholders. Our profit-sharing
programs in fiscal 2022 included a 6% ESOP contribution and
3% percent discretionary 401(k) contribution, which is in addition
to our standard 6% 401(k) dollar-for-dollar participant match. We
believe that these programs help us maintain turnover rates lower
than industry averages and position us as a career destination that
attracts and retains quality talent. In fact, our recently completed
annual retention review revealed that our company-wide retention
rate exceeds the manufacturing-industry averages.
Looking Forward
As we reflect on the past two years, we have been reminded of
the cumulative effect of many decisions that have positioned us
for success during difficult times, and we have every intention of
building on this momentum. By treating our employees well, we
maintained dedicated, well-trained teams that diligently produced
and shipped products that our customers needed during a period
of great uncertainty. In conjunction with these efforts, we invested
in inventory to better serve our customers as a resilient and reliable
business partner. When demand for our innovative, value-added
products accelerated, our team managed our supply chains
effectively and diversified our sourcing to ensure that we had
product on the shelves and available to our customers.
Entering fiscal 2023, all these factors position CSWI particularly
well to deliver another exceptional year of top and bottom-line
growth, and to provide compelling returns to our shareholders.
As we look ahead, we are keeping a close eye on the headwinds
caused by inflation, a tight labor market, and logistics challenges.
However, we believe that our strong customer relationships,
enviable distribution channels, best-in-class products and brands
with a hard-earned reputation for quality and innovation, attractive
and diverse end market exposure, and a healthy balance sheet
to execute on growth opportunities gives us every reason to be
enthusiastic about the future.
In a year like no other, I am proud of my fellow CSWI team
members globally and would like to personally thank them for
their accomplishments in the face of unprecedented adversity.
And on behalf of all my colleagues and fellow stockholders at CSW
Industrials, I thank you for your continued support of our company.
Very truly yours,
vi
| 2022 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2022
OR
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:
Title of each class
Common Stock, par value $0.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Trading symbol (s)
CSWI
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
YES
NO
� if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
� if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
� 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.
� whether the registrant has submitted electronically every Interactive Data File required to be submitted
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 such files).
� 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.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if smaller
reporting company)
Smaller reporting company
Emerging growth company
� If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.
� whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
� whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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 30, 2021, the last business day of our most recently completed second
fiscal quarter was approximately $1,984.0 million.
As of May 12, 2022, the latest practicable date, 15,676,790 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.
Table of Contents
Part I
Item 1: Business
Item 1A: Risk Factors
Item 1B: Unresolved Staff Comments
Item 2: Properties
Item 3:
Legal Proceedings
Item 4: Mine Safety Disclosures
Part II
Item 5:
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Item 6:
[Reserved]
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
1
1
11
20
21
21
21
22
22
23
24
36
37
79
80
82
83
83
83
83
83
83
84
84
86
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, 2022
(“Annual Report”) to “our 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 a strategic
focus on providing niche, value-added products in the end
markets we serve. We operate in three business segments:
Contractor Solutions, Engineered Building Solutions and
Specialized Reliability Solutions. Our products include mechanical
products for heating, ventilation, air conditioning and refrigeration
(“HVAC/R”), plumbing products, grilles, registers and diffusers
(“GRD”), building safety solutions and high-performance specialty
lubricants and sealants. End markets that we serve include
HVAC/R, architecturally-specified building products, plumbing,
energy, rail, mining and general industrial. Our manufacturing
operations are concentrated in the United States (“U.S.”), Canada
and Vietnam, and we have distribution operations in the U.S.,
Australia, Canada and the United Kingdom (“U.K.”). Our products
are sold directly to end users or through designated channels in
over 100 countries around the world, primarily including Australia,
Canada, the U.K. and the U.S.
Drawing on our innovative and proven technologies, we seek to
deliver solutions primarily to our professional end-use customers
that place a premium on superior performance and reliability. We
believe our brands are well-known in the specific end markets
we serve and have a reputation for high quality. We rely on both
organic growth and inorganic growth through acquisitions to
provide an increasingly broad portfolio of performance optimizing
solutions that meet our customers’ ever-changing needs. We have
a successful record of making attractive, synergistic acquisitions
that support expansion of our broad portfolio of solutions, and we
remain focused on identifying additional acquisition opportunities
in our core end markets.
Through our operating companies, we have a well-established
legacy of providing high quality products accompanied by
dependable service and attention to customer satisfaction. We
also have a long history of innovation, through which we have
developed a robust line of products to solve our customers’
specific challenges. These products are distributed through an
extensive wholesale distribution network serving the HVAC/R,
architecturally-specified buildings products, plumbing, general
industrial, energy, rail and mining end markets. Our desire to
develop solutions for our professional end-use customers,
combined with the differentiated nature of our niche product
offerings, drives loyalty to our brands.
CSWI is a Delaware corporation and was incorporated in 2014
in anticipation of CSWI’s separation from Capital Southwest
Corporation (“Capital Southwest”). Our well-established operating
companies provide a collective history that spans more than a
century. The separation was executed on September 30, 2015
through a pro-rata share distribution of all the then outstanding
shares of common stock of CSWI to the holders of common
stock of Capital Southwest (the “Share Distribution”). Since the
separation, CSWI has been an independent, publicly-traded
company, listed on the Nasdaq Global Select Market.
| 2022 Annual Report
1
Part I
Item 1 Business
Business Segments
Beginning with the quarter ended June 30, 2021, we revised our segment structure to align with how our chief operating decision
maker (who was determined to be our Chief Executive Officer) views our business, assesses performance and allocates resources to
our business components. Effective April 1, 2021, following the completion of various strategic transactions including the acquisition
of T.A. Industries, Inc. (“TRUaire”) and the formation of a joint venture owned by Whitmore Manufacturing, LLC (“Whitmore”), a
wholly-owned subsidiary of CSWI, and Pennzoil-Quaker State Company dba SOPUS Products (“Shell”), a wholly-owned subsidiary of
Shell Oil Company that comprises of Shell’s U.S. lubricants business (“Whitmore JV”), our business is organized into three reportable
segments: Contractor Solutions, Engineered Building Solutions and Specialized Reliability Solutions.
The table below provides an overview of these business segments. For financial information regarding our segments, see Note 21 to
our consolidated financial statements included in Item 8 Financial Statements and Supplementary Data (“Item 8”) of this Annual Report.
Business Segment
Principal Product Categories
Key End Use Markets
Representative Industrial Brands
Contractor Solutions
z Cements
z Diffusers
z Grilles
z Registers
z Solvents
z Thread sealants
z Traps
z Vents
z HVAC/R
z Plumbing
z General Industrial
z Architecturally-Specified Building
Products
Engineered Building
Solutions
z Architectural railings and associated
z Architecturally-Specified Building
services
Products
z Fire and smoke protection solutions
z Pre-engineered and custom
architectural building components
Specialized Reliability
Solutions
z Compounds
z Contamination control
z Industrial maintenance and repairs
z Lubricants
z Lubricant management products
z Operations solutions
z Sealants
z Energy
z General Industrial
z Mining
z Railing
2
| 2022 Annual Report
Part I
Item 1 Business
Contractor Solutions
Our Contractor Solutions segment manufactures efficiency and
performance enhancing products predominantly for residential
and commercial HVAC/R and plumbing applications, which are
designed primarily for professional end -use customers. The
segment is compromised primarily of our RectorSeal, TRUaire
and Shoemaker operating companies and provides a wide
range of products designed to create efficiency and expediency
for professional end-user customers, while delivering home and
building owners with trusted solutions. Our Contractor Solutions
segment is strategically positioned to grow in each market served
by leveraging our sales channels and distribution networks.
HVAC/R professional end-user customers ask for our products by
name, and for generations, professional plumbers have been using
our industry-leading solutions. We manufacture the majority of our
mechanical and chemical products internally and 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 key product types and brand names are shown below:
Product Types
z condensate removal pumps and equipment mounting brackets
z condensate switches, traps and pans
z decorative roof drain downspout nozzles
z drain waste and vent systems mechanical products
z ductless mini-split systems installation support tools and accessories
z equipment pads
z grilles, registers and diffusers
z line set covers
z solvents, cements, traps, vents, and thread sealants
z tamper resistant locking refrigerant caps
z wire pulling head tools
Brand Names
z AC Leak Freeze®
z AquaGuard®
z Aspen® Pumps
z Calci-Free®
z Clean Check®
z DesolvTM
z EZ Trap®
z Fortress®
z Goliath®
z G-O-N®
z Nokorde®
z Novent®
z RectorSeal® No. 5
z Safe-T-Switch®
z Shoemaker ManufacturingTM
z Slimduct®
z SureSeal®
z T Plus 2®
z TRUaire®
New Product Development
Customer experience is a core competency in our Contractor
Solutions segment. We gather “voice of the customer” market
research through organized focus groups and online surveys, as
well as through less formal channels. Ideas for new products or
enhancements to existing products are also generated by our
relationships with end users, independent sales representatives,
distributors and our internal sales and marketing team. We also
actively monitor the competitive landscape. We develop new
products and modify existing products in our research and
development (“R&D”) lab in Houston, Texas.
Competition
Our competition in the Contractor Solutions segment is varied.
Competitors range from small entrepreneurial companies with
a single product, to large multinational original equipment
manufacturers (“OEMs”). In the products serving the HVAC/R
end market category, we compete with Diversitech, Dura-Vent/
Hart & Cooley, Intermatic, Nu-Calgon, Little Giant, Supco and
others. In the products serving the plumbing end market category,
we compete with IPS, J.R. Smith, Mainline, Oatey and others.
Most of our products are sold through distribution channels, and
we compete in this channel based on breadth of product line,
customer service and pricing.
Customers
Our primary customers are wholesalers and distributors in the
HVAC/R and plumbing end markets. Some of these are single
location distributors, the majority are regional or national with
hundreds of locations. These products are generally sold
domestically; however, a small portion is sold internationally
through similar channels, and a small number of OEMs purchase
these products directly.
Seasonality
A significant portion of our products are sold into the HVAC/R
market, which is seasonal by nature. While products are sold
throughout the year, revenues tend to peak during the spring
and summer months.
| 2022 Annual Report
3
Part I
Item 1 Business
Engineered Building Solutions
Our Engineered Building Solutions segment provides primarily
code-driven, life-safety products that are engineered to provide
aesthetically-pleasing solutions for the construction, refurbishment
and modernization of commercial, institutional and multi-family
residential buildings. This segment is comprised primarily of
our Balco, Greco, and Smoke Guard operating companies.
Our Engineered Building Solutions segment is a market leader
in providing unique solutions to architects and contractors that
meet code requirements, while adding functionality, performance,
and aesthetically-pleasing designs. The safety and sustainability
of our engineered building products enables them to be easily
incorporated into the Leadership in Energy and Environmental
Design (“LEED”) building market.
Our key product types and brand names are shown below:
Product Types
z fire and smoke protection solutions
z fire stopping solutions
z pre-engineered and custom architectural building components
z architectural railings and metals
Brand Names
z Balco® Expansion Joint Systems
z Balco® IllumiTreadTM
z Balco® MetaflexProTM
z BlazeSealTM
z Greco Architectural Railings & Metals
z Metacaulk®
z Smoke Guard Elevator Protection
z Smoke Guard Large Curtain Solutions
z Smoke Guard Perimeter Protection
New Product Development
Strategic investment in new product innovation, technical
advancement, and customer driven product development
enhances demand for our products and enriches relationships
with end-users. Development teams are located in Boise, Idaho;
Hudson, Florida; Wichita, Kansas and Windsor Ontario, Canada.
Competition
Our products generally demand premium valuation. We compete
primarily on the basis of competitive lead times, superior customer
specification levels and customer-centric service, which are the
key drivers of our customers’ buying decisions. In the fire and
smoke protection product category, we compete with McKeon,
US Smoke & Fire, Won Door and others, typically based on
product innovation, knowledge of building codes and customer
service. In the architecturally building component, we compete
primarily with Construction Specialties, EMSEAL and Inpro on
the basis of product innovation, price and driving architectural
specifications.
Customers
Fire and smoke protection products are sold through internal sales
and installation teams, as well as local building products distributors
that also perform installations and service. Architecturally building
components are primarily sold through independent sales
representatives and building product distributors to general
contractors or sub-contractors. Engineered Building Solutions’
end use customers include multi-family residential buildings,
educational facilities or institutions, warehouses, construction
companies, plant maintenance customers, building contractors
and repair service companies.
Specialized Reliability Solutions
Our Specialized Reliability Solutions segment provides products
for increasing reliability, efficiency, performance and lifespan of
industrial assets and solving equipment maintenance challenges.
The segment is comprised primarily of our Whitmore operating
company and the Whitmore JV. Through our commercial team
and supply chain partners, our Specialized Reliability Solutions
segment delivers products that protect assets in the most
demanding environments and extreme conditions. Our customers
depend on their mission-critical equipment, and thus they depend
on our trusted specialty lubricants, compounds, sealants,
desiccant breather filtration, and lubrication management systems.
Our Specialized Reliability Solutions segment manufactures and
supplies highly specialized consumables that impart or enhance
properties such as lubricity, anti-seize qualities, friction, sealing
and heat control. These highly-specialized products 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. These products enhance, repair
or condition the internal working systems of industrial systems
and are critical to ensuring safe, efficient and effective long-term
operational integrity. The Specialized Reliability Solutions 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
identified problems.
4
| 2022 Annual Report
Our key product types and brand names by the end markets we serve are shown below:
Part I
Item 1 Business
Product Types
z anti-seize products
z contamination control
z lubricants and lubricant management products
z rail friction modifiers
z sealants
Brand Names
z Air Sentry®
z Jet-Lube® Deacon®
z Jet-Lube® Extreme®
z Jet-Lube® Kopr-Kote®
z Jet-Lube® NCS-30® ECFTM
z Jet-Lube® Run-N-Seal® ECFTM
z OilSafe®
z Whitmore® Envirolube® XE Extreme
z Whitmore® Gearmate® 1000 ICT
z Whitmore® Matrix®
z Whitmore® AccuTrack®
z Whitmore® BioRail®
z Whitmore® RailArmor®
z Whitmore® TOR Armor®
New Product Development
We develop relationships with end-users and channel partners to
understand a multitude of operating conditions where technical
innovation or enhancement is needed. For example, these
relationships have generated innovation in the areas of modifying
existing lubrication products to operate in arctic conditions or
modifying an existing product for use in an application where
saltwater may be present. The development team is located in
Rockwall, Texas and is actively targeting additional end markets
for product use and penetration.
Competition
In general, our products demand premium valuation, rather than
commodity products, and competitors tend to be varied and
include global, regional and local companies that may be large or
small. We compete primarily on the basis of product differentiation,
superior performance and quality and customer-centric service.
When compared to many commodity consumables, the product
sales cycle is often long, typically resulting in quantified, verified
and repeat product performance being the key driver of buying
Discontinued Operations
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”). As a result, we reclassified
the assets comprising that business to assets held-for-sale, and
made a corresponding adjustment to our consolidated statements
of operations to reflect discontinued operations for all periods
presented. During the quarter ended September 30, 2018, we
decisions, rather than price. As these products protect and
enhance the operation of large capital equipment, qualification
is based on the proof of value in application, resulting in a high
changeover risk barrier. Typical competitors include Exxon-Mobil,
Fuchs, Kleuber, Shell and South Coast Products.
Customers
Specialized Reliability Solutions products are primarily sold
through value-added distribution partners, as well as maintenance
and repair operations or catalog channels. Our Specialized
Reliability Solutions’ organization provides both market-specific
and product line specific training to both the distribution partners
and potential end users. Our specialists often visit end users
with distribution partners to advise on critical application issues,
which enhances our ability to both “pull” demand from the
end-user and “push” demand to distributor partners. Specialized
Reliability Solutions’ customers include petrochemical facilities,
industrial manufacturers, construction companies, utilities, plant
maintenance customers, building contractors and rail and mining
operators.
received an aggregate of $6.9 million for the sale of assets that
related to our Coatings business in multiple transactions. During
the quarter ended March 31, 2020, we received $1.5 million for
the sale of the last remaining real property owned by our former
Coatings business. The discontinued operations have had no
activities since the year ended March 31, 2020.
| 2022 Annual Report
5
Part I
Item 1 Business
Our Competitive Strengths
As discussed in this section, we believe we have a variety of competitive strengths.
Broad Portfolio of Industry Leading Products and Solutions
In our targeted end markets, we have leading industry positions
among our broad portfolio of products. We believe our products
and solutions are differentiated from those of our competitors
by superior performance, quality and total value delivered to
customers. For example, RectorSeal No. 5® pipe thread sealant
is widely regarded as an industry standard for thread sealants
for HVAC/R, plumbing and electrical configurations. Additionally,
we believe Kopr-Kote® anti-seize lubricant is recognized as the
anti-seize compound of choice for use in oil and gas drilling
operations, where it is requested by name.
Organic Revenue Growth Platform and Optimizing Performance
We focus on developing our presence in end markets with
strong growth trends, continuously evaluating the potential
uses of existing products to broaden end market penetration.
We historically have a loyal customer base that recognizes the
performance results and quality of our products and solutions.
Further, our customer base is diverse. For the year ended
March 31, 2022, no single customer represented 10% or more
of our net revenues.
These factors have enabled us to generate strong organic
revenue growth performance, while remaining focused on strong
profitability through optimizing our manufacturing processes.
This effort is supported by a culture of continuous improvement,
looking to refine processes in all of our manufacturing facilities to
reduce manufacturing costs, increase production capacity and
improve product quality. Additionally, we often evaluate strategic
investments to drive transformational changes in our manufacturing
processes. For example, in all 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.
Diverse Sales and Distribution Channels
Many of our products are sold through full-service distribution
networks where product knowledge and customer satisfaction
are key success factors. We primarily market through an
international network of both internal and third-party sales
representatives that call on our wholesale distributors, contractors
and direct customers. The strong, long-term relationships we have
developed with our wholesale distribution partners and exclusive
dealers allow us to successfully introduce organically developed
products and acquired products. In addition, our extensive
distribution network allows us to reach and serve niche end
markets that provide organic growth opportunities and a source
of opportunities for our acquisition strategy.
Inorganic Growth Investment with Proven Track Record
We believe our experience in identifying, completing and
integrating acquisitions is one of our core competitive strengths,
as evidenced by our portfolio of 7 acquisitions completed since
the inception of the Company. Historically, we have pursued
product-line acquisitions with relatively low integration risk that
have the potential to benefit from our extensive distribution
network and manufacturing efficiencies. More recently, we began
targeting commercially-proven products and solutions that are
attractive in our existing end markets where we can drive revenue
growth, improved profitability and increased cash flow.
commercial and residential markets, and expands CSWI’s HVAC/R
product offering and regional exposure in the northwest U.S. In the
third quarter of the fiscal year ended March 31, 2021, we acquired
T.A. Industries, Inc. (“TRUaire”), a leading manufacturer of GRD
for the residential and commercial HVAC/R end market, based in
Santa Fe Springs, California. In early fiscal year 2020, we acquired
Petersen Metals, Inc. (“Petersen”), a designer, manufacturer and
installer of engineered railings and safety systems for institutional
and commercial structures in the Southeast U.S. We invested
over $440 million for all three acquisitions.
In the third quarter of the fiscal year ended March 31, 2022, we
acquired Shoemaker Manufacturing (“Shoemaker”), based in Cle
Elum, Washington, which offers high-quality customizable GRD for
6
| 2022 Annual Report
Part I
Item 1 Business
Culture of Product Enhancement and Customer-Centric Solutions
Our highly-trained and specialized personnel work closely
with our customers, industry experts and research partners to
continuously improve our existing products to meet evolving
customer and end market requirements. We focus on product
enhancements and product line extensions that are designed
to meet the specific application needs of our professional end
use customers. Customer-centric solutions underpin our strong
industrial brands and reputation for high quality products, in turn
leading us to realize improved customer retention and loyalty.
Further, our ability to meet the needs of high-value, niche end
markets with customized solutions that leverage our existing
products has enabled us to differentiate ourselves from larger
competitors that may not be as willing or able to respond quickly
to evolving customer demands.
Amid the novel coronavirus (“COVID-19”) pandemic, we worked
closely with our customers to provide them with the products and
services that they need to continue conducting their operations.
This includes ensuring that our supply chains are secure, that we
maintain an adequate level of inventory to meet our customers’
needs and that we remain able to operate our facilities at the levels
required to meet customer demand.
Our Growth Strategy
We are focused on creating long-term stockholder value by increasing our revenue, profitability and cash flow. Identifying strategic
end markets yielding sustainable growth, expanding market share through our new product development and targeted acquisitions
are all components of our strategy.
We Leverage Existing Customer Relationships and Products and Solutions
We expect to drive revenue growth by leveraging our reputation
for providing high quality products to our broad customer
base. Our team of sales representatives, engineers and other
technical personnel continues to proactively collaborate with our
distributors and professional end user customers 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 three
business segments, thereby driving organic growth.
We Innovate New Products to Accelerate Organic Growth
The collaborative relationships and open feedback channels we
have with our distributors and end 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 team
of research, 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.
We Invest in Focused Acquisitions that Leverage our Distribution Channels
While we are focused on new product development, improving
our existing products and penetrating new markets with these
products, we expect to continue to identify and execute
acquisitions that will broaden our portfolio of products and
offer attractive risk-adjusted returns. We primarily focus on
commercially proven products and solutions that would benefit
from a broader distribution network and are attractive to customers
in our targeted end markets. Once acquired, we strive to utilize
our extensive distribution networks to increase revenue by selling
those products and solutions to our diversified customer base.
Raw Materials and Suppliers
Our products are manufactured using various raw materials,
including base oils, copper flake, steel, aluminum, polyvinyl
chloride and tetra-hydrofuran. These raw materials are available
from numerous sources, and we do not depend on a single
source of supply for any significant amount of raw materials.
Since the onset of the COVID-19 pandemic, many of our suppliers
have experienced varying production and shipping delays related
to the pandemic. Additionally, global supply chain and logistics
constraints continue to affect global markets and caused additional
supply chain headwinds in the year ended March 31, 2022. These
conditions have made it more difficult to manufacture and ship our
products to customers and have also led to an increase in freight
costs. We continuously monitor the business conditions of our
suppliers to manage competitive market conditions and to avoid
potential supply disruptions wherever possible.
| 2022 Annual Report
7
Part I
Item 1 Business
Intellectual Property
We own and maintain a substantial portfolio of trademarks and
patents relating to the names and designs of our products. We
consider our trademarks and patents to be valuable assets.
In addition, our pool of proprietary information, consisting of
know-how and trade secrets related to the design, manufacture
and operation of our products, is considered particularly valuable.
Accordingly, we take proactive measures to protect 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 patents generally expire 10 to 20 years from the dates they
were filed. Our patents expire from time to time, but we do not
believe that the expiration of any individual patent will have a
material adverse impact on our business, financial condition or
results of operations.
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. The level of control generally depends on the nature
of the goods and services in question. Where controls apply,
we typically need an export license or authorization (either on
a per-product or per transaction basis) or the transaction must
qualify for a license exception or the equivalent. In certain cases
corresponding reporting requirements may apply. See Note 21
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.
Human Capital Management
We believe that our employees are our most valuable assets
and that our skilled, engaged workforce provides us with a
competitive advantage. As part of our commitment to our
employees, we provide a safe work environment, ongoing training
and professional development, competitive compensation and a
generous health and retirement benefits package that includes an
employee stock ownership plan (“ESOP”), a defined contribution
plan (“401(k)”), paid time off, health and wellness care and college
tuition reimbursement.
up of approximately 400 salaried employees and 2,000 hourly
employees. Of these employees, approximately 1.6% of our
U.S. workforce is represented by unions. We also have an
employee organization in Vietnam. We believe that relations with
our employees throughout our operations are generally positive,
including those employees represented by unions or employee
organizations. No unionized facility accounted for more than 10%
of our consolidated revenues for the fiscal year ended March 31,
2022.
As of March 31, 2022, we employed approximately 2,400
individuals within our continuing operations globally. Regionally,
approximately 1,100 of our employees are in North America,
approximately 1,300 are in Asia Pacific, and approximately 10
are in Europe, the Middle East and Africa. Our workforce is made
As a result of maintaining a consistent focus on our employee-
centric culture, the retention rate (excluding retirements) for our
high performance talent in the fiscal year ended March 31, 2022
was 93%. Our company-wide (all employees) voluntary retention
rate (excluding retirements) was 79%.
Workplace Health and Safety
We are committed to creating and maintaining a safe, healthy
working environment, and we have developed a health and
safety program that focuses on implementing policies and
training programs to ensure that all employees understand this
commitment. Our health and safety strategies are consistently
reviewed and updated as changes occur in our business, and
employees are empowered to identify and report safety concerns
and take corrective actions. Safety awareness and employee
engagement programs have been implemented at the Company’s
facilities and have generated meaningful reductions in workplace
safety incidents. For the fiscal year ended March 31, 2022, our
total recordable incident rate (“TRIR”) for employees was 1.2, a
reduction of 0.5 from the prior year.
8
| 2022 Annual Report
The COVID-19 pandemic has underscored the importance of
keeping our employees safe and healthy. Our health and safety
focus is evident in our response to the COVID-19 pandemic and
includes adding work from home flexibility, encouraging those
who are sick or have symptoms to stay home, increasing cleaning
protocols across all locations, regular communications regarding
health and safety protocols and procedures, establishing physical
distancing and personal protective equipment procedures for
employees, providing masks and cleaning supplies, implementing
protocols to address actual and suspected COVID-19 cases
and potential exposure and limiting non-essential domestic and
international travel for all employees.
Part I
Item 1 Business
Our core values of integrity, respect, excellence, stewardship,
citizenship, accountability and teamwork form the foundation
for our decentralized, entrepreneurial culture, and our Code of
Business Conduct represents our shared commitment to living
out these core values with the highest level of ethical conduct. All
our employees across the globe, including our executive officers,
are required to abide by our Code of Business Conduct to ensure
that our business is conducted in a consistently legal and ethical
manner. Our Code of Business Conduct covers many topics,
including conflicts of interest, anticorruption, financial reporting,
confidentiality, insider trading, antitrust and competition law,
cybersecurity and information security, appropriate use of social
media, and respect in the workplace. Every year, through online
and in personal training, our employees receive training on all
topics addressed in our Code of Business Conduct, and are
required to certify that they will comply with our Code.
Company is making in the health and well-being of our employees
in areas such as leadership, organizational foundations, policy and
environment, program implementation and participation. As part
of our employee wellness program, and in an effort to encourage
employees to participate, we provide financial incentives to our
employees who choose to participate. Our retirement savings
program includes a 401(k) plan plus an ESOP plan. Our 401(k)
plan has a 96% participation rate, which we believe is significantly
higher than recognized industry benchmarks. Current and
former domestic employees who have participated in our ESOP
collectively own approximately 4% of our company. We believe
this ESOP strongly aligns the interests of our employees with
those of our stockholders. In addition, we provide employees
with opportunities to earn bonuses through incentives designed
to reward perfect attendance, employee referrals and suggestions
that increase employee safety or result in efficiencies and savings.
We believe that the compensation and benefits, and other
components of our total rewards program we provided to our
employees, give us a competitive edge and differentiate us
in a challenging labor market. We seek to recruit and retain
high performing talent and provide safe, secure and dignified
retirements for our employees.
Training, Development and Ethics
Consistent with our belief that our employees are our most
valuable assets, developing our people is a critical aspect of
our culture. Successful execution of the Company’s strategy
depends on attracting and retaining highly qualified individuals.
We provide developmental opportunities to help our employees
build the skills necessary to reach their career goals, including
on-the-job training, online learning, professional memberships,
and leadership and management training. To help our employees
see how their efforts contribute to our Company’s overall success,
we utilize a robust performance management process and provide
regular feedback to increase engagement and maximize talent
development efforts. We have also established various talent
development programs for current and future leaders during the
critical stages of their careers.
Compensation and Benefits
We strive to support both the short-term and long-term well-being
of our employees. This commitment extends to the communities in
which our employees live, where we are positive, active corporate
citizens. A key element of employee well-being is providing pay
and benefits for our employees that are competitive and equitable
based on local markets. We analyze our compensation and
benefits program annually, and make changes as necessary,
to ensure that we remain competitive and make changes as
necessary. We believe it is important to reward employees with
competitive pay and benefits to recognize professional excellence
and career progression.
As part of our comprehensive total rewards program, our
employees are eligible to participate in Company-subsidized
medical, dental, vision, life, short-term and long-term disability
insurance plans. We provide employees with a paid supplemental
life and accident insurance plan. We offer employees the
opportunity to contribute to a Flexible Spending Account and
a Health Savings Account. Our wellness plan offers a range of
programs focused on improving health awareness and well-being.
In recognition of our commitment to wellness, Cigna awarded
us their Well-Being Award for Outstanding Culture of Well-Being
in both 2020 and 2021. The award honors the difference the
Diversity and Inclusion
We are committed to promoting equal employment opportunities
in all our operations, which begins with employee recruiting
process and continues through our employees’ relationship with
the Company. We also believe that a truly innovative workforce
needs to be diverse and must leverage the skills and perspectives
of a broad range of backgrounds and experiences. It is our policy,
specifically noted in the Company’s Code of Business Conduct,
that we do not tolerate discrimination for any reason, including
without limitation race, color, religion, marital status, gender,
gender identity, veteran status, sexual orientation, disability or
perceived disability, whether or not such discrimination violates
law. It is also our policy to comply fully with all laws prohibiting
discrimination and promoting opportunity and advancement in
employment. This policy extends to all aspects of employment
opportunity including recruitment, hiring, compensation, benefits,
promotion, transfer, layoff, recall, reduction in force, termination,
retirement, placement, training and all other privileges, terms and
conditions of employment. These initiatives align with our goal of
creating a positive and dynamic workplace where all employees
can flourish. Our Board of Directors, senior leadership and human
resources team are fully aligned in their commitment to promoting
the above policies to ensure we remain an employer of choice.
| 2022 Annual Report
9
Part I
Item 1 Business
We assess employee engagement through targeted surveys,
which provide feedback on a variety of subjects including
safety, communications, diversity and inclusion, performance
management, development opportunities, respect and recognition
and management support. About 93% of our employees
participated in our fiscal 2022 survey. The survey results are
reviewed by our senior leadership and shared with our managers
and employees who collaborate to act on identified areas of
improvement to implement measures of success.
Government 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. While we
have implemented policies, practices and procedures to prevent
and mitigate risks, violations may occur in the future as a result of
human error, equipment failure or other causes. Further, we cannot
predict the nature, scope or effect of future environmental legislation
or regulatory requirements that could be imposed, or how existing
or future laws or regulations will be administered or interpreted.
Available Information
We file annual, quarterly and current reports, proxy statements
and other information with the U.S. Securities and Exchange
Commission (“SEC”). Our SEC filings are available to the public
at the SEC’s website (www.sec.gov). We also make these filings
available free of charge on our website (www.cswindustrials.com)
as soon as reasonably practicable after we electronically file those
documents with the SEC.
Also available on our website are our Corporate Governance
Guidelines and Code of Business Conduct, as well as the
charters for the Audit, Compensation & Talent Development, and
Nominating & Corporate Governance Committees of our Board of
Directors and other important governance documents. All of the
foregoing may be obtained through our website noted above and
are available in print without charge to stockholders who request
them. The information on or accessible through our website is
not incorporated by reference into, or otherwise made part of,
this Annual Report or any other document we file with or furnish
to the SEC.
10
| 2022 Annual Report
Part I
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. It is possible that additional risks and
uncertainties not presently known to us, or that we currently deem
immaterial, may also impair our business operations. Furthermore,
the impact of the COVID-19 pandemic may exacerbate the risks
discussed in this Annual Report, which could have a material
effect on the Company.
Market, Economic and Geopolitical Risks
Adverse changes in global economic
conditions, particularly in the U.S. and
including changes resulting from the effects
of the COVID-19 pandemic, could materially
adversely affect our financial position,
results of operations and cash flows.
The industries in which we operate are
highly competitive, and many of our
products are in highly competitive markets.
We may lose market share to producers of
other products that directly compete with or
that can be substituted for our products.
Our served industries and key end markets are affected by changes
in economic conditions outside our control, which can affect our
business in many ways. Any adverse occurrence, including among
others, industry slowdown, recession, public health crisis, political
instability, costly or constraining regulations, armed hostilities,
including any impacts from Russia’s invasion of the Ukraine and
economic or trade sanctions enacted to condemn or counteract
Russian aggression, terrorism, excessive inflation, including the
current high inflationary environment, prolonged disruptions in
one or more of our customers’ production schedules or labor
disturbances, could materially adversely affect our business,
financial condition, and operating results.
We are closely monitoring the potential impact on our business
resulting from the COVID-19 pandemic and the corresponding
decline in economic activity, in particular the effect it may have
on demand for our products in the short and long term. Reduced
demand may cause us and our competitors to compete on
the basis of price, which would have a negative impact on our
revenues and profitability. In turn, this could cause us to not be
able to satisfy the financial and other covenants to which we
are subject under our existing indebtedness. In particular, the
COVID-19 pandemic and subsequent supply chain disruptions
and uncertainties have had a significant negative impact on
the global economy in 2020 and 2021, including negatively
impacting the global supply chain and increasing the cost of
materials and operations.
Reduced demand may also hinder our growth plans and
otherwise delay or impede execution of our long-term strategic
plan and capital allocation strategy. If there is deterioration in the
general economy or in the industries we serve, our business,
results of operations and financial condition could be materially
adversely affected.
The industries in which we operate are highly competitive, and
we face significant competition from both large domestic and
international competitors and from smaller regional competitors.
Our competitors may improve their competitive position in our
served 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.
Certain end markets that we serve are
cyclical, which 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 manufacturing, construction,
energy and mining, 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. Our operations
and earnings may also be significantly affected by changes in oil,
gas and petrochemical prices and drilling activities, which depend
on local, regional and global events or conditions that affect
supply and demand for the relevant commodity. Additionally, the
cyclical nature of these end markets could be further exaggerated
or interrupted by the effects of the COVID-19 pandemic, which
in turn could significantly affect demand for our products.
| 2022 Annual Report
11
Part I
Item 1A Risk Factors
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.
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.
Climate change could have an adverse
effect on our business.
While we seek to mitigate our business risks associated with
climate change, we recognize that there are inherent climate
related risks wherever business is conducted, and climate change
could create physical and financial risk to our business. Physical
risks from climate change could, among other things, include an
increase in extreme weather events (such as floods, tornados or
hurricanes), limitations on availability in water and reliable energy,
and the health and well-being of individuals in communities where
we conduct business. Such events have the potential to disrupt
our business, our third-party suppliers or the businesses of our
customers, which in turn could have an adverse effect on our
financial condition and results of operations.
Climate change regulations may impact our
ability to operate at a profit and harm our
operating margins.
Existing climate change-driven environmental and social
regulations may negatively impact our business, our
customers, or our suppliers, in terms of availability and cost
of natural resources and raw materials, product demand, or
manufacturing. Furthermore, future regulations may impose new
operational burdens, require investment in additional emission
control technology, or result in unfavorable market changes. The
cost of compliance with stringent climate change regulations
could adversely affect our ability to compete with companies
in locations that are not subject to stringent climate change
regulations.
Business, Operations and Human Capital Risks
Our attempts to address evolving customer
needs require that we continually enhance
our products. Our efforts to enhance
our products may not be commercially
viable and failure to develop commercially
successful products or keep pace with our
competitors could harm our business and
results of operations.
A failure to develop commercially successful products or product
enhancements or to identify product extensions could materially
adversely affect our financial results. If our attempts to develop or
enhance products are unsuccessful, we may be unable to recover
our development costs, which could have an adverse effect on
our business and results of operations. In addition, our inability to
enhance or develop products that can meet the evolving needs
of our customers, including a failure to do so that results in our
products lagging those of new or existing competitors, could
reduce demand for our products and may have a material adverse
effect on our business and results of operations.
Our international sales and manufacturing
operations, including our use of third party
manufacturers for certain products that we
sell, involve inherent risks that could result
in harm to our business.
We have worldwide sales and manufacturing operations, including
in North America, Europe, the Middle East, Australia and Asia,
including Vietnam. We also use third parties to manufacture
certain of our products, most of which are located in jurisdictions
outside the United States, including China. Foreign sales and
manufacturing are subject to a number of risks, including political
and economic uncertainty, social unrest, sudden changes in
laws and regulations (including those enacted in response to
pandemics), ability to enforce existing or future contracts, labor
shortages and work stoppages, natural disasters, currency
exchange rate fluctuations, transportation delays or loss or
damage to products in transit, expropriation, nationalization,
compliance with foreign laws and changes in domestic and
foreign governmental policies, including the imposition of new or
increased tariffs and duties on exported and imported products.
12
| 2022 Annual Report
Part I
Item 1A Risk Factors
To the extent that we rely on independent third parties to perform
sales and manufacturing functions, we do not directly control
their activity, including product delivery schedules and quality
assurance, which 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 third party sales representative or manufacturer experiences
capacity constraints or financial difficulties, suffers damage to
its facilities, experiences power outages, natural disasters, labor
shortages or labor strikes, or any other disruption, we may not
be able to obtain alternative resources in a timely manner or
on commercially acceptable terms. Any of these factors could
negatively affect our business, results of operations and financial
condition.
Loss of key suppliers, the inability to
secure raw materials on a timely basis, the
potential impacts of global inflation, or our
inability to pass commodity price increases
on to customers could have an adverse
effect on our business.
Materials used in our manufacturing 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. We are closely monitoring
the impact of the COVID-19 pandemic and other macroeconomic
conditions on our supply chain, which is causing supply chains
for many companies to be interrupted, slowed or temporarily
rendered inoperable. In addition, supply chain shortages have
negatively impacted, and could continue to negatively impact,
our manufacturing costs and logistics costs and, in turn, our
gross margins. We may also be required to pay higher prices
for raw materials due to inflationary trends regardless of supply.
In addition, inflation can also result in higher interest rates. With
inflation, the costs of capital increases, and the purchasing power
of our and our end users’ cash resources can decline. Current
or future efforts by the government to stimulate the economy
may increase the risk of significant inflation, which could have a
direct and indirect adverse impact on our business and results
of operations.
While we believe many challenges are temporary and can be
managed in the near-term, our business and results of operations
could be materially adversely affected by prolonged or increasing
supply chain disruptions. Availability and cost of raw materials
could be affected by a number of factors, including the condition
of the energy industry and other commodity prices; inflation; 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.
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,
for any reason, including among others changing market
conditions resulting from the COVID-19 pandemic, 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.
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.
Our insurance policies may not cover, or
fully cover, us against natural disasters,
global conflicts or environmental risk.
We currently have insurance policies for certain business risks,
which include property damage, business interruption, operational
and product liability, transit, directors’ and officers’ liability,
cybersecurity, industrial accident 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, revenues, customer service and administration. In
addition, in the event that a product liability or third-party liability
claim is brought against us, we may be required to recall our
products in certain jurisdictions if they fail to meet relevant quality
| 2022 Annual Report
13
Part I
Item 1A Risk Factors
or safety standards, and we cannot guarantee that we will be
successful in making an insurance claim under our policies or
that the claimed proceeds will be sufficient to compensate the
actual damages suffered.
Should we suffer a major uninsured loss, a product liability
judgment against us or a product recall, future earnings could be
materially adversely affected. We could be required to increase our
debt or divert resources from other investments in our business
to discharge product related claims. In addition, adverse publicity
in relation to our products could have a significant effect on future
revenues, and insurance may not continue to be available at
economically acceptable premiums. As a result, our insurance
coverage may not cover the full scope and extent of claims
against us or losses that we incur.
Cybersecurity breaches and other
disruptions to our information technology
systems could compromise our information,
disrupt our operations, and expose us to
liability, which may adversely impact our
operations.
In the ordinary course of our business, we store sensitive data,
including our proprietary business information and that of our
customers, suppliers and business partners, and personally
identifiable information of our employees in our information
technology systems, including in our data centers and on our
networks. The secure processing, maintenance and transmission
of this data is critical to our operations. Despite our efforts to
secure our information systems from cyber-security attacks or
breaches, our information technology systems may be vulnerable
to attacks by hackers or breached or disrupted due to employee
error, malfeasance or other disruptions. If these technologies,
systems, products or services are damaged, cease to function
properly, are compromised due to employee or third-party
contractor error, user error, malfeasance, system errors, or other
vulnerabilities, or are subject to cybersecurity attacks, such as
those involving denial of service attacks, unauthorized access,
malicious software, or other intrusions, including by criminals,
nation states or insiders, our business may be adversely
impacted. The impacts of any such circumstances could include
production downtimes, operational delays, and other impacts
on our operations and ability to provide products and services
to our customers; compromise of confidential, proprietary or
otherwise protected information, including personal information
and customer confidential data; destruction, corruption, or theft of
data or intellectual property; manipulation, disruption, or improper
use of these technologies, systems, products or services; financial
losses from fraudulent transactions, remedial actions, loss of
business or potential liability; adverse media coverage; and legal
claims or legal proceedings, including regulatory investigations,
actions and fines; and damage to our reputation. There has been a
rise in the number of cyberattacks targeting confidential business
information generally and in the manufacturing industry specifically.
Moreover, there has been a rise in the number of cyberattacks
that depend on human error or manipulation, including phishing
attacks or schemes that use social engineering to gain access to
systems or perpetuate wire transfer or other frauds.
These trends increase the likelihood of such events occurring as
well as the costs associated with protecting against such attacks.
Although such attempts have been made to attack our information
technology systems, no material harm has resulted. Any such
attack, breach or disruption could compromise our information
technology systems and 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.
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,
2022, we had approximately 2,400 full-time employees, of
which approximately 20 were subject to collective bargaining
agreements, and approximately 1,300 of which are located in
Vietnam. If our workers were to engage in a strike, work stoppage
or other slowdown, our operations could be disrupted, or we
could experience higher labor costs. In addition, if significant
portions of our employees were to become unionized, we could
experience significant operating disruptions and higher ongoing
labor costs, which could adversely affect our business, financial
condition and results of operations.
Loss of key personnel or our inability to
attract and retain new qualified personnel
could hurt our business and inhibit our
ability to operate and grow successfully.
Our success in the highly competitive end markets in which
we operate will continue to depend to a significant extent on
the experience and expertise of our senior leaders. 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 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.
14
| 2022 Annual Report
Part I
Item 1A Risk Factors
Strategic Transactions and Investments Risks
Our acquisition and integration of
businesses could negatively impact our
financial results.
We may be unable to successfully execute
and realize the expected financial benefits
from strategic initiatives.
Inorganic growth is an important part of our strategic growth
plans, and we seek to acquire businesses, some of which may
be material, in pursuit of our plans. Acquiring businesses involves
a number of financial, accounting, managerial, operational, legal,
compliance and other risks and challenges, including the following,
any of which could adversely affect our financial statements:
z we may experience difficulty in identifying appropriate acquisition
candidates;
z 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;
z 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;
z 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;
z 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;
z 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;
z we could experience difficulty in integrating financial and other
controls and systems;
z we may lose key employees or customers of the acquired
company;
z 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;
z conforming the acquired company’s standards, process,
procedures and controls, including accounting systems and
controls, with our operations could cause deficiencies related
to our internal control over financial reporting or exposure to
regulatory sanctions resulting from the acquired company’s
activities; and
z the COVID-19 pandemic may impact our ability to conduct
due diligence on acquisitions in the normal manner, including
forecasting future financial performance, which could cause a
delay in executing transactions until alternate methods of due
diligence are determined or the impacted due diligence is able
to be conducted by customary means.
From time to time, our business has engaged in strategic initiatives,
and such activities may occur in the future. These efforts have
included consolidating manufacturing facilities, rationalizing our
manufacturing processes, and, establishing a joint venture within
our Specialized Reliability Solutions segment.
While we expect meaningful financial benefits from our strategic
initiatives, we may not realize the full benefits expected within
the anticipated time frame. Adverse effects from strategy-driven
organizational change could interfere with our realization of
anticipated synergies, customer service improvements and cost
savings from these strategic initiatives. Additionally, our ability to
fully realize the benefits and implement strategic initiatives may be
limited by certain contractual commitments. Moreover, we may
incur substantial expenses in connection with the execution of
strategic plans in excess of what is forecasted. Further, strategic
initiatives can be a complex and time-consuming process that
can place substantial demands on management, which could
divert attention from other business priorities or disrupt our daily
operations. Any of these failures could materially adversely affect
our business, financial condition, results of operations and cash
flows, which could constrain our liquidity.
Changes in future business or other market
conditions could cause business investments
and/or recorded goodwill or other long-term
assets to become impaired, resulting in
substantial losses and write-downs that
would materially adversely affect our results
of operations and financial condition.
From time to time, we acquire businesses, following careful analysis
and due diligence procedures designed to achieve a desired return
or strategic objective. These procedures often involve certain
assumptions and judgments in determining acquisition price.
After acquisition, such assumptions and judgments may prove
to be inaccurate due to a variety of circumstances, which could
adversely affect the anticipated returns or which are otherwise not
recoverable as an adjustment to the purchase price. Additionally,
actual operating results for an acquisition may vary significantly
from initial estimates. As of March 31, 2022, we had goodwill of
$224.7 million recorded in our consolidated balance sheet, the
majority of which was recorded in connection with the TRUaire
acquisition. We evaluate the recoverability of recorded goodwill
annually, as well as when we changed reporting units and when
events or circumstances indicate the possibility of impairment.
Because of the significance of our goodwill and other intangible
assets, a future impairment of these assets could have a material
adverse effect on our results of operations and financial condition.
For additional information on our accounting policies related to
goodwill, see our discussion under Note 1 to our consolidated
financial statements in Item 8 of this Annual Report.
| 2022 Annual Report
15
Part I
Item 1A Risk Factors
Financial Risks
Our outstanding indebtedness and the
restrictive covenants in the agreements
governing our indebtedness limit our
operating and financial flexibility.
We are required to make scheduled repayments and, under certain
events of default, accelerated repayments on our outstanding
indebtedness, which may require us to dedicate a substantial
portion of our cash flows from operations to payments on our
indebtedness. Such repayment requirements could reduce the
availability of our cash flows to fund working capital acquisitions,
capital expenditures, R&D efforts and other general corporate
purposes, and could generally limit our flexibility in planning for,
or reacting to, changes in our business and industry.
In addition, the agreements governing our indebtedness impose
certain operating and financial restrictions on us and somewhat
limit management’s discretion in operating our businesses. These
agreements limit or restrict our ability, among other things, to:
incur additional debt; pay dividends and make other distributions;
make investments and other restricted payments; create liens; sell
assets; and enter into transactions with affiliates.
In the event we incur additional indebtedness, or if interest rates
on our indebtedness increase, the risks described above could
increase. In addition, certain or our variable rate indebtedness use
the London Inter-bank Offered Rate (“LIBOR”) as a benchmark
for establishing the rate of interest. LIBOR has been the subject
of national, international, and other regulatory guidance and
proposals for reform. On March 5, 2021, the United Kingdom’s
Financial Conduct Authority published the dates that the use
of LIBOR as an index for commercial loans will be phased out.
Foreign currency indices, including the British pound, the Euro,
and Swiss franc, along with the U.S. dollar 1-week and 2-month
settings ceased after December 31, 2021. Also, after June 30,
2023, the remaining U.S. dollar settings will cease. While our
material financing agreements indexed to LIBOR provide for an
alternative base rate that could be applied in the event that LIBOR
is discontinued, there can be no assurances as to whether such
alternative base rate will be more or less favorable than LIBOR.
We intend to monitor developments with respect to the phasing
out of LIBOR and will work to minimize the impact of any LIBOR
transitions. The consequences of these developments cannot
be entirely predicted but could include an increase in the cost
of variable rate indebtedness. In addition, the overall financial
markets may be disrupted as a result of the replacement of
LIBOR, which could have an adverse effect on our cost of capital
and our financial position.
We are also required to comply with leverage and interest
coverage financial covenants and deliver to our lenders audited
annual and unaudited quarterly financial statements. Our ability to
comply with these covenants may be affected by events beyond
our control. Failure to comply with these covenants could result
in an event of default that, if not cured or waived, may have a
material adverse effect on our business, financial condition, results
of operations and cash flows.
16
| 2022 Annual Report
Fluctuations in currency exchange rates
may significantly impact our results of
operations and may significantly affect
the comparability of our results between
financial periods.
Our operations are conducted in many countries. The results of
the operations and the financial position of these subsidiaries are
reported in the relevant foreign currencies and then translated
into U.S. dollars at the applicable exchange rates for inclusion
in our consolidated financial statements. The main currencies
to which we are exposed, besides the U.S. dollar, are primarily
the Australian dollar, the British pound, the Canadian dollar
and the Vietnamese Dong. The exchange rates between these
currencies and the U.S. dollar in recent years have fluctuated
significantly and may continue to do so in the future for a variety of
reasons, including general economic conditions and event-driven
circumstances. A depreciation of these currencies against the
U.S. dollar will decrease the U.S. dollar equivalent of the amounts
derived from these operations reported in our consolidated
financial statements, and an appreciation of these currencies will
result in a corresponding increase in such amounts.
Because many of our raw material costs are determined with
respect to the U.S. dollar rather than these currencies, depreciation
of these currencies may have an adverse effect on our profit
margins or our reported results of operations. Conversely, to the
extent that we are required to pay for goods or services in foreign
currencies, the appreciation of such currencies against the U.S.
dollar will tend to negatively impact our results of operations. In
addition, currency fluctuations may affect the comparability of our
results of operations between financial periods.
We incur currency transaction risk whenever we enter into either a
purchase or sale transaction using a currency other than the local
currency of the transacting entity. Given the volatility of exchange
rates, there can be no assurance that we will be able to 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.
Changes in effective tax rates or adverse
outcomes resulting from examination of our
income tax returns could adversely affect
our results.
Our future effective tax rates could be adversely affected by changes
in tax laws, regulations, accounting principles or interpretations
thereof, which can impact our current and future years’ tax
provision. The effect of such tax law changes or regulations and
interpretations, as well as any additional tax reform legislation in the
U.S., U.K, Canada, Australia, Vietnam or elsewhere, could have
a material adverse effect on our business, financial condition and
results of operations. In addition, we are also subject to periodic
Part I
Item 1A Risk Factors
examination of our income tax returns by the Internal Revenue
Service and other tax authorities. We regularly assess the likelihood
of adverse outcomes resulting from these examinations to determine
the adequacy of our provision for income taxes. As of March 31,
2022, we had a reserve of $14.0 million relating to uncertain tax
positions, and taxing authorities may disagree with the positions we
have taken regarding the tax treatment or characterization of our
transactions. 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 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.
We may inadvertently fail to maintain
effective disclosure controls and procedures
and internal controls over financial
reporting.
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.
Legal and Regulatory Risks
Regulatory and statutory changes
applicable to us or our customers could
adversely affect our financial condition and
results of operations.
We and many of our customers are subject to various national,
state and local laws, rules and regulations. Changes in any of
these areas could result in additional compliance costs, seizures,
confiscations, 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
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.
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.
| 2022 Annual Report
17
Part I
Item 1A Risk Factors
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.
18
| 2022 Annual Report
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 lose an important
permit, license, registration or authorization, forcing them to cease
or reduce their business, our revenues could decrease, which
would have a material adverse effect on our business, financial
condition and results of operations.
Industrial manufacturing is inherently
hazardous, which could result in accidents
that disrupt our operations or expose us to
significant losses or liabilities.
Hazards associated with our manufacturing processes 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, 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 and other raw materials 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 materials.
Future studies on the health effects of certain chemicals and
materials may result in additional or new regulations that further
restrict or prohibit the use of, and exposure to, certain chemicals
and materials. Additional regulation of certain chemicals and
materials could require us to change our operations, and these
changes could affect the quality of our products and materially
increase our costs.
We may be unable to protect our
trademarks, trade secrets, other intellectual
property and proprietary information, which
could harm our competitive position.
Our ability to protect and preserve our trademarks, trade secrets
and other intellectual property and proprietary information
relating to our business is an important factor to our success.
However, we may be unable to prevent third parties from using
our intellectual property and other proprietary information without
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:
z our business strategy;
z changes in local political, economic, social and labor conditions;
Part I
Item 1A Risk Factors
our authorization or from independently developing intellectual
property and other proprietary information that is similar to ours,
particularly in those countries where the laws do not protect our
proprietary rights to the same degree as in the U.S. In addition,
because certain of our products are manufactured by third parties,
we have necessarily shared some of our intellectual property
with those third parties. There can be no guarantee that those
third parties, some of whom are located in jurisdictions where
intellectual property risks may be more pronounced, will comply
with contractual and other legal commitments to preserve and
protect our intellectual property.
The use of our intellectual property and other proprietary
information by others could reduce or eliminate any competitive
advantage we have developed, potentially causing us to lose
sales or otherwise harm our business. If it becomes necessary
for us to litigate to protect these rights, any proceedings could be
burdensome and costly, and we may not prevail.
Our intellectual property may not provide us with any competitive
advantage and may be challenged by third parties. Moreover, our
competitors may already hold or in the future may hold intellectual
property rights in the U.S. or abroad that, if enforced or issued,
could possibly prevail over our rights or otherwise limit our ability
to manufacture or sell one or more of our products in the U.S. or
internationally. Despite our efforts, we may be sued for infringing
on the intellectual property rights of others. This litigation is costly
and, even if we prevail, the costs of such litigation could adversely
affect our financial condition.
Adequate remedies may not be available in the event of
an unauthorized use or disclosure of our trade secrets and
manufacturing expertise. The loss of employees who have
specialized knowledge and expertise could harm our competitive
position and cause our revenues 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.
z potential disruptions from wars and military conflicts, including
Russia’s invasion of Ukraine;
z future levels of revenues, operating margins, income from
operations, net income or earnings per share;
z the ability to respond to anticipated inflationary pressure,
including reductions on consumer discretionary income and
our ability to pass along rising costs through increased selling
prices;
z anticipated levels of demand for our products and services;
z the actual impact to supply, production levels and costs from
global supply chain logistics and transportation challenges
z short and long-term effects of the COVID-19 pandemic;
z future levels of research and development, capital, environmental
or maintenance expenditures;
z our beliefs regarding the timing and effects on our business of
health and safety, tax, environmental or other legislation, rules
and regulations;
| 2022 Annual Report
19
Part I
Item 1B Unresolved Staff Comments
z the success or timing of completion of ongoing or anticipated
capital, restructuring or maintenance projects;
z expectations regarding the acquisition or divestiture of assets
and businesses;
z our ability to obtain appropriate insurance and indemnities;
z the potential effects of judicial or other proceedings, including
tax audits, on our business, financial condition, results of
operations and cash flows;
z the anticipated effects of actions of third parties such as
competitors, or federal, foreign, state or local regulatory
authorities, or plaintiffs in litigation;
z the expected impact of accounting pronouncements; and
z 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. The impact of the
COVID-19 pandemic may also exacerbate the risks discussed in
this Annual Report, which could have a material impact on our
company. Any forward-looking statements you read in this Annual
Report reflect our views as of the date of this Annual Report
with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy and liquidity. You should
not place undue reliance on these forward-looking statements
and you should carefully consider all of the factors identified in
this Annual Report that could cause actual results to differ. We
assume no obligation to update or revise these forward-looking
statements, except as required by law.
Item 1B: Unresolved Staff Comments
Not applicable.
20
| 2022 Annual Report
Part I
Item 4 Mine Safety Disclosures
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. The current lease term expires
August 31, 2026, but may be renewed.
We consider the many manufacturing and R&D facilities,
distribution centers, warehouses, offices and other properties that
we own or lease to be in good condition and generally suitable for
the purposes for which they are used. The following table presents
our principal physical locations by segment and excludes facilities
classified as discontinued operations.
Location
Boise, Idaho
Cle Elum, Washington
Use
Segment
Manufacturing, Office and R&D
Engineered Building Solutions
Distribution Center, Manufacturing, Office,
R&D and Warehouse
Contractor Solutions
Dong Nai, Vietnam
Manufacturing and Office
Fall River, Massachusetts
Manufacturing and Office
Greenwood, Indiana
Distribution Center & Office
Contractor Solutions
Contractor Solutions
Contractor Solutions
Houston, Texas
Houston, Texas
Hudson, Florida
Manufacturing, Office, R&D and Warehouse Contractor Solutions
Distribution Center & Office
Contractor Solutions
Manufacturing, Office and R&D
Engineered Building Solutions
Jacksonville, Florida
Distribution Center & Office
North East, Maryland
Distribution Center & Office
Contractor Solutions
Contractor Solutions
Rockwall, Texas
Manufacturing, Office, R&D and Warehouse Specialized Reliability
Terrell, Texas
Manufacturing, Office and Warehouse
Santa Fe Springs, California
Distribution Center & Office
Solutions
Specialized Reliability
Solutions & Engineered
Building Solutions
Contractor Solutions
Wichita, Kansas
Manufacturing and Office
Engineered Building Solutions
Windsor, Ontario, Canada
Manufacturing, Office and R&D
Engineered Building Solutions
Square
Footage
42,000
180,000
634,000
140,200
54,000
253,900
150,000
40,000
217,000
150,000
227,600
Owned/Leased
Leased
Leased
Owned
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Owned
101,000
Leased
240,000
42,800
42,000
Leased
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 10 to our consolidated financial statements included in Item 8 of this Annual
Report for additional information regarding our 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.
| 2022 Annual Report
21
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 under the symbol “CSWI.”
Holders
As of May 12, 2022, there were 377 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.
Issuer Purchases of Equity Securities
Note 13 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 during the quarter ended March 31, 2022.
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
5,497(a)(b)
115,291(a)
1,191(a)
121,979
112.00
114.52
114.84
5,458
115,291
1,191
121,940
Maximum Number of Shares (or
Approximate Dollar Value) That
May Yet Be Purchased Under
the Program
($)
(in millions)
98.9
85.7
85.6
(a) On October 30, 2020, we announced that our Board of Directors authorized a new program to repurchase up to $100.0 million of our common stock, which replaced
a previously announced $75.0 million program. Under the current program, shares may be repurchased from time to time in the open market or in privately negotiated
transactions. Our Board of Directors has established an expiration date of December 31, 2022, for completion of the new repurchase program; however, the program
may be limited or terminated at any time at our discretion without notice. As of March 31, 2022, 126,115 shares of our common stock had been repurchased under
the current program for an aggregate amount of $14.4 million.
Includes 39 shares tendered by employees to satisfy minimum tax withholding amounts for restricted share vesting at an average price per share of $125.56.
(b)
22
| 2022 Annual Report
Part II
Item 6 [Reserved]
Stock Performance Chart
The following graph compares the cumulative total shareholder
return on our common stock from April 1, 2017 through March 31,
2022 compared with the Russell 2000 Index, of which CSWI
is a component, and a composite custom peer group, which
was selected on an industry basis and is periodically reviewed
and updated (if necessary) to ensure it provides reasonable
comparability based on products offered and end markets
served by CSWI. The graph assumes that $100 was invested
at the market close on April 1, 2017 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:
Aaon, Inc
Armstrong Industries, Inc
Astec Industries, Inc.
Chase Corporation
Columbus McKinnon Corp
CTS Corporation
Futurefuel Corp.
Gorman-Rupp Co.
Innospec Inc.
Kraton Corp.
Landec Corporation
PGT Innovations
Littelfuse, Inc.
Quaker Chemical Corp.
LSB Industries, Inc.
Tredegar Corp.
Methode Electronics, Inc.
NN, Inc.
This graph is fur nished 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.
$
380
330
280
230
180
130
80
Item 6: [Reserved]
$327
$159
$135
03/31/17
03/30/18
03/29/19
03/31/20
03/31/21
03/31/22
● CSWI
● RusseII 2000
● Custom Peer Group
| 2022 Annual Report
23
Part II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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 a strategic
focus on providing niche, value-added products in the end
markets we serve. We operate in three business segments:
Contractor Solutions, Engineered Building Solutions and
Specialized Reliability Solutions. Our products include mechanical
products for heating, ventilation, air conditioning and refrigeration
(“HVAC/R”), grilles, registers and diffusers (“GRD”), building safety
solutions and high-performance specialty lubricants and sealants.
End markets that we serve include HVAC/R, architecturally-
specified building products, plumbing, energy, rail, mining and
general industrial. Our manufacturing operations are concentrated
in the United States (“U.S.”), Canada and Vietnam, and we have
distribution operations in the U.S., Australia, Canada and the
United Kingdom (“U.K.”). Our products are sold directly to end
users or through designated channels in over 100 countries
around the world, primarily including Australia, Canada, the U.K.
and the U.S.
Many of our products are used to protect the capital assets of
our customers that are expensive to repair or replace and are
critical to their operations. We have a source of recurring revenue
from the maintenance, repair and overhaul and consumable
nature of many of our products. We also provide some custom
engineered products that strengthen and 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®, Safe-T-Switch®, Air Sentry®,
Deacon®, Leak Freeze®, Greco® and TRUaire® and Shoemaker
ManufacturingTM.
Drawing on our innovative and proven technologies, we seek to
deliver solutions primarily to our professional end-use customers
that place a premium on superior performance and reliability. We
believe our brands are well-known in the specific end markets
we serve and have a reputation for high quality. We rely on both
organic growth and inorganic growth through acquisitions to
provide an increasingly broad portfolio of performance optimizing
solutions that meet our customers’ ever-changing needs. We have
a successful record of making attractive, synergistic acquisitions
in support of this objective, and we remain focused on identifying
additional acquisition opportunities in our core end markets.
24
| 2022 Annual Report
The COVID-19 pandemic and its resulting impacts had an overall
negative impact on our financial results in our prior fiscal year
ended March 31, 2021. During our current fiscal year ended
March 31, 2022, the direct impact of the COVID-19 pandemic
on our consolidated operating results was limited, in all material
respects, to our operations in Vietnam. In early August 2021, the
Vietnamese government mandated numerous restrictions in an
effort to mitigate the spread of COVID-19, including closures of
non-essential businesses, limitations on movements of individuals,
and the imposition of other highly-restrictive measures for
businesses, like ours, that continued operations in compliance
with the restrictions. Our Vietnam operations began resuming
normal production activities in late November 2021, when the
Vietnamese government-mandated restrictions began to ease.
Regarding our operations generally, the indirect impacts of the
COVID-19 pandemic have resulted in material and freight cost
inflation, supply chain disruptions and freight delays, driven by
numerous factors including countermeasures taken by U.S.
federal, state and/or local governments and the Federal Reserve,
labor supply shortages, and recovering demand. We expect
material and freight cost volatility, supply chain challenges and
freight delays to continue in the near-term, and we are addressing
these impacts through focused inventory management and by
continuing and increasing the pricing initiatives that began in the
three months ended March 31, 2021.
While the COVID-19 pandemic and its indirect effects have
contributed to increased demand in certain parts of our business,
including the HVAC/R end market, we expect customer demand
levels and our overall results of operations and financial condition
to have some level of volatility through the duration of the
pandemic when compared to pre-pandemic periods. Despite
strong demand in certain of our end markets and clear signs of
recovery in others, we cannot reasonably estimate the magnitude
or length of the pandemic’s direct and indirect adverse impact,
including its ultimate impact on our business or financial condition,
due to continued uncertainty regarding (1) the duration and
severity of the COVID-19 pandemic, including any surges due to
variants and (2) the continued potential for short and long-term
impacts on our facilities and employees, customer demand and
supply chain.
Part II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
We are closely monitoring the Russian invasion of Ukraine and its
global impacts. We have no operations, employees or assets in
Russia, Belarus or Ukraine, nor do we source goods or services
of any material amount from those countries, whether directly
or indirectly. During the fiscal year ended March 31, 2022, we
had no sales into Belarus or Ukraine and our sales into Russia
were immaterial to both our consolidated sales and the sales
for our Specialized Reliability Solutions segment. Additionally,
shortly after the Russian invasion of Ukraine began in February
2022, we indefinitely suspended all business activity in Russia.
While the conflict continues to evolve and the outcome remains
highly uncertain, we do not currently believe the Russia-Ukraine
conflict will have a material impact on our business and results
of operations. However, if the Russia-Ukraine conflict continues
or worsens, leading to greater global economic or political
disruptions and uncertainty, our business and results of operations
could be materially impacted as a result.
combination of cash on hand and borrowings under our Revolving
Credit Facility, and 849,852 shares of common stock were
reissued from treasury shares. TRUaire activity has been included
in our Contractor Solutions segment since the acquisition date.
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”). As a result, we reclassified
the assets comprising that business to assets held-for-sale, and
made a corresponding adjustment to our consolidated statements
of operations to reflect discontinued operations for all periods
presented. During the quarter ended September 30, 2018, we
received an aggregate of $6.9 million for the sale of assets that
related to our Coatings business in multiple transactions. During
the quarter ended March 31, 2020, we received $1.5 million for
the sale of the last remaining real property owned by our former
Coatings business. The discontinued operation have had no
activities since the year ended March 31, 2020.
Business Developments
On December 15, 2021, we acquired 100% of the outstanding
equity of Shoemaker Manufacturing, LLC (“Shoemaker”), based
in Cle Elum, Washington, for an aggregate purchase price of
$43.5 million, including preliminary working capital and closing
cash adjustments and expected contingent consideration.
Shoemaker offers high-quality customizable GRD for commercial
and residential markets, and expands CSWI’s HVAC/R product
offering and regional exposure in the northwest U.S. The
aggregate purchase price was comprised of cash consideration
of $38.5 million, 25,483 shares of the Company’s common stock
valued at $3.0 million at transaction close and additional contingent
consideration of up to $2.0 million based on Shoemaker meeting
a defined financial target during the quarter ended March 31,
2022, which was achieved. Shoemaker activity has been included
in our Contractor Solutions segment since the acquisition date.
On April 1, 2021, Whitmore Manufacturing, LLC (“Whitmore”), a
wholly-owned subsidiary of CSWI, completed the formation of a
joint venture with Pennzoil-Quaker State Company dba SOPUS
products (“Shell”), a wholly-owned subsidiary of Shell Oil Company
that comprises Shell’s U.S. lubricants business. The formation
was consummated through a transaction in which Whitmore sold
to Shell a 50% interest in a wholly-owned subsidiary (containing
certain existing operating assets) in exchange for consideration
of $13.4 million from Shell in the form of cash ($5.3 million) and
intangible assets ($8.1 million). The Whitmore JV has been
consolidated into the operations of the Company and its activity
has been included in our Specialized Reliability Solutions segment
since the formation date.
On December 15, 2020, we acquired 100% of the outstanding
equity of T.A. Industries, Inc. (“TRUaire”), a leading manufacturer
of grilles, registers, and diffusers for the residential and commercial
HVAC/R end market, based in Santa Fe Springs, California. The
acquisition also included TRUaire’s wholly-owned manufacturing
facility based in Vietnam. The acquisition extended the Company’s
product offerings to the HVAC market and provided strategic
distribution facilities. The consideration paid for TRUaire included
cash of $288.0 million and 849,852 shares of the Company’s
common stock. The cash consideration was funded through a
Segment Realignment
Beginning with the quarter ended June 30, 2021, we revised
our segment structure to align with how our chief operating
decision maker (who was determined to be our Chief Executive
Officer) views our business, assesses performance and allocates
resources to our business components. This segment structure
revision became effective on April 1, 2021, and followed
the completion of various strategic transactions including
the acquisition of TRUaire and the formation of the Whitmore
JV. Refer to Accounting Policies in Note 1 to our consolidated
financial statements included in Item 8 of this Annual Report.
As a result of the business segment revision, reclassification of
certain prior year financial information has been made to conform
with the current period’s presentation. None of the changes
impact the Company’s previously reported consolidated net
revenue, operating income, net income or net income per share.
Refer to Note 21 to our consolidated financial statements included
in Item 8 of this Annual Report for additional information on the
Company’s segment realignment.
Change in Accounting Principle
In connection with the integration of TRUaire and the Whitmore
JV, the Company voluntarily changed its method of accounting
for certain domestic inventory previously valued by the last-in,
first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method
during the fourth quarter of fiscal 2022. The FIFO method of
accounting for inventory is preferable because it improves the
Company’s comparability with the industry peers, the majority
of which use the FIFO method as the primary inventory valuation
method, conforms the Company’s entire inventory to a single
method of accounting and aligns the inventory cost flow
assumption with the physical flow of goods. All prior periods
presented have been retrospectively adjusted to apply the
new method of accounting. Refer to Note 1 and Note 7 to
our consolidated financial statements included in Item 8 of this
Annual Report for more information related to the change in
inventory accounting method.
| 2022 Annual Report
25
Part II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Markets
HVAC/R
The HVAC/R market is our largest market served and it represented
approximately 53% and 42% of our net revenues in the years
ended March 31, 2022 and 2021, respectively. We provide an
extensive array of products for installation, repair and maintenance
of HVAC/R systems that includes condensate switches, pans
and pumps, grilles, registers and diffusers (“GRD”), refrigerant
caps, line set covers and other chemical and mechanical
products. The industry is driven by replacement and repair of
existing HVAC/R systems, as well as new construction projects.
New HVAC/R systems are heavily influenced by macro trends,
while replacement and repair of existing HVAC/R systems are
dependent on weather and age of unit. The HVAC/R market tends
to be seasonal with the peak sales season beginning in March and
continuing through August. Construction and repair is typically
performed by contractors, and we utilize our global distribution
network to drive sales of our brands to such contractors.
Architecturally-Specified Building Products
Architecturally-specified building products represented
approximately 19% and 27% of our net revenues in the years
ended March 31, 2022 and 2021, respectively. We manufacture
and sell products such as engineered railings, smoke and fire
protection systems, expansion joints and stair edge nosings for
end use customers including multi-family residential buildings,
educational facilities or institutions, warehouses, construction
companies, plant maintenance customers, building contractors
and repair service companies. Sales of these products are driven
by architectural specifications and safety codes. The sales process
is typically long as these can be multi-year construction projects.
The construction market, both commercial and multi-family, is a
key driver for sales of architecturally-specified building products.
a network of distributors. The growth trajectory of the general
industrial end market is expected to reflect a blended average of
the aforementioned end use markets.
Energy
The energy market represented approximately 6% and 4% of
our net revenues in the years ended March 31, 2022 and 2021,
respectively. We provide market-leading lubricants and anti-seize
compounds, as well as greases, for use in oilfield drilling activity
and maintenance of oilfield drilling and valve related equipment.
We sell our products primarily through distributors that are
strategically situated near the major oil and gas producing
areas across the globe. The outlook for the energy industry is
heavily dependent on the global demand expectations from
developed and emerging economies, as well as oil price and local
government policies relative to oil exploration, drilling, storage
and transportation.
Rail
The rail market represented approximately 3% and 4% of our
net revenues in the years ended March 31, 2022 and 2021,
respectively. We provide an array of products into the rail
industry, including lubricants and lubricating devices for rail lines,
which increase efficiency, reduce noise and extend the life of rail
equipment such as rails and wheels. We leverage our technical
expertise to build relationships with key decision-makers to ensure
our products meet required specifications. We sell our products
primarily through a direct sales force, as well as through distribution
partners. End markets for Rail include Class 1 Rail as the primary
end market in North America and Transit Rail as the primary end
market in all other geographies. Cyclical product classes such as
farm products and petrochemical products can impact volumes in
Class 1 Rail. While coal transport is diminishing demand for Class 1
Rail in North America, global investment in Transit Rail systems is
expected to more than offset this decline.
Plumbing
Mining
The plumbing market represented approximately 9% and 10%
of our net revenues in the years ended March 31, 2022 and
2021, 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, such as drain traps. Installation is typically
performed by contractors, and we utilize our global distribution
network to drive sales of our products to contractors.
General Industrial
The general industrial end market represented approximately
7% and 10% of our net revenues in the years ended March 31,
2022 and 2021, respectively. We provide products focused on
asset protection and reliability, including lubricants, desiccant
breathers and fluid management products. The general industrial
market includes the manufacture of chemicals, steel, cement,
food and beverage, pulp and paper and a wide variety of other
processed materials. We serve this market primarily through
The mining market represented approximately 3% and 3%
of our net revenues in the years ended March 31, 2022 and
2021, respectively. Across the globe, we provide market-leading
lubricants to open gears used in large mining excavation
equipment, primarily through direct sales agents, as well as a
network of strategic distributors. The North American mining
industry is heavily weighted toward coal production and has
experienced headwinds due to continued decline in domestic
coal demand, partially mitigated by the seaborne coal export
market. Globally, coal demand has been robust, and focused
efforts in coal markets outside of the U.S., coupled with enhanced
focus on markets such as iron, gold, diamonds and uranium
in Southeast Asia, South America, and Africa have delivered
growth that has generally offset the weakness in North American
coal demand. Outside of coal, the mining market tends to move
with global industrial output as basic industrial metals such as
copper, tin, aluminum, and zinc, which are critical inputs to many
industrial products.
26
| 2022 Annual Report
Part II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Outlook
We expect to maintain a strong balance sheet in fiscal year 2023,
which provides us with access to capital through our cash on
hand, internally-generated cash flow and availability under our
Revolving Credit Facility. Our capital allocation strategy continues
to guide our investing decisions, with a priority to direct capital to
the highest risk adjusted return opportunities, within the categories
of organic growth, strategic acquisitions and the return of cash to
shareholders through our share repurchase and dividend programs.
With the strength of our financial position, we will continue to
invest in financially and strategically attractive expanded product
offerings, key elements of our long-term strategy of targeting
long-term profitable growth. We will continue to invest our capital in
maintaining our facilities and in continuous improvement initiatives.
We recognize the importance of, and remain committed to,
continuing to drive organic growth, as well as investing additional
capital in opportunities with attractive risk-adjusted returns, driving
increased penetration in the end markets we serve.
We remain disciplined in our approach to acquisitions, particularly
as it relates to our assessment of valuation, prospective synergies,
diligence, cultural fit and ease of integration, especially in light of
the economic conditions due to the pandemic.
Results of Operations
The following discussion provides an analysis of our consolidated
results of operations and results for each of our segments.
The operations of Shoemaker have been included in our
consolidated results of operations and in the operating results
of our Contractor Solutions segment since December 15, 2021,
the effective date of the acquisition. The operations of TRUaire
have been included in our consolidated results of operations
and in the operating results of our Contractor Solutions segment
since December 15, 2020, the effective date of the acquisition.
The operations of Petersen Metals, Inc. (“Petersen”) have been
included in our consolidated results of operations and in the
operating results of our Engineered Building Solutions segment
since April 2, 2019, 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.
Net Revenues
(Amounts in thousands)
Revenues, net
Year Ended March 31,
2022
($)
2021
($)
2020
($)
626,435
419,205
385,871
Net revenues for the year ended March 31, 2022 increased
$207.2 million, or 49.4%, as compared with the year ended
March 31, 2021. The increase was primarily due to the acquisitions
of TRUaire and Shoemaker ($103.2 million or 24.6%). Excluding the
impact of acquisitions, organic sales increased $104.0 million or
24.8% from the prior year due to implemented pricing initiatives and
increased sales volumes. Pricing initiatives, which began in the three
months ended March 31, 2021 to mitigate rising costs, continued
and increased during the current year. Sales volumes increased in
all end markets including HVAC/R, energy, plumbing, mining, rail,
architecturally-specified building products and general industrial.
Net revenues for the year ended March 31, 2021 increased
$33.3 million, or 8.6%, as compared with the year ended
March 31, 2020. The increase was primarily due to the December
15, 2020 acquisition of TRUaire ($33.8 million or 8.8%). Excluding
the acquisition impact, the organic sales remained relatively flat
from the prior year with a slight sales decrease ($0.5 million or
0.1%) primarily due to decreased sales into general industrial,
energy, rail and mining end markets, mostly offset by increased
sales volumes into the HVAC/R and architecturally-specified
building products end markets. Although the energy and mining
end markets decreased over the prior fiscal year, those decreases
occurred during the first nine months of the fiscal year, while
the fourth fiscal quarter showed improvements as compared
with the same period in the prior year. The plumbing end market
experienced growth in the fourth fiscal quarter as compared with
the same period in the prior year, offsetting the slight decreases
in the first nine months of the fiscal year.
Net revenues into the Americas, Europe, Middle East and Africa
(“EMEA”) and the Asia Pacific regions for the year ended March 31,
2022, 2021 and 2020 are presented below. The presentation of
net revenues by geographic region is based on the location of
the customer. For additional information regarding net revenues
by geographic region, see Note 20 to our consolidated financial
statements included in Item 8 of this Annual Report.
Americas
EMEA
Asia Pacific Regions
Year Ended March 31,
2022
94%
3%
3%
2021
93%
4%
3%
2020
90%
6%
4%
| 2022 Annual Report
27
Part II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Gross Profit and Gross Profit Margin
(Amounts in thousands, except percentages)
Gross profit
Gross profit margin
Year Ended March 31,
2022
($)
2021*
($)
2020*
($)
255,962
184,550
176,837
40.9%
44.0%
45.8%
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
Gross profit for the year ended March 31, 2022 increased
$71.4 million, or 38.7%, as compared with the year ended March 31,
2021. The increase was primarily due to the acquisitions of TRUaire
and Shoemaker, pricing initiatives and increased organic sales.
Gross profit margin for the year ended March 31, 2022 of 40.9%
decreased from 44.0% for the year ended March 31, 2021, primarily
due to the inclusions of the TRUaire and Shoemaker acquisitions,
material and freight costs increases outpacing implemented pricing
initiatives and $1.7 million of under-absorption costs resulting from
reduced production levels and incremental compensation expenses
incurred at the TRUaire Vietnam facility during the year to maintain
TRUaire Vietnam’s operations in accordance with COVID-19
restrictions (“TRUaire Vietnam COVID COGS Impact”).
Gross profit for the year ended March 31, 2021 increased
$7.7 million, or 4.4%, as compared with the year ended March 31,
2020. The increase was primarily due to the TRUaire acquisition,
partially offset by decreased gross margin and an $0.8 million gain
on sales of property, plant and equipment in the prior year that did
not recur. Gross profit margin for the year ended March 31, 2021
of 44.0% decreased from 45.8% for the year ended March 31,
2020, primarily due to the TRUaire acquisition, including a
$3.5 million purchase accounting impact and increased freight and
transportation costs in the fourth fiscal quarter.
Selling, General and Administrative Expense
(Amounts in thousands, except percentages)
Operating expenses
Operating expenses as a % of revenues
Year Ended March 31,
2022
($)
2021
($)
2020
($)
158,582
125,330
110,983
25.3%
29.9%
28.8%
Selling, general and administrative expense for the year ended
March 31, 2022 increased $33.3 million, or 26.5%, as compared
with the year ended March 31, 2021. The increase was primarily
due to the added expenses related to the inclusion of TRUaire,
Shoemaker and the Whitmore JV in the current period, increased
equity compensation expenses and increased spending on
sales commissions driven by increased revenues, increased
depreciation expenses related to enterprise resource planning
systems, increased headcount, increased travel and $0.7 million
of transaction expenses related to the Shoemaker acquisition. The
increases were partially offset by transactions expenses related to
the TRUaire acquisition ($7.8 million) and JV formation ($2.6 million)
incurred in the prior year period that did not recur. The decrease
in operating expense as a percentage of sales was primarily
attributable to sales increasing by a greater percentage than the
increase in operating expenses.
Selling, general and administrative expense for the year ended
March 31, 2021 increased $14.3 million, or 12.9%, as compared
with the year ended March 31, 2020. The increase was primarily
due to transaction expenses related to the TRUaire acquisition
($7.8 million) and the formation of Whitmore JV ($2.6 million), the
inclusion of TRUaire’s operations and employee severance costs
($0.7 million), partially offset by reduced spend on travel and
entertainment expenses and a trademark impairment ($1.0 million)
in the prior year that did not recur. The increase in operating expense
as a percentage of sales was primarily attributable to transaction
expenses discussed above.
Operating Income
(Amounts in thousands, except percentages)
Operating income
Operating margin
Year Ended March 31,
2022
($)
97,380
2021*
($)
59,220
2020*
($)
65,854
15.5%
14.1%
17.1%
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
28
| 2022 Annual Report
Part II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operating income for the year ended March 31, 2022 increased
by $38.2 million, or 64.4%, as compared with the year ended
March 31, 2021. The increase was a result of the $71.4 million
increase in gross profit, partially offset by the $33.3 million increase
in selling, general and administrative expense as discussed above.
Operating income for the year ended March 31, 2021 decreased
by $6.6 million, or 10.1%, as compared with the year ended
March 31, 2020. The decrease was a result of $14.3 million
increase in selling, general and administrative expense as
discussed above, partially offset by the $7.7 million increase in
gross profit.
Other Income and Expense
Interest expense, net for the year ended March 31, 2022 increased
$3.1 million to $5.4 million as compared with the year ended
March 31, 2021, due to increased borrowing under our Revolving
Credit Facility (described in Note 9 to our consolidated financial
statements included in Item 8 of this Annual Report) in connection
with the TRUaire and Shoemaker acquisitions.
Interest expense, net for the year ended March 31, 2021 increased
$1.1 million to $2.4 million as compared with the year ended
March 31, 2020, primarily due to increased borrowing under our
Revolving Credit Facility (described in Note 9 to our consolidated
financial statements included in Item 8 of this Annual Report) in
connection with the TRUaire acquisition.
Other expense, net decreased by $5.5 million for the year ended
March 31, 2022 to expense of $0.5 million as compared with the
year ended March 31, 2021. The decrease was primarily due to
a prior year indemnification expense of $5.0 million arising from
the partial release of a tax indemnification asset related to the
TRUaire acquisition that did not recur.
Other expense, net decreased by $1.2 million for the year ended
March 31, 2021 to expense of $6.0 million as compared with the
year ended March 31, 2020. The decrease was primarily due to an
indemnification expense of $5.0 million due to the partial release of
a tax indemnification asset related to the TRUaire acquisition and
loss arising from transactions in currencies other than our sites’
functional currencies, entirely offset by a charge of $6.5 million
resulting from the termination of our U.S. defined benefit pension
plan and a lease termination cost of $0.5 million in the prior year
that did not recur.
Provision for Income Taxes and
Effective Tax Rate
The provision for income taxes for the year ended March 31,
2022 was $24.1 million, representing an effective tax rate
of 26.4%, as compared with the provision of $10.8 million,
representing an effective tax rate of 21.2%, for the year ended
March 31, 2021 and the provision of $12.7 million, representing
an effective tax rate of 22.2%, for the year ended March 31,
2020. As compared with the statutory rate for the year ended
March 31, 2022, the provision for income taxes was primarily
impacted by the state tax expense (net of federal benefits), which
increased the provision by $4.8 million and the effective rate by
5.2%; executive compensation limitation, which increased the
provision by $1.0 million and effective tax rate by 1.1% and a
net increase in the reserve for uncertain tax positions, which
increased the provision by $0.8 million and the effective tax rate
by 0.8%. This was offset by tax benefits related to the restricted
stock vesting which decreased the provision by $1.9 million and
the effective tax rate by 2.1%.
As compared with the statutory rate for the year ended March 31,
2021, the provision for income taxes was primarily impacted by the
state tax expense, which increased the provision by $2.4 million
and the effective rate by 4.8%, the additional non-deductible
expenses, which increased the provision by $1.9 million and the
effective rate by 2.1%, and the release of uncertain tax positions,
which decreased the provision by $4.7 million and the effective
rate by 9.3%.
During the year ended March 31, 2022, we released a $0.3
million reserve related to positions taken on tax returns for which
the statute has expired, and accrued interest and penalties of
$0.6 million and $0.5 million, respectively.
During the year ended March 31, 2021, we recorded total tax
contingency reserves of $17.3 million, including unrecognized
tax benefit of $13.6 million, accrued interest and penalty of
$1.4 million and $2.3 million, respectively, through purchase
accounting as a result of the TRUaire acquisition discussed in
Note 2 to our consolidated financial statements included in Item 8
of this Annual Report. During the three months ended March 31,
2021, a tax benefit of $5.3 million, including release of accrued
interest ($0.6 million) and penalty ($0.6 million), was recognized
through the income statement as a result of receiving the audit
closing letter from Internal Revenue Service related to calendar
2017. For the year ended March 31, 2021, we recorded an
additional net tax contingency reserve of $0.2 million, accrued
interest of $0.1 million and accrued penalty of $0.2 million.
Our federal income tax returns for the years ended March 31,
2021, 2020 and 2019 remain subject to examination. Our income
tax returns for TRUaire’s pre-acquisition periods including calendar
years 2018, 2019 and 2020 remain subject to examinations. Our
income tax returns in certain state income tax jurisdictions remain
subject to examination for various periods for the period ended
September 30, 2015 and subsequent years.
As of both March 31, 2022 and 2021, we had no tax effected
net operating loss carryforwards, net of valuation allowances.
Net operating loss carryforwards will expire in periods beyond
the next 5 years.
| 2022 Annual Report
29
Part II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Segments
We conduct our operations through three business segments based on type of product and how we manage the business. We
evaluate segment performance and allocate resources based on each segment’s operating income. The key operating results for our
three business segments are discussed below.
Contractor Solutions Segment Results
The Contractor Solutions segment manufactures efficiency and performance enhancing products predominantly for residential and
commercial HVAC/R, plumbing, architecturally-specified building and general industrial applications, which are designed primarily for
professional end-use customers.
(Amounts in thousands, except percentages)
Revenues, net
Operating income
Operating margin
Year Ended March 31,
2022
($)
416,487
96,115
2021*
($)
245,528
59,007
2020*
($)
190,696
58,236
23.1%
24.0%
30.5%
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
Net revenues for the year ended March 31, 2022 increased
$171.0 million, or 69.6%, as compared with the year ended
March 31, 2021. The increase was primarily due to the
TRUaire and Shoemaker acquisitions ($103.2 million or 42.0%).
Excluding the impact of acquisitions, organic sales increased by
$67.8 million, or 27.6%, due to implemented pricing initiatives
and increased sales volumes. Pricing initiatives to mitigate rising
costs, which began in the three months ended March 31, 2021,
continued and increased during the year ended March 31, 2022.
Sales volumes increased in HVAC/R, plumbing and architecturally-
specified building products end markets and decreased in general
industrial end market.
Net revenues for the year ended March 31, 2021 increased
$54.8 million, or 28.8%, as compared with the year ended
March 31, 2020. The increase was primarily due to the TRUaire
acquisition ($33.8 million or 17.7%) and organic sales increases
($21.0 million or 11.1%) driven by increased sales volumes into
the HVAC/R, general industrial, architecturally-specified building
products and plumbing end markets.
Operating income for the year ended March 31, 2022 increased
$37.1 million, or 62.9%, as compared with the year ended
March 31, 2021. The increase was primarily due to the inclusion
of TRUaire and the transactions expenses ($7.8 million) related
to the TRUaire acquisition incurred in prior year that did not recur,
partially offset by the transaction expenses ($0.7 million) in the
current year related to the Shoemaker acquisition. The organic
sales growth contributed to the increased operating income,
which was partially offset by increased material and freight
costs, the $1.7 million TRUaire Vietnam COVID COGS Impact
discussed above and increased spending on sales commissions,
depreciation and optimization expenses related to enterprise
resource planning systems, headcount and travel.
Operating income for the year ended March 31, 2021 increased
$0.8 million, or 1.3%, as compared with the year ended March 31,
2020. The increase was primarily attributable to transaction
expenses related to the TRUaire acquisition ($7.8 million), partially
offset by increased revenues.
Engineered Building Solutions Segment Results
The Engineered Building Solutions segment provides primarily code-driven products focused on life safety that are engineered to
provide aesthetically-pleasing solutions for the construction, refurbishment and modernization of commercial, institutional, and
multi-family residential buildings.
(Amounts in thousands, except percentages)
Revenues, net
Operating income
Operating margin
Year Ended March 31,
2022
($)
97,296
11,101
2021*
($)
95,672
14,066
2020*
($)
90,881
14,278
11.4%
14.7%
15.7%
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
30
| 2022 Annual Report
Part II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net revenues for the year ended March 31, 2022 increased
$1.6 million, or 1.7%, as compared with the year ended March 31,
2021. The increase was primarily due to enhanced marketing efforts
and market share gains.
Net revenues for the year ended March 31, 2021 increased
$4.8 million, or 5.3%, as compared with the year ended March 31,
2020. The increase was primarily due to the successful execution
of a large-scale project and project wins due to competitive
lead times.
Operating income for the year ended March 31, 2022 decreased
$3.0 million, or 21.1%, as compared with the year ended March 31,
2021. The decrease was due to a shift in sales to lower margin
projects and added salespeople to achieve long-term revenue
growth objectives.
Operating income for the year ended March 31, 2021 decreased
$0.2 million, or 1.5%, as compared with the year ended
March 31, 2020. The decrease was due to a shift in sales to
lower margin projects.
Specialized Reliability Solutions Segment Results
Specialized Reliability Solutions segment provides long-established products for increasing the reliability, performance and lifespan of
industrial assets and solving equipment maintenance challenges.
(Amounts in thousands, except percentages)
Revenues, net
Operating income
Operating margin
Year Ended March 31,
2022
($)
116,042
9,007
7.8%
2021*
($)
78,365
581
0.7%
2020*
($)
104,641
7,690
7.3%
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
Net revenues for the year ended March 31, 2022 increased
$37.7 million, or 48.1%, as compared with the year ended March 31,
2021. The increase was primarily due to demand recovery in the
energy, mining and rail and general industrial end markets, pricing
initiatives to mitigate rising costs that began in the three months
ended June 30, 2021 and continued throughout the current year,
as well as the inclusion of the newly formed Whitmore JV.
Net revenues for the year ended March 31, 2021 decreased
$26.3 million, or 25.1%, as compared with the year ended
March 31, 2020. The decrease was primarily attributable to
decreased sales volumes into the general industrial, energy, rail
and mining end markets.
Operating income for the year ended March 31, 2022 increased
$8.4 million, or 1,451.5%, as compared with the year ended
March 31, 2021. The increase was primarily due to increased
organic sales and the Whitmore JV, partially offset by increased
material expenses outpacing implemented price increases,
increased spending on sales commissions driven by increased
sales and increased travel expense.
Operating income for the year ended March 31, 2021 decreased
$7.1 million, or 92.5%, as compared with the year ended March 31,
2020. The decrease was primarily attributable to decreased sales
and $2.6 million of transaction expenses related to the formation
of Whitmore JV, partially offset by decreases in travel and
personnel-related expenses and sales commissions.
For additional information on segments, see Note 21 to our
consolidated financial statements included in Item 8 of this Annual
Report.
Liquidity and Capital Resources
General
Existing cash on hand, cash generated by operations and
borrowings available under our Revolving Credit Facility (“Revolver
Borrowings”) are our primary sources of short-term liquidity. Our
ability to consistently generate strong cash flow from our operations
is one of our most significant financial strengths; it enables us to
invest in our people and our brands, make capital investments
and strategic acquisitions, provide a cash dividend program, and
from time-to-time, repurchase shares of our common stock. Our
largest use of cash in our operations is for purchasing and carrying
inventories and carrying seasonal accounts receivable. Additionally,
we use our Revolver Borrowings to support our working capital
requirements, capital expenditures and strategic acquisitions.
We seek to maintain adequate liquidity to meet working capital
requirements, fund capital expenditures, and repay scheduled
principal and interest payments on debt. Absent deterioration
of market conditions, we believe that cash flows from operating
and financing activities, primarily Revolver Borrowings, will provide
adequate resources to satisfy our working capital, scheduled
principal and interest payments on debt, anticipated dividend
payments, periodic share repurchases, and anticipated capital
expenditure requirements for both our short-term and long-term
capital needs.
| 2022 Annual Report
31
Part II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cash Flow Analysis
(Amounts in thousands)
Net cash provided by operating activities, continuing operations
Net cash used in investing activities, continuing operations
Net cash (used in) provided by financing activities
Year Ended March 31,
2022
($)
69,089
(51,456)
(13,039)
2021*
($)
66,254
(289,889)
214,049
2020*
($)
71,397
(21,982)
(57,151)
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
Our cash balance at March 31, 2022 was $16.6 million, as
compared with $10.1 million at March 31, 2021.
For the year ended March 31, 2022, our cash provided by
operating activities from continuing operations was $69.1 million,
as compared with $66.3 million and $71.4 million for the years
ended March 31, 2021 and 2020, respectively.
z Working capital used cash for the year ended March 31, 2022
due to higher inventories ($49.4 million) and higher accounts
receivable ($26.7 million), partially offset by higher accounts
payable and other current liabilities ($28.0 million) and lower
prepaid expenses and other current assets ($3.5 million).
z Working capital used cash for the year ended March 31, 2021
due to higher accounts receivable ($7.2 million), higher prepaid
expenses and other current assets ($4.2 million), and higher
inventories ($3.4 million), partially offset by higher accounts
payable and other current liabilities ($13.9 million).
z Working capital provided cash for the year ended March 31,
2020 due to higher accounts payable and other current
liabilities ($5.9 million) and lower prepaid expenses and other
assets ($4.0 million), mostly offset by higher accounts receivable
($8.0 million) and higher inventory ($1.7 million).
Cash flows used in investing activities from continuing operations
during the year ended March 31, 2022 were $51.5 million as
compared with $289.9 million and $22.0 million for the years
ended March 31, 2021 and 2020, respectively.
z Capital expenditures during the years ended March 31,
2022, 2021 and 2020 were $15.7 million, $8.8 million and
$11.4 million, respectively. Our capital expenditures have been
focused on enterprise resource planning systems, capacity
expansion, continuous improvement and automation and new
product introductions
z During the year ended March 31, 2022 we acquired Shoemaker
for an aggregate purchase price of $43.5 million, including
$38.5 million in cash consideration. Additionally, we received
proceeds of $1.4 million as a result of the final working
capital true-up adjustment related to the TRUaire acquisition.
During the year ended March 31, 2021 we acquired TRUaire
for $286.9 million (after working capital adjustment) in cash
consideration and stock consideration valued at $97.7 million.
During the year ended March 31, 2020 we acquired Petersen
for $11.8 million as discussed in Note 2 to our consolidated
financial statements included in Item 8 of this Annual Report.
32
| 2022 Annual Report
Cash flows provided by (used in) financing activities during the
years ended March 31, 2022, 2021 and 2020 were $(13.0) million,
$214.0 million and $(57.2) million, respectively. Cash outflows
resulted from:
z Net borrowing (repayments) on our lines of credit (as discussed
in Note 9 to our consolidated financial statements included in
Item 8 of this Annual Report) of $10.4 million, $231.4 million
and $(20.6) million during the years ended March 31, 2022,
2021 and 2020, respectively.
z Payments of $2.3 million of underwriting discounts and fees in
connection with amending and extending our Revolving Credit
Facility during the year ended March 31, 2022, as discussed
in Note 9 to our consolidated financial statements included in
Item 8 of this Annual Report.
z Proceeds from the redeemable noncontrolling interest
shareholder for its investment in the consolidated Whitmore
JV of $6.3 million during the year ended March 31, 2022, as
discussed in Note 3 to our consolidated financial statements
included in Item 8 of this Annual Report.
z Repurchases of shares under our share repurchase programs
(as discussed in Note 13 to our consolidated financial
statements included in Item 8 of this Annual Report) of
$14.4 million, $7.3 million and $26.9 million during the years
ended March 31, 2022, 2021 and 2020, respectively.
z Dividend payments of $9.5 million, $8.1 million and $8.1 million
were paid during the years ended March 31, 2022, 2021 and
2020, respectively.
We believe that available cash and cash equivalents, cash flows
generated through operations and cash available under our
Revolving Credit Facility will be sufficient to meet our liquidity
needs, including capital expenditures, for at least the next
12 months.
Acquisitions
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. During the year ended
March 31, 2022, we acquired 100% of the outstanding equity of
Shoemaker Manufacturing, LLC (“Shoemaker”). The aggregate
cash paid for the Shoemaker acquisition, net of cash acquired,
totaled $37.3 million and was funded through a combination of
cash on hand and borrowings under our Revolving Credit Facility.
See Note 2 to our consolidated financial statements included in
Item 8 of this Annual Report for a discussion of our acquisitions.
Part II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Debt
Out short-term debt obligation consists of the current maturity
of our Whitmore Term Loan in the amount of $0.6 million. Our
long-term debt obligations consist of the final maturity of our
Whitmore Term Loan with maturity dates between fiscal 2024
and 2030 and Revolver Borrowings with maturity date in fiscal
2027. As of March 31, 2022, we had $243.0 million in outstanding
Revolver Borrowings, which resulted in a borrowing capacity of
$157.0 million. See Note 9 to our consolidated financial statements
included in Item 8 of this Annual Report for a discussion of our
indebtedness.
Dividends
Total dividends of $9.5 million were paid during the year ended
March 31, 2022. On April 14, 2022, we announced a 13%
quarterly dividend increase to $0.170 per share which was
paid on May 13, 2022 to shareholders of record as of April 29,
2022. We currently expect to continue to pay a regular quarterly
dividend to shareholders in the future, but such payments are
subject to approval of our Board of Directors and are dependent
upon our financial conditions, results of operations, capital
requirements, and other factors, including those set forth under
Item 1A. “Risk Factors” of this Annual Report. See Note 13 to
our consolidated financial statements included in Item 8 of this
Annual Report for a discussion of dividends.
Share Repurchase Program
On October 30, 2020, our Board of Directors authorized the
repurchase up to $100.0 million of our common stock, which
replaced the previously announced $75.0 million program. During
the year ended March 31, 2022, we repurchased 126,115 shares
for an aggregate amount of $14.4 million. We primarily used
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;
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.
cash on hand to pay for the repurchased shares. Our Board of
Directors has established an expiration of December 31, 2022 for
the $100.0 million repurchase program and we currently expect
to continue to repurchase shares in the near future, but such
repurchases are dependent upon our financial condition, results of
operations, capital requirements, and other factors, including those
set forth under Item 1A. “Risk Factors” of this Annual Report. See
Note 13 to our consolidated financial statements included in Item 8 of
this Annual Report for a discussion of our share repurchase program.
Capital Expenditures
During the year ended March 31, 2022, we invested $15.7 million
in capital expenditures related to enterprise resource planning
systems, capacity expansion, continuous improvement and
automation and new product introductions. We plan to continue
investing in capital expenditures in the future to improve
manufacturing productivity, upgrade information technology
infrastructure and security and implement advanced technologies
for our existing facilities.
Contractual Obligations
Our contractual obligations as of March 31, 2022 primarily included
purchase obligations and operating lease commitments. 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 cancellable without penalty. We expect to incur $67.4 million
in purchase obligations over the next 12 months. For operating
lease commitments, see Note 10 to our consolidated financial
statements included in Item 8 of this Annual Report.
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.
| 2022 Annual Report
33
Part II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Revenue Recognition
We recognize revenues to depict the transfer of control of promised
goods or services to our customers in an amount that reflects the
consideration to which we expect to be entitled in exchange for
those goods or services. Refer to Note 20 for further discussion.
We recognize revenue when all of the following criteria have
been met: (i) a contract with a customer exists, (ii) performance
obligations have been identified, (iii) the price to the customer has
been determined, (iv) the price to the customer has been allocated
to the performance obligations, and (v) performance obligations
are satisfied, which are more fully described below.
(i) We identify a contract with a customer when a sales agreement
indicates approval and commitment of the parties; identifies
the rights of the parties; identifies the payment terms; has
commercial substance; and it is probable that we will collect
the consideration to which we will be entitled in exchange
for the goods or services that will be transferred to the
customer. In most instances, our contract with a customer
is the customer’s purchase order. For certain customers,
we may also enter into a sales agreement that outlines a
framework of terms and conditions that apply to all future
purchase orders for that customer. In these situations, our
contract with the customer is both the sales agreement and
the specific customer purchase order. Because our contract
with a customer is typically for a single transaction or customer
purchase order, the duration of the contract is one year or
less. As a result, we have elected to apply certain practical
expedients and, as permitted by the Financial Accounting
Standards Board, omit certain disclosures of remaining
performance obligations for contracts that have an initial term
of one year or less.
(ii) We identify performance obligations in a contract for each
promised good or service that is separately identifiable from
other promises in the contract and for which the customer
can benefit from the good or service either on its own or
together with other resources that are readily available to the
customer. Goods and services provided to our customers that
are deemed immaterial are included with other performance
obligations.
(iii) We determine the transaction price as the amount of
consideration we expect to be entitled to in exchange for
fulfilling the performance obligations, including the effects of
any variable consideration.
(iv) For any contracts that have more than one performance
obligation, we allocate the transaction price to each
performance obligation in an amount that depicts the amount
of consideration to which we expect to be entitled in exchange
for satisfying each performance obligation. We have excluded
disclosure of the transaction price allocated to remaining
performance obligations if the performance obligation is part
of a contract that has an original expected duration of one
year or less as the majority of our contracts are short-term in
nature with a term of one year or less.
(v) We recognize revenue when, or as, we satisfy the performance
obligation in a contract by transferring control of a promised
good or service to the customer.
34
| 2022 Annual Report
We exclude from the measurement of the transaction price all
taxes assessed by a governmental authority that are both imposed
on and concurrent with a specific revenue-producing transaction
and collected from a customer. As such, we present revenue net
of sales and other similar taxes. Shipping and handling costs
associated with outbound freight after control over a product has
transferred to a customer are accounted for as a fulfillment cost
and are included in cost of revenues. Costs to obtain a contract,
which include sales commissions recorded in selling, general
and administrative expense, are expensed when incurred as the
amortization period is one year or less. We do not have customer
contracts that include significant financing components.
Deferred Taxes and Tax Reserves
Deferred tax assets and liabilities are determined based on
temporary differences between the financial statement carrying
amounts and the tax basis of assets and liabilities, applying
enacted tax rates expected to be in effect for the year in which
the differences are expected to reverse. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Based on
the evaluation of available evidence, both positive and negative,
we recognize future tax benefits, such as net operating loss
carryforwards and tax credit carryforwards, to the extent that
these benefits are more likely than not to be realized. We base our
judgment of the recoverability of our deferred tax assets primarily
on historical earnings, our estimate of current and expected future
earnings using historical and projected future operating results,
and prudent and feasible tax planning strategies.
The amount of income taxes we pay is subject to ongoing audits
by federal, state and foreign tax authorities, which may result
in proposed assessments. Significant judgment is required in
determining income tax provisions and evaluating tax positions.
We establish reserves for open tax years for uncertain tax positions
that may be subject to challenge by various taxing authorities. The
consolidated tax provision and related accruals include the impact of
such reasonably estimable losses and related interest and penalties
as deemed appropriate. Tax benefits recognized in the financial
statements from uncertain tax positions are measured based on
the largest benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement. During the year ended March 31,
2022, we released a $0.3 million reserve related to positions taken
on tax returns for which the statute has expired, and accrued
interest and penalties of $0.6 million and $0.5 million, respectively.
During the year ended March 31, 2021, we recorded total tax
contingency reserves of $17.3 million, including unrecognized tax
benefit of $13.6 million, accrued interest and penalty of $1.4 million
and $2.3 million, respectively, through purchase accounting as a
result of the TRUaire acquisition discussed in Note 2. During the
three months ended March 31, 2021, a tax benefit of $5.3 million,
including release of accrued interest ($0.6 million) and penalty ($0.6
million), was recognized through the income statement as a result
of receiving the audit closing letter from Internal Revenue Service
related to calendar 2017. For the year ended March 31, 2021, we
recorded an additional net tax contingency reserve of $0.2 million,
accrued interest of $0.1 million and accrued penalty of $0.2 million.
For the year ended March 31, 2020, we released a net $1.4 million
reserve, which included settlements of $0.2 million, increases of
Part II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
$0.1 million and a release of $1.3 million in federal uncertain tax
positions. The interest and penalties related to the uncertain tax
position resulted in a reduction of $0.4 million in income tax expense
for the year ended March 31, 2020. 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.
Our federal income tax returns for the years ended March 31,
2021, 2020 and 2019 remain subject to examination. Our income
tax returns for TRUaire’s pre-acquisition periods including calendar
years 2018, 2019 and 2020 remain subject to examinations. Our
income tax returns in certain state income tax jurisdictions remain
subject to examination for various periods for the period ended
September 30, 2015 and subsequent years.
While we believe we have adequately provided for any reasonably
foreseeable outcome related to these matters, our future results
may include favorable or unfavorable adjustments to our estimated
tax liabilities. To the extent that the expected tax outcome of these
matters changes, such changes in estimate will impact the income
tax provision in the period in which such determination is made.
Goodwill and Indefinite-Lived
Intangible Assets
The initial recording of goodwill and intangible assets requires
subjective judgements concerning estimates of the fair value of
the acquired assets. We test the value of goodwill for impairment
as of January 31 each year or whenever events or circumstances
indicate such asset may be impaired.
The test for goodwill impairment involves significant judgement
in estimating projections of fair value generated through future
performance of each of the reporting units. The identification of
our reporting units began at the operating segment level and
considered whether components one level below the operating
segment levels should be identified as reporting units for purpose
of testing goodwill for impairment based on certain conditions.
These conditions included, among other factors, (i) the extent to
which a component represents a business and (ii) the aggregation
of economically similar components within the operating
Accounting Developments
segments. Other factors that were considered in determining
whether the aggregation of components was appropriate included
the similarity of the nature of the products and services, the nature
of the production processes, the methods of distribution and the
types of industries served.
Accounting Standards Codification (“ASC”) 350 allows an optional
qualitative assessment, prior to a quantitative assessment test, to
determine whether it is more likely than not that the fair value of
a reporting unit exceeds its carrying amount. We bypassed the
qualitative assessment and proceeded directly to the quantitative
test. If the carrying value of a reporting unit exceeds its fair value,
the goodwill of that reporting unit is impaired and an impairment
loss is recorded equal to the excess of the carrying value over its
fair value. We estimate the fair value of our reporting units based
on an income approach, whereby we calculate the fair value of a
reporting unit based on the present value of estimated future cash
flows. A discounted cash flow analysis requires us to make various
judgmental assumptions about future sales, operating margins,
growth rates and discount rates, which are based on our budgets,
business plans, economic projections, anticipated future cash
flows and market participants. Our quantitative test performed
as of January 31, 2022 indicated that no goodwill impairment
loss should be recognized for the year ended March 31, 2022.
There were no impairment loss recognized for the years ended
March 31, 2021 and 2020, respectively.
We have indefinite-lived intangible assets in the form of trademarks
and license agreements. We test these intangible assets for
impairment at least annually as of January 31 or whenever events
or circumstances indicate that the carrying amount may not be
recoverable. Significant assumptions used in the impairment test
include the discount rate, royalty rate, future sales projections
and terminal value growth rate. These inputs are considered
non-recurring level three inputs within the fair value hierarchy.
An impairment loss would be recognized when estimated future
cash flows are less than their carrying amount. We recorded
impairment losses on intangible assets (excluding those related
to discontinued operations) of $0, $0 and $1.0 million for the years
ended March 31, 2022, 2021 and 2020, respectively.
We have presented the information about accounting pronouncements not yet implemented in Note 1 to our consolidated financial
statements included in Item 8 of this Annual Report.
| 2022 Annual Report
35
Part II
Part II
Item 7A Quantitative and Qualitative Disclosures About Market Risk
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.
We manage, or hedge, interest rate risks related to our borrowings
by means of interest rate swap agreements. As of March 31, 2022,
we had $243.0 million in outstanding variable rate indebtedness,
after consideration of the interest rate swap, which covered 3.9%
of our $252.8 million of our total outstanding indebtedness. At
March 31, 2022, we had $243.0 million in unhedged variable rate
indebtedness with a weighted average interest rate of 1.95%.
Each quarter point change in interest rates would result in a
change of approximately $0.6 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 portion of our operations outside of the U.S. in
currencies other than the U.S. dollar. Our non-U.S. operations
are conducted primarily in their local currencies, which are also
their functional currencies, and include the Australian dollar, British
pound, Canadian dollar and Vietnamese dong. Foreign currency
exposures arise from translation of foreign-denominated assets
and liabilities into U.S. dollars and from transactions denominated
in a currency other than a non-U.S. operation’s functional currency.
We realized net (losses) gains associated with foreign currency
translation of less than $(0.1) million, $4.8 million and $(2.3) million
for the years ended March 31, 2022, 2021 or 2020, respectively,
which are included in accumulated other comprehensive income
(loss). We recognized foreign currency transaction net gains
(losses) of less than $0.1 million, $(0.9) million and $0.3 million
for the years ended March 31, 2022, 2021 or 2020, respectively,
which are included in other income (expense), net on our
consolidated statements of operations.
Based on a sensitivity analysis at March 31, 2022, a 10%
change in the foreign currency exchange rates for the year ended
March 31, 2022 would have impacted our income from continuing
operations by less than 1%. This calculation assumes that all
currencies change in the same direction and proportion relative
to the U.S. dollar and that there are no indirect effects, such as
changes in non-U.S. dollar sales volumes or prices.
36
| 2022 Annual Report
Part II
Item 8 Financial Statements and Supplementary Data
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, 2022 and 2021, the related
consolidated statements of operations, comprehensive income,
equity, and cash flows for each of the three years in the period
ended March 31, 2022, 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, 2022 and 2021, and
the results of its operations and its cash flows for each of the
three years in the period ended March 31,2022, in conformity
Basis for Opinion
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, 2022, 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 18, 2022 expressed an
unqualified 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 regarding 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising
from the current period audit of the financial statements that
was communicated or required to be communicated to the
audit committee and that: (1) relates to accounts or disclosures
that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The
communication of a critical audit matter does not alter in any way
our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
| 2022 Annual Report
37
(i) We identify a contract with a customer when a sales agreement
Part II
Item 8 Financial Statements and Supplementary Data
Valuation of Customer Lists Intangible Asset
As described further in Note 2 to the financial statements, on
December 15, 2021, the Company completed the acquisition of
Shoemaker Manufacturing, LLC for an aggregate purchase price
of $43.5 million. The Company’s accounting for the acquisition
required the estimation of the fair value of assets acquired and
liabilities assumed, which included a customer lists intangible
asset of $23.0 million. The estimated fair value of the customer
lists intangible asset was determined using the excess earnings
method. We identified the estimation of the fair value of the
customer lists intangible asset in management’s purchase price
allocation as a critical audit matter.
The principal consideration for our determination that the valuation
of the customer lists intangible asset is a critical audit matter
is the significant estimation uncertainty involved in determining
fair value. The significant assumptions included the expected
revenue growth rates, gross profit margin, and discount rates.
These assumptions required a high degree of auditor judgment,
subjectivity, and effort in performing procedures and evaluating
management’s significant assumptions and involved the use of
valuation specialists.
Our audit procedures related to the valuation of the customer lists
intangible asset included the following, among others.
a. We tested the effectiveness of internal controls over
management’s valuation of the customer list intangible asset.
b. We evaluated the methodologies and tested the significant
assumptions used by the Company by involving valuation
specialists to evaluate the appropriateness of the methodology
and the significant assumptions in the fair value estimate by
comparing the discount rate to relevant observable market
data.
c. We tested the underlying data by comparing the estimated
future revenues and gross profit margin to historical operating
results, as well as tested the completeness and accuracy
of the underlying data used in the excess earnings method
valuation.
d. We also evaluated corroborative and contrary evidence when
evaluating the expected future revenue growth rates, gross
profit margin, and discount rate assumptions.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2015.
Dallas, Texas
May 18, 2021
38
| 2022 Annual Report
CSW Industrials, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Other assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued and other current liabilities
Current portion of long-term debt
Total current liabilities
Long-term debt
Retirement benefits payable
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 18)
Redeemable noncontrolling interest
Equity:
Common shares, $0.01 par value
Shares authorized – 50,000
Shares issued – 16,283 and 16,162, respectively
Preferred shares, $0.01 par value
Shares authorized (10,000) and issued (0)
Additional paid-in capital
Treasury shares, at cost (576 and 511 shares, respectively)
Retained earnings
Accumulated other comprehensive loss
Total equity
TOTAL LIABILITIES AND EQUITY
Part II
Item 8 Financial Statements and Supplementary Data
March 31,
2022
($)
2021*
($)
16,619
122,804
150,114
10,610
300,147
87,032
224,658
300,837
82,686
995,360
47,836
69,005
561
117,402
252,214
1,027
140,306
510,949
15,325
162
10,088
96,695
102,651
9,684
219,118
82,554
218,795
283,060
75,995
879,522
32,444
49,743
561
82,748
241,776
1,695
137,853
464,072
—
161
—
—
112,924
(46,448)
407,522
(5,074)
469,086
995,360
104,690
(34,075)
350,670
(5,996)
415,450
879,522
*
Year ended March 31, 2021 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
See accompanying notes to consolidated financial statements.
| 2022 Annual Report
39
Part II
Item 8 Financial Statements and Supplementary Data
CSW Industrials, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
Revenues, net
Cost of revenues
Gross profit
Selling, general and administrative expenses
Impairment expenses
Operating income
Interest expense, net
Other expense, net
Income before income taxes
Provision for income taxes
Income from continuing operations
Income from discontinued operations, net of tax
Net income
Income attributable to redeemable noncontrolling interest
NET INCOME ATTRIBUTABLE TO CSW INDUSTRIALS, INC.
Basic earnings per common share:
Continuing operations
Discontinued operations
NET INCOME ATTRIBUTABLE TO CSW INDUSTRIALS, INC.
Diluted earnings per common share:
Continuing operations
Discontinued operations
NET INCOME ATTRIBUTABLE TO CSW INDUSTRIALS, INC.
Weighted average number of shares outstanding:
Basic
Diluted
Year Ended March 31,
2022
($)
2021*
($)
2020*
($)
626,435
419,205
385,871
(370,473)
(234,655)
(209,034)
255,962
184,550
176,837
(158,582)
(125,330)
(110,032)
—
97,380
(5,449)
(466)
91,465
(24,146)
67,319
—
67,319
(934)
66,385
4.21
—
4.21
4.20
—
4.20
—
59,220
(2,383)
(5,969)
50,868
(10,769)
40,099
—
40,099
—
(951)
65,854
(1,331)
(7,135)
57,388
(12,732)
44,656
1,061
45,717
—
40,099
45,717
2.67
—
2.67
2.65
—
2.65
2.97
0.07
3.04
2.94
0.07
3.01
15,755
15,807
15,015
15,126
15,039
15,206
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and
7 to the Consolidated Financial Statements.
40
| 2022 Annual Report
Part II
Item 8 Financial Statements and Supplementary Data
CSW Industrials, Inc.
Consolidated Statements of Comprehensive Income
(Amounts in thousands)
Net income
Other comprehensive (loss) income:
Foreign currency translation adjustments
Cash flow hedging activity, net of taxes of $(142), $(156) and $265, respectively
Pension and other postretirement effects, net of taxes of $(138), $(34) and $(682), respectively
Other comprehensive income (loss)
Comprehensive income
Less: Comprehensive income attributable to redeemable noncontrolling
COMPREHENSIVE INCOME ATTRIBUTABLE TO CSW INDUSTRIALS, INC.
Year Ended March 31,
2022
($)
67,319
(44)
533
433
922
68,241
(934)
67,307
2021*
($)
40,099
4,791
587
72
5,450
45,549
—
2020*
($)
45,717
(2,316)
(996)
2,595
(717)
45,000
—
45,549
45,000
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and
7 to the Consolidated Financial Statements.
See accompanying notes to consolidated financial statements.
| 2022 Annual Report
41
Part II
Item 8 Financial Statements and Supplementary Data
CSW Industrials, Inc.
Consolidated Statements of Equity
Balance at March 31, 2019 (As reported)
Cumulative effect of inventory accounting method
change (Note 1 and Note 7)
Balance at March 31, 2019*
Adoption of ASC 842
Share-based compensation
Stock activity under stock plans
Repurchase of common shares
Net income
Dividends
Other comprehensive loss, net of tax
Balance at March 31, 2020*
Share-based compensation
Stock activity under stock plans
Reissuance of treasury shares
Repurchase of common shares
Net income
Dividends
Other comprehensive income, net of tax
Balance at March 31, 2021*
Share-based compensation
Stock activity under stock plans
Reissuance of treasury shares
Repurchase of common shares
Net income
Dividends
Other comprehensive income, net of tax
Common
Stock
($)
158
—
158
—
—
1
—
—
—
—
Additional
Paid-In
Capital
($)
Accumulated
Other
Comprehensive
Loss
($)
Retained
Earnings
($)
Total
Equity
($)
46,633
277,588
(10,729)
263,686
Treasury
Shares
($)
(49,964)
—
—
3,785
—
3,785
(49,964)
46,633
281,373
(10,729)
267,471
(206)
—
—
—
45,717
(8,182)
—
—
—
—
—
—
—
(717)
(206)
5,074
(1,980)
(26,864)
45,717
(8,130)
(717)
318,702
(11,446)
280,365
—
—
1,451
(26,864)
—
—
—
159
(75,377)
—
2
—
—
—
—
—
—
(2,812)
51,405
(7,291)
—
—
—
—
5,074
(3,432)
—
—
52
—
48,327
5,085
(2)
51,233
—
—
47
—
—
—
—
—
40,099
(8,132)
—
161
(34,075)
104,690
350,670
—
1
—
—
—
—
—
—
(4,884)
6,938
(14,427)
—
—
—
8,450
—
(289)
—
—
73
—
—
—
—
—
66,385
(9,533)
—
—
—
—
—
—
—
5,450
(5,996)
—
—
—
—
—
—
922
5,085
(2,812)
102,638
(7,291)
40,099
(8,085)
5,450
415,450
8,450
(4,883)
6,649
(14,427)
66,385
(9,460)
922
BALANCE AT MARCH 31, 2022
162
(46,448)
112,924
407,522
(5,074)
469,086
*
The balances at March 31, 2019, 2020 and 2021 amounts have been adjusted to reflect the change in inventory accounting method, as described in
Notes 1 and 7 to the Consolidated Financial Statements.
See accompanying notes to consolidated financial statements.
42
| 2022 Annual Report
CSW Industrials, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Cash flows from operating activities:
Net income
Less: Income from discontinued operations, net of tax
Income from continuing operations
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization of intangible and other assets
Provision for inventory reserves
Provision for doubtful accounts
Share-based and other executive compensation
Net gain on disposals of property, plant and equipment
Pension plan termination expense
Net pension benefit
Impairment of intangible assets
Net deferred taxes
Changes in operating assets and liabilities:
Accounts receivable
Inventories
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 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
Cash paid for acquisitions
Net cash used in investing activities, continuing operations
Net cash provided by investing activities, discontinued operations
Part II
Item 8 Financial Statements and Supplementary Data
Year Ended March 31,
2022
($)
2021*
($)
2020*
($)
67,319
40,099
—
—
67,319
40,099
45,717
1,061
44,656
11,572
25,314
1,553
1,498
8,450
(85)
—
31
—
9,194
13,843
1,558
696
5,086
(23)
—
163
—
(3,261)
(1,798)
(26,729)
(49,403)
3,479
626
27,983
742
69,089
—
(7,219)
(3,377)
(4,246)
(1,532)
13,856
(46)
66,254
—
69,089
66,254
(15,653)
—
139
(35,942)
(51,456)
—
(8,833)
6,152
30
(287,238)
(289,889)
—
7,918
6,927
184
909
5,074
(833)
6,559
(121)
951
486
(7,997)
(1,653)
3,969
29
5,884
(1,545)
71,397
(1,500)
69,897
(11,437)
—
1,292
(11,837)
(21,982)
1,538
Net cash used in investing activities
(51,456)
(289,889)
(20,444)
| 2022 Annual Report
43
Part II
Item 8 Financial Statements and Supplementary Data
CSW Industrials, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Cash flows from financing activities:
Borrowings on lines of credit
Repayments of lines of credit
Payments of deferred loan costs
Purchase of treasury shares
Proceeds from stock option activity
Proceeds from acquisition of redeemable noncontrolling interest shareholder
Dividends paid to shareholders
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
CASH AND CASH EQUIVALENTS, END OF PERIOD
Supplemental non-cash disclosure:
Cash paid during the year for interest
Cash paid during the year for income taxes
Item 8: Financial Statements and
Supplementary Data
Year Ended March 31,
2022
($)
2021*
($)
2020*
($)
255,000
(23,561)
(148)
7,500
(28,061)
—
(10,489)
(28,460)
94,000
(83,561)
(2,328)
(19,311)
1,327
6,293
(9,459)
1,330
—
(8,083)
(13,039)
214,049
1,937
6,531
10,088
16,619
4,955
20,485
1,336
(8,250)
18,338
10,088
1,875
14,021
—
—
(8,130)
(57,151)
(615)
(8,313)
26,651
18,338
1,165
8,873
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and
7 to the Consolidated Financial Statements.
See accompanying notes to consolidated financial statements.
44
| 2022 Annual Report
Part II
Item 8: Financial Statements and Supplementary Data
Part II
Item 8 Financial Statements and Supplementary Data
CSW Industrials, Inc.
Notes to Consolidated Financial Statements
1. Organization and Operations and Summary of Significant Accounting
Policies
CSWI is a diversified industrial growth company with a strategic
focus on providing niche, value-added products in the end markets
we serve. We operate in three business segments: Contractor
Solutions, Engineered Building Solutions and Specialized Reliability
Solutions. Our products include mechanical products for heating,
ventilation, air conditioning and refrigeration (“HVAC/R”), plumbing
products, grilles, registers and diffusers (“GRD”), building safety
solutions and high-performance specialty lubricants and sealants.
End markets that we serve include HVAC/R, architecturally-
specified building products, plumbing, energy, rail, mining
and general industrial. 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®, KOPR-KOTE®,
KATS Coatings®, Safe-T-Switch®, Air Sentry®, Deacon®, Leak
Freeze®, Greco® and TRUaire® and Shoemaker ManufacturingTM.
The COVID-19 pandemic and its resulting impacts had an overall
negative impact on our financial results in our prior fiscal year
ended March 31, 2021. During our current fiscal year ended
March 31, 2022, the direct impact of the COVID-19 pandemic
on our consolidated operating results was limited, in all material
respects, to our operations in Vietnam. In early August 2021, the
Vietnamese government mandated numerous restrictions in an
effort to mitigate the spread of COVID-19, including closures of
non-essential businesses, limitations on movements of individuals,
and the imposition of other highly-restrictive measures for
businesses, like ours, that continued operations in compliance
with the restrictions. Our Vietnam operations began resuming
normal production activities in late November 2021, when the
Vietnamese government-mandated restrictions began to ease.
Regarding our operations generally, the indirect impacts of the
COVID-19 pandemic have resulted in material and freight cost
inflation, supply chain disruptions and freight delays, driven by
numerous factors including countermeasures taken by U.S.
federal, state and/or local governments and the Federal Reserve,
labor supply shortages, and recovering demand. We expect
material and freight cost volatility, supply chain challenges and
freight delays to continue in the near-term, and we are addressing
these impacts through focused inventory management and by
continuing and increasing the pricing initiatives that began in the
three months ended March 31, 2021.
While the COVID-19 pandemic and its indirect effects have
contributed to increased demand in certain parts of our business,
including the HVAC/R end market, we expect customer demand
levels and our overall results of operations and financial condition
to have some level of volatility through the duration of the pandemic
when compared to pre-pandemic periods. Despite strong demand
in certain of our end markets and clear signs of recovery in others,
we cannot reasonably estimate the magnitude or length of the
pandemic’s direct and indirect adverse impact, including its
ultimate impact on our business or financial condition, due to
continued uncertainty regarding (1) the duration and severity of
the COVID-19 pandemic, including any surges due to the variants
and (2) the continued potential for short and long-term impacts on
our facilities and employees, customer demand and supply chain.
We are closely monitoring the Russian invasion of Ukraine and its
global impacts. We have no operations, employees or assets in
Russia, Belarus or Ukraine, nor do we source goods or services of any
material amount from those countries, whether directly or indirectly.
During the fiscal year ended March 31, 2022, we had no sales into
Belarus or Ukraine and our sales into Russia were immaterial to both
our consolidated sales and the sales for our Specialized Reliability
Solutions segment. Additionally, shortly after the Russian invasion
of Ukraine began in February 2022, we indefinitely suspended all
business activity in Russia. While the conflict continues to evolve
and the outcome remains highly uncertain, we do not currently
believe the Russia-Ukraine conflict will have a material impact on our
business and results of operations. However, if the Russia-Ukraine
conflict continues or worsens, leading to greater global economic
or political disruptions and uncertainty, our business and results of
operations could be materially impacted as a result.
Basis of Presentation
The consolidated financial position, results of operations and
cash flows included in this Annual Report on Form 10-K for
the fiscal year ended March 31, 2022 (“Annual Report”) include
all revenues, costs, assets and liabilities directly attributable to
CSWI and have been prepared in accordance with United States
(“U.S.”) generally accepted accounting principles (“GAAP”). The
consolidated financial statements are for us and our consolidated
subsidiaries, each of which is a wholly-owned subsidiary, except
our 50% investment in a variable interest entity for which we
have determined that we are the primary beneficiary and therefore
have consolidated into our financial statements. All significant
intercompany transactions have been eliminated in consolidation.
Variable Interest Entities
We evaluate whether an entity is a variable interest entity (“VIE”)
and determine if the primary beneficiary status is appropriate on a
quarterly basis. We consolidate a VIE for which we are the primary
beneficiary. When assessing the determination of the primary
beneficiary, we consider all relevant facts and circumstances,
including: the power to direct the activities of the VIE that
most significantly impact the VIE’s economic performance, the
obligation to absorb the expected losses and/or the right to
receive the expected returns of the VIE. Through this evaluation,
we determined that the Whitmore JV is a VIE and the Company
is the primary beneficiary of this VIE, primarily due to Whitmore
having the power to direct the manufacturing activities, which
are considered the most significant activities for the Whitmore JV.
| 2022 Annual Report
45
Part II
Item 8 Financial Statements and Supplementary Data
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:
z Timing and amount of revenue recognition;
z Deferred taxes and tax reserves; and
z Valuation of goodwill and indefinite-lived intangible assets.
Change in Accounting Principle
During the fourth quarter of the fiscal year ended March 31,
2022, the Company changed its method of accounting for certain
domestic inventory previously valued by the last-in, first-out
(“LIFO”) method to the first-in, first-out (“FIFO”) method. All prior
periods presented have been retrospectively adjusted to apply the
new method of accounting. Refer to Note 7 for more information
on the change in inventory accounting method.
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 $11.3 million and $6.1 million at March 31, 2022
and 2021, respectively, and balances of $5.3 million and $4.0 million
were held in foreign banks at March 31, 2022 and 2021, respectively.
Accounts Receivable, Allowance for
Doubtful Accounts and Credit Risk
Trade accounts receivables are recorded at the invoiced amounts
and do not bear interest. We record an allowance for credit
losses on trade receivables that, when deducted from the gross
trade receivables balance, presents the net amount expected
to be collected. We estimate the allowance based on an aging
schedule and according to historical losses as determined from
our billings and collections history. This may be adjusted after
consideration of customer-specific factors such as financial
difficulties, liquidity issues or insolvency, as well as both current
and forecasted macroeconomic conditions as of the reporting date.
We adjust the allowance and recognize credit losses in the income
statement each period. Trade receivables are written off against
the allowance in the period when the receivable is deemed to be
uncollectible. Subsequent recoveries of amounts previously written
off are reflected as a reduction to periodic credit losses in the income
statement. Our allowance for expected credit losses for short-term
receivables as of March 31, 2022 was $1.2 million, compared to
$0.9 million as of March 31, 2020.
Credit risks are mitigated by the diversity of our customer base
across many different industries and by performing creditworthiness
analyses on our customers. Additionally, we mitigate credit risk
through letters of credit and advance payments received from
our customers. We do not believe that we have any significant
concentrations of credit risk.
Inventories and Related Reserves
Inventories are stated at the lower of cost or net realizable value
and include raw materials, supplies, direct labor and manufacturing
overhead. Cost is determined using the first-in, first-out (“FIFO”)
method for valuing inventories at majority of our domestic operations.
Our foreign subsidiaries and some domestic operations use either
the FIFO or the weighted average cost method to value inventory.
Foreign inventories represent approximately 10% and 12% of total
inventories as of March 31, 2022 and 2021, 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 to 40 years
7 to 40 years
5 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.
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
The value of goodwill is tested for impairment at least annually as
of January 31 or whenever events or circumstances indicate such
assets may be impaired. The identification of our reporting units
began at the operating segment level and considered whether
components one level below the operating segment levels should
be identified as reporting units for purpose of testing goodwill
for impairment based on certain conditions. These conditions
included, among other factors, (i) the extent to which a component
46
| 2022 Annual Report
represents a business and (ii) the aggregation of economically
similar components within the operating segments. Other factors
that were considered in determining whether the aggregation of
components was appropriate included the similarity of the nature of
the products and services, the nature of the production processes,
the methods of distribution and the types of industries served.
Accounting Standards Codification (“ASC”) 350 allows an optional
qualitative assessment, prior to a quantitative assessment test, to
determine whether it is more likely than not that the fair value of
a reporting unit exceeds its carrying amount. We bypassed the
qualitative assessment and proceeded directly to the quantitative
test. If the carrying value of a reporting unit exceeds it fair value,
the goodwill of that reporting unit is impaired and an impairment
loss is recorded equal to the excess of the carrying value over its
fair value. We estimate the fair value of our reporting units based
on an income approach, whereby we calculate the fair value of a
reporting unit base on the present value of estimated future cash
flows. A discounted cash flow analysis requires us to make various
judgmental assumptions about future sales, operating margins,
growth rates and discount rates, which are based on our budgets,
business plans, economic projections, anticipated future cash flows
and market participants and are considered non-recurring Level III
inputs within the fair value hierarchy. No goodwill impairment loss
was recognized as a result of the impairment tests for the years
ended March 31, 2022, 2021 or 2020.
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 test
indefinite-lived intangible assets for impairment at least annually
as of January 31 or whenever events or circumstances indicate
that the carrying amount may not be recoverable. Significant
assumptions used in the impairment test include the discount
rate, royalty rate, future sales projections and terminal value
growth rate. These inputs are considered non-recurring Level III
inputs within the fair value hierarchy. An impairment loss would be
recognized when estimated future cash flows are less than their
carrying amount. We recorded an impairment of intangible assets
of continuing operations of $0, $0 and $1.0 million for the years
ended March 31, 2022, 2021 and 2020, respectively.
Property Held for Investment
One of our non-operating subsidiaries holds and manages a
non-operating property, which is valued at lower of cost or market
and disposed of as opportunities arise to maximize value.
Deferred Loan Costs
Deferred loan costs related to our credit facility, which are
reported in other assets and consist of fees and other expenses
associated with debt financing, are amortized over the term of the
associated debt using the effective interest method.
Part II
Item 8 Financial Statements and Supplementary Data
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 9. 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.
Level III – Inputs reflect management’s best estimate of what
market participants would use in pricing the asset or
liability at the measurement date. Consideration is given
to the risk inherent in the valuation technique and the
risk inherent in the inputs to the model.
Recurring fair value measurements are limited to redeemable
noncontrolling interest, investments in derivative instruments and
assets held in defined benefit pension plans. The redemption
value of the redeemable noncontrolling interest is estimated using
a discounted cash flow analysis, which requires management
judgment with respect to future revenue, operating margins,
growth rates and discount rates and is classified as Level III
under the fair value hierarchy. The fair value measurements of our
derivative instruments are determined using models that maximize
the use of the observable market inputs including interest rate
curves and both forward and spot prices for currencies, and are
classified as Level II under the fair value hierarchy. The redemption
value of the redeemable noncontrolling interest is discussed in
Note 3. The fair values of our derivative instruments are included
in Note 11. The fair values of assets held in defined benefit pension
plans are discussed in Note 15.
Leases
We determine if a contract is or contains a lease at inception by
evaluating whether the contract conveys the right to control the
use of an identified asset. Right-of-Use (“ROU”) assets and lease
liabilities are initially recognized at the commencement date based
on the present value of remaining lease payments over the lease
term calculated using our incremental borrowing rate, unless the
| 2022 Annual Report
47
Part II
Item 8 Financial Statements and Supplementary Data
implicit rate is readily determinable. ROU assets represent the right
to use an underlying asset for the lease term, including any upfront
lease payments made and excluding lease incentives. Lease
liabilities represent the obligation to make future lease payments
throughout the lease term. As most of our operating leases do not
provide an implicit rate, we apply our incremental borrowing rate
to determine the present value of remaining lease payments. Our
incremental borrowing rate is determined based on information
available at the commencement date of the lease. The lease
term includes renewal periods when we are reasonably certain
to exercise the option to renew. The ROU asset is amortized over
the expected lease term. Lease and non-lease components, when
present on our leases, are accounted for separately. Leases with
an initial term of 12 months or less are excluded from recognition
in the balance sheet, and the expense for these short-term
leases and for operating leases is recognized on a straight-line
basis over the lease term. We have certain lease contracts with
terms and conditions that provide for variability in the payment
amount based on changes in facts or circumstances occurring
after the commencement date. These variable lease payments
are recognized in our consolidated income statements as the
obligation is incurred. As of March 31, 2022, we did not have
material leases that imposed significant restrictions or covenants,
material related party leases or sale-leaseback arrangements.
Derivative Instruments and Hedge
Accounting
We do not use derivative instruments for trading or speculative
purposes. We enter into interest rate swap agreements for the
purpose of hedging our cash flow exposure to floating interest
rates on certain portions of our debt. All derivative instruments
are recognized on the balance sheet at their fair values. Changes
in the fair value of a designated interest rate swap are recorded
in other comprehensive loss until earnings are affected by the
underlying hedged item. Any ineffective portion of the gain or
loss is immediately recognized in earnings. Upon settlement,
realized gains and losses are recognized in interest expense in
the consolidated statements of 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.
Actuarial gains and losses and prior service costs are recognized
in accumulated other comprehensive loss as they arise, and we
amortize these costs into net pension expense over the remaining
expected service period.
We used a measurement date of March 31 for all periods
presented.
Redeemable Noncontrolling Interests
Noncontrolling interests with redemption features that are not
solely within our control are considered redeemable noncontrolling
interests. Our redeemable noncontrolling interest relates to Shell’s
50% equity interest in the Whitmore JV and is classified in temporary
equity that is reported between liabilities and shareholders’ equity
on our Consolidated Balance Sheets initially at its formation-
date fair value. We adjust the redeemable noncontrolling interest
each reporting period for the net income (or loss) attributable to
the noncontrolling interest. We also make a measurement period
adjustment, if any, to adjust the redeemable noncontrolling interest
to the higher of the redemption value or carrying value each reporting
period. These adjustments are recognized through retained earnings
and are not reflected in net income or net income attributable to
CSWI. The redemption value of the redeemable noncontrolling
interest is estimated using a discounted cash flow analysis, which
requires management judgment with respect to future revenue,
operating margins, growth rates and discount rates. Net income
(loss) attributable to the redeemable noncontrolling interests are
presented as a separate line on the consolidated statements
of operations which is necessary to identify those income (loss)
specifically attributable to CSWI. The financial results and position
of the redeemable noncontrolling interest acquired through the
formation of the Whitmore JV are included in their entirety in our
consolidated statements of operations and consolidated balance
sheets beginning with the first quarter of fiscal 2022.
When calculating earnings per share attributable to CSWI, we
adjust net income attributable to CSWI for the excess portion of
the measurement period adjustment to the extent the redemption
value exceeds both the carrying value and the fair value of the
redeemable noncontrolling interest on a cumulative basis. Refer
to Note 3 for further information regarding the redeemable
noncontrolling interest.
48
| 2022 Annual Report
Revenue Recognition
We recognize revenues to depict the transfer of control of promised
goods or services to our customers in an amount that reflects the
consideration to which we expect to be entitled in exchange for
those goods or services. Refer to Note 20 for further discussion.
We recognize revenue when all of the following criteria have
been met: (i) a contract with a customer exists, (ii) performance
obligations have been identified, (iii) the price to the customer has
been determined, (iv) the price to the customer has been allocated
to the performance obligations, and (v) performance obligations
are satisfied, which are more fully described below.
(i) We identify a contract with a customer when a sales agreement
indicates approval and commitment of the parties; identifies
the rights of the parties; identifies the payment terms; has
commercial substance; and it is probable that we will collect
the consideration to which we will be entitled in exchange
for the goods or services that will be transferred to the
customer. In most instances, our contract with a customer
is the customer’s purchase order. For certain customers,
we may also enter into a sales agreement that outlines a
framework of terms and conditions that apply to all future
purchase orders for that customer. In these situations, our
contract with the customer is both the sales agreement and
the specific customer purchase order. Because our contract
with a customer is typically for a single transaction or customer
purchase order, the duration of the contract is one year or
less. As a result, we have elected to apply certain practical
expedients and, as permitted by the Financial Accounting
Standards Board (“FASB”), omit certain disclosures of
remaining performance obligations for contracts that have
an initial term of one year or less.
(ii) We identify performance obligations in a contract for each
promised good or service that is separately identifiable from
other promises in the contract and for which the customer
can benefit from the good or service either on its own or
together with other resources that are readily available to the
customer. Goods and services provided to our customers that
are deemed immaterial are included with other performance
obligations.
(iii) We determine the transaction price as the amount of
consideration we expect to be entitled to in exchange for
fulfilling the performance obligations, including the effects of
any variable consideration.
(iv) For any contracts that have more than one performance
obligation, we allocate the transaction price to each
performance obligation in an amount that depicts the amount
of consideration to which we expect to be entitled in exchange
for satisfying each performance obligation. We have excluded
disclosure of the transaction price allocated to remaining
performance obligations if the performance obligation is part
of a contract that has an original expected duration of one
year or less as the majority of our contracts are short-term in
nature with a term of one year or less.
(v) We recognize revenue when, or as, we satisfy the performance
obligation in a contract by transferring control of a promised
good or service to the customer.
Part II
Item 8 Financial Statements and Supplementary Data
We exclude from the measurement of the transaction price all
taxes assessed by a governmental authority that are both imposed
on and concurrent with a specific revenue-producing transaction
and collected from a customer. As such, we present revenue net
of sales and other similar taxes. Shipping and handling costs
associated with outbound freight after control over a product has
transferred to a customer are accounted for as a fulfillment cost
and are included in cost of revenues. Costs to obtain a contract,
which include sales commissions recorded in selling, general
and administrative expense, are expensed when incurred as the
amortization period is one year or less. We do not have customer
contracts that include significant financing components.
Research and Development (“R&D”)
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
$4.8 million, $4.5 million and $4.3 million for the years ended
March 31, 2022, 2021 and 2020, 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 the Russell
2000 Index. The fair value of share-based payment arrangements
is amortized on a straight-line basis to compensation expense over
the period in which the restrictions lapse based on the expected
number of shares that will vest. To cover the exercise of options
and vesting of restricted shares, we generally issue new shares
from our authorized but unissued share pool, although we may
instead issue treasury shares in certain circumstances.
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
| 2022 Annual Report
49
Part II
Item 8 Financial Statements and Supplementary Data
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
During the fiscal quarter ended March 31, 2019, we lifted our
assertion that the earnings of our United Kingdom (“U.K.”) and
Australian subsidiaries were indefinitely invested outside of the U.S.
During the fiscal quarter ended September 30, 2020, we lifted our
assertion that the earnings of our Jet Lube Canada subsidiary were
indefinitely invested outside of the U.S. We assert that the foreign
earnings of the U.K., Australian, Vietnam, RectorSeal Canada and
Jet Lube Canada subsidiaries will be remitted to the U.S. through
distributions. A provision was made for taxes that may become
payable upon distribution of earnings from our U.K., Australian,
Vietnam and Jet Lube Canada subsidiaries. We still consider the
earnings of our other Canadian subsidiaries indefinitely invested
outside the U.S. as we have needs for working capital in our other
Canadian entities.
Uncertain Tax Positions
We establish income tax liabilities to remove some or all of the income
tax benefit of any of our income tax positions based upon one of
the following: (1) the tax position is not “more likely than not” to be
sustained, (2) the tax position is “more likely than not” to be sustained,
but for a lesser amount or (3) the tax position is “more likely than not”
to be sustained, but not in the financial period in which the tax position
was originally taken. The amount of income taxes we pay is subject
to ongoing audits by federal, state, and foreign taxing authorities,
which often result in proposed assessments. We establish reserves
for open tax years for uncertain tax positions that may be subject to
challenge by various taxing authorities. The consolidated tax provision
and related accruals include the impact of such reasonably estimable
losses and related interest and penalties as deemed appropriate.
We recognize the tax benefit from an uncertain tax position only if
it is more likely than not that the tax position will be sustained on
examination by the taxing authorities. The determination is based on
the technical merits of the position and presumes that each uncertain
tax position will be examined by the relevant taxing authority that has
full knowledge of all relevant information. The tax benefits recognized
in the financial statements from such a position are measured based
on the largest benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement.
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 12
50
| 2022 Annual Report
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 connection with stock options and
restricted stock awards not entitled to vote and receive dividends
during the restriction period.
Foreign Currency Translation
Assets and liabilities of our foreign subsidiaries are translated to
U.S. dollars at exchange rates prevailing at the balance sheet
date, while income and expenses are translated 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.
Segments
We conduct our operations through three business segments
based on how we manage the business. Our Chief Executive
Officer views our business, assesses performance and allocates
resources using financial information generated and reported at
the reportable segment level. We evaluate segment performance
and allocate resources based on each reportable segment’s
operating income. Our reportable segments are as follows:
1. Contractor Solutions, which manufactures efficiency and
performance enhancing products predominantly for residential
and commercial HVAC/R and plumbing applications, which
are designed primarily for professional end-use customers.
This segment is comprised primarily of our RectorSeal,
TRUaire and Shoemaker operating companies.
2. Engineered Building Solutions, which provides primarily
code-driven products focused on life safety that are
engineered to provide aesthetically-pleasing solutions for the
construction, refurbishment and modernization of commercial,
institutional, and multi-family residential buildings. This
segment is comprised primarily of our Balco, Greco and
Smoke Guard operating companies.
3. Specialized Reliability Solutions, which provides products for
increasing the reliability, performance and lifespan of industrial
assets and solving equipment maintenance challenges. This
segment is comprised primarily of our Whitmore operating
company and the Whitmore JV.
Intersegment sales and transfers are recorded at cost plus a
profit margin, with the revenues and related margin on such
sales eliminated in consolidation. We do not allocate share-based
compensation expense, interest expense, interest income or other
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.
Discontinued Operations
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”). As a result, we reclassified
the assets comprising that business to assets held-for-sale, and
made a corresponding adjustment to our consolidated statements
of operations to reflect discontinued operations for all periods
presented. The discontinued operations have had no activities
since the year ended March 31, 2020.
Accounting Developments
Pronouncements Implemented
In December 2019, the FASB issued ASU No. 2019-12, “Income
Taxes: Simplifying the Accounting for Income Taxes.” This update
simplifies the accounting for income taxes by removing certain
exceptions and adding some requirements regarding franchise
(or similar) tax, step-ups in a business combination, treatment of
entities not subject to tax and when to apply enacted changes
in tax laws. This ASU is effective for fiscal years beginning after
December 15, 2020 and interim periods within those fiscal years.
The amendments related to changes in ownership of foreign
equity method investments or foreign subsidiaries should be
applied on a modified retrospective basis through a cumulative-
effect adjustment to retained earnings as of the beginning of the
fiscal year of adoption. The amendments related to franchise
taxes that are partially based on income should be applied on
either a retrospective basis for all periods presented or a modified
retrospective basis through a cumulative-effect adjustment to
2. Acquisitions
Shoemaker Manufacturing, LLC
On December 15, 2021, we acquired 100% of outstanding
equity of Shoemaker Manufacturing, LLC (“Shoemaker”),
based in Cle Elum, Washington, for an aggregate purchase
price of $43.5 million, including working capital and closing
cash adjustments and expected contingent consideration.
Shoemaker offers high-quality customizable GRD for commercial
and residential markets, and expands CSWI’s HVAC/R product
offering and regional exposure in the northwest U.S. The
aggregate purchase price was comprised of cash consideration of
$38.5 million (including $1.2 million cash acquired), 25,483 shares
of the Company’s common stock valued at $3.0 million at
transaction close and additional contingent consideration of
up to $2.0 million based on Shoemaker meeting a defined
financial target during the quarter ended March 31, 2022, which
was achieved. The cash consideration was funded with cash
on hand and borrowings under our existing Revolving Credit
Facility. The 25,483 shares of common stock delivered to the
sellers as consideration were issued from treasury shares. As of
Part II
Item 8 Financial Statements and Supplementary Data
retained earnings as of the beginning of the fiscal year of adoption.
All other amendments should be applied on a prospective basis.
Early adoption is permitted. Our adoption of ASU No. 2019-12
effective April 1, 2021 did not have a material impact on our
condensed consolidated financial conditions and results of
operations.
Pronouncements not yet implemented
In October 2021, the FASB issued ASU No. 2021-08,
“Accounting for Contract Assets and Contract Liabilities from
Contracts with Customers.” This update improves comparability
for both the recognition and measurement of acquired
customer revenue contracts at the date of and after a business
combination. The amendments are effective for fiscal years
beginning after December 15, 2022, including interim periods
within those fiscal years and should be applied prospectively to
business combinations occurring on or after the effective date
of the amendments. The adoption is not expected to have a
significant impact on our consolidated financial condition and
results of operations.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate
Reform (Topic 848) Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.” This update provides temporary
optional expedients and exceptions to existing guidance on
applying contract modifications and hedge accounting to
facilitate the market transition from existing reference rates,
such as the London Interbank Offered Rate (“LIBOR”), which
is scheduled to be phased out in June 2023, to alternate rates
such as the Secured Overnight Financing Rate (“SOFR”).
This ASU was effective upon issuance and can be applied
prospectively through December 31, 2022. The adoption is
not expected to have a significant impact on our consolidated
financial condition and results of operations.
the acquisition date, the estimated fair value of the contingent
consideration obligation was classified as a current liability of
$2.0 million and was determined using a scenario-based analysis
on forecasted future results. In May 2022, the full earn-out amount
of $2.0 million was remitted to the sellers due to the performance
obligation had been met. During the year ended March 31, 2022,
we incurred $0.7 million in transaction expenses in connection
with the Shoemaker acquisition, which were included in selling,
general and administrative expenses in the Consolidated
Statement of Operations under the Contractor Solution segment.
The Shoemaker acquisition was accounted for as a business
combination under FASB Accounting Standards Codification
Topic 805, Business Combinations (“Topic 805”). The excess of the
purchase price over the preliminary fair value of the identifiable assets
acquired was $8.1 million allocated to goodwill, which represents
the value expected to be obtained from owning a more extensive
GRD product portfolio for the HVAC/R market and increased
regional exposure to the northwest U.S. The preliminary allocation
of the fair value of the net assets acquired included customer lists
($23.0 million), trademarks ($6.5 million), noncompete agreements
| 2022 Annual Report
51
Part II
Item 8 Financial Statements and Supplementary Data
($0.7 million), backlog ($0.3 million), inventory ($3.6 million),
accounts receivable ($1.7 million), cash ($1.2 million), equipment
($1.4 million) and prepaid expenses ($0.2 million), net of current
liabilities ($3.2 million). Customer lists, noncompete agreements and
backlog are being amortized over 15 years, 5 years and 1 month,
respectively, while trademarks and goodwill are not being amortized.
The Company’s evaluation of the facts and circumstances available
of December 15, 2021, to assign fair values to assets acquired and
liabilities assumed is ongoing. We expect to finalize the purchase
price allocation as soon as practicable, but no later than one
year from the acquisition date. Goodwill and all intangible assets,
including customer lists, trademarks, noncompete agreements and
backlog are deductible and amortized over 15 years for income tax
purposes. Shoemaker activity has been included in our Contractor
Solutions segment since the acquisition date. No proforma
information has been provided due to immateriality.
T.A. Industries
On December 15, 2020, we acquired 100% of the outstanding
equity of T.A. Industries, Inc. (“TRUaire”), a leading manufacturer
of grilles, registers, and diffusers for the residential and commercial
HVAC/R end market, based in Santa Fe Springs, California. The
acquisition also included TRUaire’s wholly-owned manufacturing
facility based in Vietnam. The acquisition extended the Company’s
product offerings to the HVAC market and provided strategic
distribution facilities.
The contractual consideration paid for TRUaire included cash of
$288.0 million (after working capital and closing cash adjustments)
and 849,852 shares of the Company’s common stock valued at
$97.7 million at transaction close based on the closing market
price of the Company’s common shares on the acquisition date.
The cash consideration was funded through a combination of
cash on hand and borrowings under our Revolving Credit Facility.
The 849,852 shares of common stock delivered to the sellers as
consideration were reissued from treasury shares.
Acquisition Consideration (Amounts in thousands, except for shares)
Cash(a)
Common stock (849,852 shares)
TOTAL CONSIDERATION TRANSFERRED
$
$
287,986
97,656
385,642
(a) Amount includes working capital and closing cash adjustments, and includes
a $1.0 million to be paid to the sellers as a result of an expected tax refund
pursuant to the purchase agreement.
The TRUaire acquisition was accounted for as a business
combination under FASB Accounting Standards Codification
Topic 805, Business Combinations (“Topic 805”). Pursuant to
Topic 805, the Company allocated the TRUaire purchase price
to tangible and identifiable intangible assets acquired and
liabilities assumed based on their estimated fair values as of the
acquisition date, December 15, 2020. The excess of the purchase
price over those fair values was recorded to goodwill. The
Company completed the analysis of tangible assets, intangible
assets, liabilities assumed and the related allocation during the
three months ended December 31, 2021. The following table
summarizes the Company’s best initial estimate of the aggregate
fair value of the assets acquired and liabilities assumed at the date
of acquisition (in thousands).
Initial Estimated Fair
Value
($)
Measurement Period
Adjustments
($)
Updated Estimated
Fair Value
($)
Cash
Accounts Receivable, net
Inventory
Short-Term Tax Indemnity Assets
Other Current Assets
Property, Plant and Equipment
Trade Name (indefinite life)
Customer Lists (useful life of 15 years)
Right-Of-Use Assets
Long-Term Tax Indemnity Assets
Other Long-term Assets
Accounts Payable
Accrued and Other Current Liabilities
Lease Liabilities - Short-Term
Deferred Tax Liabilities(a)
Tax Contingency Reserve
Lease Liabilities - Long-Term
Estimated fair value of net assets acquired
Goodwill(a)
TOTAL PURCHASE PRICE
1,471
13,467
46,313
5,000
1,285
28,832
43,500
194,000
49,040
7,500
2,850
(4,074)
(3,678)
(4,811)
(56,249)
(22,511)
(45,369)
256,566
129,169
385,735
—
(17)
(1,300)
—
2,103
(4,201)
—
8,500
—
—
(698)
—
(172)
—
(3,784)
5,190
—
5,621
(5,714)
(93)
1,471
13,450
45,013
5,000
3,388
24,631
43,500
202,500
49,040
7,500
2,152
(4,074)
(3,850)
(4,811)
(60,033)
(17,321)
(45,369)
262,187
123,455
385,642
(a) Reflects an immaterial adjustment of $1.8 million to both goodwill and deferred tax liabilities associated with the opening balance sheets inventory.
52
| 2022 Annual Report
Deferred tax liabilities were established to record the deferred
tax impact of purchase price accounting adjustments, primarily
related to intangibles assets. Tax contingency reserves relate to
uncertain tax positions TRUaire took in the periods prior to the
acquisition date.
In accordance with the tax indemnification included in the
purchase agreement of TRUaire, the seller provided contractual
indemnification to the Company for up to $12.5 million related to
uncertain tax positions taken in prior years. The outcome of this
arrangement will either be settled or expire by 2023. During the
three months ended March 31, 2021, TRUaire received an audit
closing letter from Internal Revenue Service related to calendar
2017, a pre-acquisition tax year. As a result of this, $5.0 million
of the relevant tax indemnification was released in accordance
with the purchase agreement. The release of the relevant uncertain
tax position accrual of $5.3 million was recorded as an income
tax benefit for the three months ended March 31, 2021, and the
offsetting indemnification expense of $5.0 million was recorded in
other expense on the consolidated statement of operations. As of
March 31, 2022, approximately $7.5 million of the indemnification
assets remained outstanding.
Goodwill of $123.5 million represents the excess of the purchase
price over the fair value of the underlying tangible and intangible
assets acquired and liabilities assumed. The acquisition goodwill
represents the value expected to be obtained from expanding
the Company’s product offerings more broadly across the HVAC
end market. The goodwill recorded as part of this acquisition
is included in the Contractor Solutions segment. The goodwill
associated with the acquisition will not be amortized for financial
reporting purposes and will not be deductible for income tax
purposes.
TRUaire activity has been included in our Contractor Solutions
segment since the acquisition date. During the years ended
March 31, 2022 and March 31, 2021, the Company incurred
and paid $0 and $7.8 million transaction expenses in connection
with the TRUaire acquisition. Effective April 1, 2022, TRUaire was
fully integrated with RectorSeal, the primary operating company
of the Contractor Solutions segment.
Pursuant to Topic 805, unaudited supplemental proforma results
of operations for the year ended March 31, 2021 and 2020, as
if the acquisition of TRUaire had occurred on April 1, 2019 are
presented below (in thousands, except per share amounts):
Revenue, net
Net income
Net earnings per common share:
Diluted
Basic
Year Ended March 31,
2021
($)
495,788
47,648
3.03
3.05
2020
($)
480,285
28,492
1.77
1.79
These proforma results do not present financial results that would
have been realized had the acquisition occurred on April 1, 2019,
nor are they intended to be a projection of future results. The
Part II
Item 8 Financial Statements and Supplementary Data
unaudited proforma results include certain proforma adjustments to
net income that were directly attributable to the acquisition, as if the
acquisition had occurred on April 1, 2019, including the following:
z Transactions expenses of $0 and $7.8 million for the years
ended March 31, 2021 and 2020, respectively, that would
have been recognized by the Company related to the TRUaire
acquisition;
z Additional depreciation expense of $0.4 million and $0.5 million
for the years ended March 31, 2021 and 2020, respectively,
that would have been recognized as a result of the fair value
step-up of the property, plant and equipment;
z Additional amortization expense of $0 and $7.9 million for the
years ended March 31, 2021 and 2020, respectively, that would
have been recognized as a result of the fair value step-up of
the inventory;
z Additional amortization expense of $9.6 million and $13.5 million
for the years ended March 31, 2021 and 2020, respectively,
that would have been recognized as a result of the allocation
of purchase consideration to customer lists subject to
amortization;
z Estimated additional interest expense of $3.3 million and
$4.6 million for the years ended March 31, 2021 and 2020,
respectively, as a result of incurring additional borrowing;
z Income tax effect of the proforma adjustments calculated using
a blended statutory income tax rate of 24.5% of $3.2 million
and $8.4 million for the years ended March 31, 2021 and 2020,
respectively.
Petersen Metals
On April 2, 2019, we acquired the assets of Petersen Metals,
Inc. (“Petersen”), based near Tampa, Florida, for $11.8 million,
of which $11.5 million was paid at closing and funded through
our Revolving Credit Facility, and the remaining $0.3 million
represented a working capital adjustment paid in July 2019.
Petersen is a leading designer, manufacturer and installer of
architecturally-specified, engineered metal products and railings,
including aluminum and stainless steel railings products for interior
and exterior applications. The excess of the purchase price over
the fair value of the identifiable assets acquired was $6.1 million
allocated to goodwill, which will be deductible for income tax
purposes. Goodwill represents the value expected to be obtained
from enabling geographic, end market and product diversification
and expansion as Petersen is a strategic complement to our
existing line of architecturally-specified building products. The
allocation of the fair value of the net assets acquired included
customer lists of $3.2 million and backlog of $0.4 million, as well
as accounts receivable, inventory and equipment of $2.2 million,
$0.8 million and $0.7 million, respectively, net of current liabilities
of $1.5 million. Customer lists are being amortized over 15 years,
backlog is amortized over 1.5 years and goodwill is not being
amortized. Petersen activity has been included in our Engineered
Building Solutions segment since the acquisition date. No
proforma information has been provided due to immateriality.
| 2022 Annual Report
53
Part II
Item 8 Financial Statements and Supplementary Data
3. Consolidation of Variable Interest Entity and Redeemable Noncontrolling
Interest
Whitmore Joint Venture
On April 1, 2021, Whitmore Manufacturing, LLC (“Whitmore”),
a wholly-owned subsidiary of CSWI, completed the formation
of a joint venture (the “Whitmore JV”) with Pennzoil-Quaker
State Company dba SOPUS Products (“Shell”), a wholly-owned
subsidiary of Shell Oil Company that comprises Shell’s U.S.
lubricants business. The formation was consummated through
a transaction in which Whitmore sold to Shell a 50% interest in
a wholly-owned subsidiary (containing certain existing operating
assets) in exchange for consideration of $13.4 million from Shell in
the form of cash ($5.3 million) and intangible assets ($8.1 million).
The Whitmore JV has been consolidated into the operations of
the Company and its activity has been included in our Specialized
Reliability Solutions segment since the formation date.
The Whitmore JV is deemed to be a VIE as the equity investors at risk, as a group, lack the characteristics of a controlling financial
interest. The major factor that led to the conclusion that the Company is the primary beneficiary of this VIE is that Whitmore has the
power to direct the manufacturing activities, which are considered the most significant activities for the Whitmore JV. Whitmore JV’s
total net assets are presented below (in thousands):
Cash
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Property, plant and equipment, net
Intangible assets, net
Other assets
TOTAL ASSETS
Accounts payable
Accrued and other current liabilities
Other long-term liabilities
TOTAL LIABILITIES
March 31, 2022
($)
5,505
7,653
1,663
6
7,014
7,288
121
29,250
5,401
1,306
51
6,758
For the year ended March 31, 2022, the Whitmore JV generated net income of $1.9 million.
The Whitmore JV’s LLC Agreement contains a put option that gives either member the right to sell its 50% equity interest in the Whitmore
JV to the other member at a dollar amount equivalent to 90% of the initiating member’s equity interest determined based on the fair
market value of the Whitmore JV’s net assets. This put option can be exercised, at either member’s discretion, by providing written
notice to the other member after three years from the Whitmore JV’s formation, subject to certain timing restrictions. This redeemable
noncontrolling interest is recorded at the higher of the redemption value or carrying value each reporting period. Changes in redeemable
noncontrolling interest for the year ended March 31, 2022 were as follows (in thousands):
Balance at March 31, 2021
Fair value of redeemable noncontrolling interest at formation-date
Net income attributable to redeemable noncontrolling interest
Contributions from noncontrolling interest
Adjustments to redemption value
BALANCE AT MARCH 31, 2022
4. Discontinued Operations
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”) to allow us to focus resources
on our core growth platforms. Our former Coatings business
manufactured specialized industrial coatings products including
urethanes, epoxies, acrylics and alkyds. As a result, we reclassified
54
| 2022 Annual Report
$
—
13,391
934
1,000
—
$
15,325
the assets comprising that business to assets held-for-sale, and
made a corresponding adjustment to our consolidated statements
of operations to reflect discontinued operations for all periods
presented. During the quarter ended September 30, 2018, we
received an aggregate of $6.9 million for the sale of assets that
related to our Coatings business in multiple transactions. This
Part II
Item 8 Financial Statements and Supplementary Data
resulted in gains on disposal of $6.9 million due to write-downs
of long-lived assets in prior periods. During the quarter ended
March 31, 2020, we received $1.5 million for the sale of the last
remaining real property owned by our former Coatings business.
The sale resulted in proceeds and a gain on disposal of $1.5 million
due to write-downs of long-lived assets in prior periods. The last
remaining asset of the Coatings business is a long-term lease
that expires in March 2027. We have not terminated the lease,
but we have sub-let the property for the remainder of the lease
term. As such, this lease has been moved back into continuing
operations, effective March 31, 2020, and the related ROU assets
and lease liabilities have been reported as continuing operations
since March 31, 2020. The discontinued operations have had no
activities since the year ended March 31, 2020.
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, any corresponding tax
assets or liabilities have been reflected as a component of our
continuing operations. Discontinued operations reported no
assets or liabilities as of March 31, 2022 and 2021, respectively,
in the consolidated balance sheets.
Summarized selected financial information for the Coatings business for the years ended March 31, 2022, 2021 and 2020, is presented
in the following table (in thousands):
Revenues, net
Gain from discontinued operations before income taxes
Income tax expense
GAIN FROM DISCONTINUED OPERATIONS
5. Goodwill and Intangible Assets
During the three months ended June 30, 2021, we revised our
segment structure creating three reportable segments: Contractor
Solutions, Engineered Building Solutions and Specialized Reliability
Solutions. Refer to Note 1 and Note 21 for additional information
on the Company’s segment realignment. As part of our segment
realignment, we changed our reporting units and reallocated
existing goodwill to each of the new reportable segments and
associated reporting units, based on management’s estimate of
the relative fair value of each reporting unit. The result of this
reallocation of goodwill has been recast, by reportable segment,
as of March 31, 2021.
Year Ended March 31,
2022
($)
—
—
—
—
2021
($)
—
—
—
—
2020
($)
—
1,326
(265)
1,061
In conjunction with the goodwill reallocation described above,
during the three months ended June 30, 2021, we performed
an impairment test of goodwill held by all reporting units as of
March 31, 2021. Based on the results of the goodwill assessment,
we determined that the fair values of each reporting unit
exceeded its carrying value. As such, we concluded that there
was no indication of goodwill impairment for all reporting units in
connection with the segment changes.
The changes in the carrying amount of goodwill for the years ended March 31, 2022 and 2021 were as follows (in thousands):
Balance at April 1, 2020
TRUaire acquisition
Currency translation
BALANCE AT MARCH 31, 2021
Goodwill re-allocation
TRUaire acquisition
Shoemaker acquisition
Currency translation
Contractor
Solutions
($)
43,610
125,554
181
169,345
14,813
(2,099)
8,115
(22)
Engineered
Building
Solutions
($)
21,237
—
1,001
22,238
2,727
—
—
42
BALANCE AT MARCH 31, 2022
190,152
25,007
Specialized
Reliability
Solutions
($)
26,840
—
372
27,212
(17,540)
—
—
(173)
9,499
Total
($)
91,687
125,554
1,554
218,795
—
(2,099)
8,115
(153)
224,658
| 2022 Annual Report
55
Part II
Item 8 Financial Statements and Supplementary Data
The following table provides information about our intangible assets for the years ended March 31, 2022 and 2021 (in thousands, except years):
Finite-lived intangible assets:
Patents
Customer lists and amortized trademarks
Non-compete agreements
Other
TRADE NAMES AND TRADEMARKS
NOT BEING AMORTIZED:
March 31, 2022
March 31, 2021
Wtd Avg Life
(Years)
Ending Gross
Amount
($)
Accumulated
Amortization
($)
Ending Gross
Amount
($)
Accumulated
Amortization
($)
11
14
5
8
9,417
297,909
939
5,123
313,388
61,097
(8,065)
(61,368)
(258)
(3,957)
(73,648)
9,461
267,096
982
4,743
282,282
(7,540)
(42,345)
(790)
(3,141)
(53,816)
—
54,594
—
Amortization expense for the years ended March 31, 2022, 2021 and 2020 was $24.8 million (including the amortization of inventory
purchase accounting adjustment of $3.9 million), $10.5 million and $6.7 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):
2023
2024
2025
2026
2027
Thereafter
TOTAL
$
$
18,877
18,403
17,668
17,062
16,294
151,436
239,740
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 of March 31, 2022,
512,782 shares were available for issuance under the 2015 Plan.
We recorded share-based compensation expense for restricted stock as follows for the years ended March 31, 2022, 2021 and 2020
(in thousands):
Share-based compensation expense
Related income tax benefit
NET SHARE-BASED COMPENSATION EXPENSE
Year Ended March 31,
2022
($)
8,450
(2,197)
6,253
2021
($)
5,085
(1,220)
3,865
2020
($)
5,074
(1,218)
3,856
Stock option activity, which represents outstanding CSWI awards resulting from the conversion of Capital Southwest stock options
held by former Capital Southwest employees, was as follows:
Outstanding at April 1, 2021
Exercised
Outstanding at March 31, 2022(a)
EXERCISABLE AT MARCH 31, 2022(a)
Year Ended March 31, 2022
Weighted
Average Exercise
Price
($)
Remaining
Contractual Life
(Years)
Aggregate
Intrinsic Value
(in Millions)
($)
25.23
25.23
25.23
25.23
2.4
2.4
1.0
1.0
Number of
Shares
63,413
(52,613)
10,800
10,800
(a) All remaining awards outstanding and exercisable at March 31, 2022 are held by employees of CSWI.
56
| 2022 Annual Report
Part II
Item 8 Financial Statements and Supplementary Data
Year Ended March 31, 2021
Weighted
Average Exercise
Price
($)
Remaining
Contractual Life
(Years)
Aggregate
Intrinsic Value
(in Millions)
($)
25.30
25.40
25.23
25.23
3.4
3.4
7.0
7.0
Number of
Shares
115,858
(52,445)
63,413
63,413
Outstanding at April 1, 2020
Exercised
Outstanding at March 31, 2021
EXERCISABLE AT MARCH 31, 2021
No options were granted or vested during the years ended
March 31, 2022, 2021 and 2020, and all stock options were
vested and recognized prior to the year ended March 31, 2020.
The intrinsic value of options exercised during the years ended
March 31, 2022, 2021 and 2020 was $5.8 million, $2.5 million
and $5.6 million, respectively. Cash received for options exercised
during the years ended March 31, 2022, 2021 and 2020 was
$1.3 million, $1.3 million and $2.9 million, respectively, and the
tax benefit received was $1.4 million, $0.4 million and $1.2 million,
respectively.
Restricted stock activity was as follows:
Outstanding at April 1, 2021
Granted
Vested
Canceled
OUTSTANDING AT MARCH 31, 2022
Year Ended March 31, 2022
Weighted Average
Grant Date Fair
Value
($)
70.50
161.00
63.44
90.60
126.02
Number of
Shares
172,916
164,864
(106,929)
(2,520)
228,331
During the three months ended June 30, 2021, Joe Armes, the
Company’s Chairman, Chief Executive Officer and President, was
awarded special long-term incentive awards with the purpose
of retaining him through retirement and promoting successful
succession planning and transition practices. Mr. Armes’ awards
include 31,496 shares of restricted stock, 27,559 performance
shares and 19,685 performance restricted stock units. All awards
granted to Mr. Armes are included in the above restricted share
activity.
During the restriction period, the holders of restricted shares
are entitled to vote and receive dividends. Unvested restricted
shares outstanding as of March 31, 2022 and 2021 included
102,360 and 82,728 shares (at target), respectively, with
performance-based vesting provisions, having vesting ranges
from 0-200% based on pre-defined performance targets with
market conditions. Performance-based awards accrue dividend
equivalents, which are settled upon (and to the extent of) vesting
of the underlying award, and do not have the right to vote
until vested. Performance-based awards are earned upon the
achievement of objective performance targets and are payable in
common shares. Compensation expense is calculated based on
the fair market value as determined by a Monte Carlo simulation
and is recognized over a 36-month cliff vesting period. We granted
47,845 and 34,245 awards with performance-based vesting
provisions during the years ended March 31, 2022 and 2021,
respectively, with a vesting range of 0-200%.
At March 31, 2022, we had unrecognized compensation cost
related to unvested restricted shares of $20.1 million, which will be
amortized into net income over the remaining weighted average
vesting period of 3.4 years. The total fair value of restricted shares
vested during the years ended March 31, 2022 and 2021 was
$14.2 million and $8.5 million, respectively.
7. Inventory
Inventories are stated at the lower of cost or net realizable value.
In connection with the integration of TRUaire and the Whitmore
JV, the Company voluntarily changed its method of accounting
for certain domestic inventory previously valued by the LIFO
method to the FIFO method during the fourth quarter of fiscal
2022. The cumulative effect of this change on periods presented
prior to fiscal 2020 resulted in an increase in Retained earnings of
$3.8 million at March 31, 2019. The FIFO method of accounting
for inventory is preferable because it improves the Company’s
comparability with the industry peers, the majority of which use
the FIFO method as the primary inventory valuation method,
conforms the Company’s entire inventory to a single method of
accounting and aligns the inventory cost flow assumption with
the physical flow of goods.
| 2022 Annual Report
57
Part II
Item 8 Financial Statements and Supplementary Data
The Inventories, net caption in the Consolidated Balance Sheet is comprised of the following components:
Raw materials and supplies
Work in process
Finished goods
Total inventories
Less: Obsolescence reserve
INVENTORIES, NET
March 31,
2022
($)
46,136
7,471
100,792
154,399
(4,285)
150,114
2021*
($)
27,416
6,365
72,452
106,233
(3,582)
102,651
*
Year ended March 31, 2021 amounts have been revised to reflect the change in inventory accounting method, as described above and in Note 1 to the consolidated
financial statements.
As a result of the retrospective application of this change in accounting method, the following financial statement line items within
the accompanying financial statements were adjusted, as follows:
(in thousands, except for per share amounts)
Consolidated Statement of Operations
Cost of sales
Income before income taxes
Income tax expense
Net income
Income attributable to redeemable noncontrolling interest
Net income attributable to CSW Industrials, Inc.
Earnings per share attributable to CSW Industrials, Inc.
Basic
Diluted
Consolidated Statements of Comprehensive Income
Net income
Comprehensive income attributable to redeemable noncontrolling interest
Total comprehensive income attributable to CSW Industrials, Inc.
(in thousands, except for per share amounts)
Consolidated Statement of Operations
Cost of sales
Income before income taxes
Income tax expense
Net income
Net income attributable to CSW Industrials, Inc.
Earnings per share attributable to CSW Industrials, Inc.
Basic
Diluted
Consolidated Statements of Comprehensive Income
Net income
Total comprehensive income attributable to CSW Industrials, Inc.
58
| 2022 Annual Report
Fiscal Year Ended March 31, 2022
As Computed
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
373,194
370,473
88,744
23,426
65,318
(1,073)
64,245
4.08
4.06
65,318
(1,073)
65,167
91,465
24,146
67,319
(934)
66,385
4.21
4.20
67,319
(934)
67,307
(2,721)
2,721
720
2,001
139
2,140
0.13
0.14
2,001
139
2,140
Fiscal Year Ended March 31, 2021
As Previously
Reported
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
234,405
234,655
51,118
10,830
40,287
40,287
2.68
2.66
40,287
45,738
50,868
10,769
40,099
40,099
2.67
2.65
40,099
45,549
250
(250)
(61)
(188)
(188)
(0.01)
(0.01)
(188)
(189)
(in thousands, except for per share amounts)
Consolidated Statement of Operations
Cost of sales
Income before income taxes
Income tax expense
Net income
Net income attributable to CSW Industrials, Inc.
Earnings per share attributable to CSW Industrials, Inc.
Basic
Diluted
Consolidated Statements of Comprehensive Income
Net income
Total comprehensive income attributable to CSW Industrials, Inc.
(in thousands, except for per share amounts)
Consolidated Balance Sheets
Inventories, net
Deferred tax liabilities
Redeemable noncontrolling interest
Retained earnings
Consolidated Statement of Cash Flows
Net income
Deferred income taxes
Provision for inventory reserves
(in thousands, except for per share amounts)
Consolidated Balance Sheets
Inventories, net
Deferred tax liabilities
Retained earnings
Consolidated Statement of Cash Flows
Net income
Deferred income taxes
Provision for inventory reserves
Part II
Item 8 Financial Statements and Supplementary Data
Fiscal Year Ended March 31, 2020
As Previously
Reported
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
208,821
209,034
57,601
12,784
45,877
45,877
3.05
3.02
45,877
45,160
57,388
12,732
45,717
45,717
3.04
3.01
45,717
45,000
213
(213)
(52)
(160)
(160)
(0.01)
(0.01)
(160)
(160)
Fiscal Year Ended March 31, 2022
As Computed
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
142,828
60,962
15,464
401,945
65,318
(3,981)
4,274
150,114
62,810
15,325
407,522
67,319
(3,261)
1,553
7,286
1,848
(139)
5,577
2,001
720
(2,721)
Fiscal Year Ended March 31, 2021
As Previously
Reported
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
98,086
66,052
347,234
40,287
(1,737)
1,308
102,651
67,180
350,670
40,099
(1,798)
1,558
4,565
1,128
3,436
(188)
(61)
250
| 2022 Annual Report
59
Part II
Item 8 Financial Statements and Supplementary Data
(in thousands, except for per share amounts)
Consolidated Balance Sheets
Inventories, net
Deferred tax liabilities
Retained earnings
Consolidated Statement of Cash Flows
Net income
Deferred income taxes
Provision for inventory reserves
Fiscal Year Ended March 31, 2020
As Previously
Reported
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
53,753
3,848
315,078
58,567
5,037
318,703
45,877
45,717
537
(28)
486
184
4,814
1,189
3,625
(160)
(51)
212
As a result of the retrospective application of this change in accounting principle, the following financial statement line items within the
unaudited quarterly condensed consolidated financial statements for fiscal 2022 and 2021 were adjusted, as follows:
Three Months Ended
June 30, 2021
June 30, 2020
As Previously
Reported
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
As Previously
Reported
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
(in thousands, except for per share amounts)
Consolidated Statement of Operations
Cost of sales
Income before income taxes
Income tax expense
Net income
Income attributable to redeemable
noncontrolling interest
92,668
26,765
6,401
20,363
(315)
92,240
27,193
6,507
20,686
(224)
Net income attributable to CSW Industrials, Inc.
20,048
20,462
Earnings per share attributable to
CSW Industrials, Inc.
Basic
Diluted
1.28
1.27
1.30
1.30
(428)
428
106
323
91
414
0.02
0.03
48,211
15,628
3,668
11,960
—
48,355
15,484
3,633
11,852
—
144
(144)
(35)
(108)
—
11,960
11,852
(108)
0.81
0.81
0.81
0.80
—
(0.01)
Three Months Ended
September 30, 2021
September 30, 2020
As Previously
Reported
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
As Previously
Reported
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
(in thousands, except for per share amounts)
Consolidated Statement of Operations
Cost of sales
Income before income taxes
Income tax expense
Net income
Income attributable to redeemable
noncontrolling interest
92,533
24,329
6,121
18,208
(212)
92,333
24,529
6,170
18,359
(188)
Net income attributable to CSW Industrials, Inc.
17,995
18,171
Earnings per share attributable to
CSW Industrials, Inc.
Basic
Diluted
60
| 2022 Annual Report
1.14
1.14
1.15
1.15
(200)
200
49
151
24
176
0.01
0.01
56,204
21,536
5,182
16,353
—
56,629
21,111
5,078
16,033
—
425
(425)
(104)
(320)
—
16,353
16,033
(320)
1.11
1.10
1.09
1.08
(0.02)
(0.02)
Part II
Item 8 Financial Statements and Supplementary Data
Three Months Ended
December 31, 2021
December 31, 2020
As Previously
Reported
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
As Previously
Reported
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
(in thousands, except for per share amounts)
Consolidated Statement of Income
Cost of sales
Income before income taxes
Income tax expense
Net income
Income attributable to redeemable
noncontrolling interest
86,244
10,837
2,068
8,769
(458)
84,943
12,139
2,389
9,750
(444)
Net income attributable to CSW Industrials, Inc.
8,311
9,306
Earnings per share attributable to
CSW Industrials, Inc.
Basic
Diluted
0.53
0.52
0.59
0.59
(1,301)
1,302
321
981
14
995
0.06
0.07
50,594
51,240
3,056
709
2,346
—
2,410
550
1,859
—
646
(646)
(159)
(487)
—
2,346
1,859
(487)
0.16
0.16
0.12
0.12
(0.04)
(0.04)
Three Months Ended
March 31, 2022
March 31, 2021
As Computed
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
As Previously
Reported
Under LIFO
($)
As Reported
Under FIFO
($)
Effect of
Change
($)
(in thousands, except for per share amounts)
Consolidated Statement of Income
Cost of sales
Income before income taxes
Income tax expense
Net income
Income attributable to redeemable
noncontrolling interest
101,749
100,957
(792)
26,813
8,835
17,979
(88)
27,605
9,080
18,525
(79)
792
245
546
9
555
0.04
0.04
Net income attributable to CSW Industrials, Inc.
17,891
18,446
Earnings per share attributable to
CSW Industrials, Inc.
Basic
Diluted
1.13
1.13
1.17
1.17
79,396
10,898
1,270
9,628
—
78,430
11,864
1,507
10,356
—
9,628
10,356
0.62
0.61
0.66
0.66
(966)
966
237
728
—
728
0.04
0.05
| 2022 Annual Report
61
Part II
Item 8 Financial Statements and Supplementary Data
8. Details of Certain Consolidated Balance Sheet Captions
Accounts receivable, net consists of the following (in thousands):
Accounts receivable trade
Other receivables
Less: Allowance for doubtful accounts
ACCOUNTS RECEIVABLE, NET
Property, plant and equipment, net, consist of the following (in thousands):
Land and improvements
Buildings and improvements
Plant, office and laboratory equipment
Construction in progress
Less: Accumulated depreciation
PROPERTY, PLANT AND EQUIPMENT, NET
March 31,
2022
($)
120,603
3,378
123,981
(1,177)
2021
($)
93,366
4,244
97,610
(915)
122,804
96,695
March 31,
2022
($)
3,226
53,346
99,770
11,083
2021
($)
3,168
53,020
95,848
3,462
167,425
155,498
(80,393)
87,032
(72,944)
82,554
Depreciation of property, plant and equipment was $11.6 million, $9.2 million and $7.9 million for the years ended March 31, 2022,
2021 and 2020, respectively. Of these amounts, cost of revenues includes $8.3 million, $7.1 million and $6.6 million, respectively.
Other assets consist of the following (in thousands):
Right-of-use lease assets
Property held for investment(a)
Deferred income taxes
Long-term tax indemnification assets
Other
OTHER ASSETS
March 31,
2022
($)
2021
($)
67,076
61,707
418
304
7,500
7,388
82,686
967
1,462
7,500
4,359
75,995
(a) As of March 31, 2021, $0.5 million asset was held for sale in the “Elimination and Other” segment. This asset was reclassified to other current asset during the year
ended March 31, 2022.
62
| 2022 Annual Report
Accrued and other current liabilities consist of the following (in thousands):
Compensation and related benefits
Rebates and marketing agreements
Operating lease liabilities
Billings in excess of costs
Non-income taxes
Income taxes payable
Other accrued expenses
ACCRUED AND OTHER CURRENT LIABILITIES
Other long-term liabilities consists of the following (in thousands):
Operating lease liabilities
Deferred income taxes
Tax Reserve
Other
Part II
Item 8 Financial Statements and Supplementary Data
March 31,
2022
($)
21,617
16,340
9,269
1,026
1,949
4,266
14,538
69,005
March 31,
2022
($)
63,275
62,810
13,987
234
2021
($)
19,120
9,031
8,063
1,018
1,593
3,755
7,163
49,743
2021*
($)
56,709
67,180
13,228
736
OTHER LONG-TERM LIABILITIES
140,306
137,853
*
Years ended March 31, 2021 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the Consolidated
Financial Statements.
9. Long-Term Debt and Commitments
Debt consists of the following (in thousands):
Revolving Credit Facility, interest rate of 1.95% and 2.11%, respectively
Whitmore term loan, interest rate of 2.45% and 2.11%, respectively
Total debt
Less: Current portion
LONG-TERM DEBT
March 31,
2022
($)
243,000
9,775
252,775
2021
($)
232,000
10,337
242,337
(561)
(561)
252,214
241,776
| 2022 Annual Report
63
Part II
Item 8: Financial
Statements and
Supplementary Data
Part II
Item 8 Financial Statements and Supplementary Data
Revolving Credit Facility Agreement
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 maturity date to September 15, 2022.
On December 1, 2020, the Company entered into an amendment
to the Revolving Credit Facility to utilize the accordion feature, thus
increasing the commitment from $250.0 million to $300.0 million,
and hence eliminating the available incremental commitment by
a corresponding amount. On March 10, 2021, the Revolving
Credit Facility was amended to facilitate the formation and future
operation of the joint venture discussed in Note 3.
On May 18, 2021, we entered into a Second Amended and
Restated Credit Agreement (the “Second Credit Agreement”)
with JPMorgan Chase Bank, N.A., as administrative agent
and collateral agent, and the lenders, issuing banks and
swingline lender party thereto. CSW Industrials Holdings, LLC,
a wholly-owned subsidiary of the Company (the “Borrower”) is
the borrower under the Second Credit Agreement. The Second
Credit Agreement provides for a $400.0 million Revolving Credit
Facility that contains a $25.0 million sublimit for the issuance of
letters of credit and a $10.0 million sublimit for swingline loans.
The Second Credit Agreement is scheduled to mature on May 18,
2026. Borrowings under the Second Credit Agreement may
be used for working capital and general corporate purposes,
including, without limitation, for financing permitted acquisitions
and fees and expenses incurred in connection therewith. The
obligations of the Borrower under the Second Credit Agreement
are guaranteed by the Company and all of its direct and indirect
domestic subsidiaries. The Second Credit Agreement is secured
by a first priority lien on all tangible and intangible assets and stock
issued by the Borrower and its domestic subsidiaries, subject to
specified exceptions, and 65% of the voting equity interests in its
first-tier foreign subsidiaries.
The financial covenants contained in the Second Credit Agreement
require the maintenance of a maximum Leverage Ratio of 3.00
to 1.00, subject to a temporary increase to 3.75 to 1.00 for
18 months following the consummation of permitted acquisitions
with consideration in excess of certain threshold amounts set
forth in the Second Credit Agreement, and the maintenance
of a minimum Fixed Charge Coverage Ratio of 1.25 to 1.00,
the calculations and terms of which are defined in the Second
Credit Agreement. The Second Credit Agreement also contains
(i) affirmative and negative covenants which are customary for
similar credit agreements, including, without limitation, limitations
on the Company, the Borrower and its subsidiaries with respect
to indebtedness, liens, investments, distributions, mergers and
acquisitions, disposition of assets and transactions with affiliates,
and (ii) customary events of default.
Borrowings under the Second Credit Agreement bear interest, at
the Borrower’s option, at either base rate or LIBOR, plus, in either
case, an applicable margin based on the Company’s leverage
ratio calculated on a quarterly basis. The base rate is described
in the Second Credit Agreement as the highest of (i) the Federal
funds effective rate plus 0.50%, (ii) the prime rate quoted by
The Wall Street Journal, and (iii) the one-month LIBOR rate plus
1.00%. We also pay a commitment fee of an applicable margin
based on the Company’s leverage ratio 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.
As of March 31, 2022 and 2021, we had $243.0 million and
$232.0 million, respectively, in outstanding borrowings under the
Facility, which resulted in a borrowing capacity of $157.0 million
and $68.0 million, respectively, inclusive of the accordion
feature. Covenant compliance is tested quarterly and we were in
compliance with all covenants as of March 31, 2022.
Whitmore Term Loan
As of March 31, 2022, Whitmore Manufacturing, LLC (one of
our wholly-owned operating subsidiaries) maintained a secured
term loan related to the warehouse, corporate office building and
remodel of the 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, 2022 and 2021, Whitmore had $9.8 million and
$10.3 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 11.
Future Minimum Debt Payments
Future minimum debt payments are as follows for years ending March 31 (in thousands):
2023
2024
2025
2026
2027
Thereafter
TOTAL
64
| 2022 Annual Report
$
561
561
561
561
243,561
6,970
$
252,775
Part II
Item 8 Financial Statements and Supplementary Data
10. Leases
We have operating leases for manufacturing facilities, offices, warehouses, vehicles and certain equipment. Our leases have remaining
lease terms of 1 year to 26 years, some of which include escalation clauses and/or options to extend or terminate the leases.
In October 2019, we terminated two operating leases and paid an early lease termination fee of $0.5 million. The loss on early termination
is recorded in other income (expense), net as the leased properties were not used in our operations.
We do not currently have any financing lease arrangements.
(in thousands)
COMPONENTS OF OPERATING LEASE EXPENSES
Operating lease expense
Short-term lease expense
TOTAL OPERATING LEASE EXPENSE(a)
(a)
Included in cost of revenues and selling, general and administrative expense
(in thousands)
OPERATING LEASE ASSETS AND LIABILITIES
ROU assets, net(a)
Short-term lease liabilities
Long-term lease liabilities
Total operating lease liabilities(b)
(a)
(b)
Included in other assets
Included in accrued and other current liabilities and other long-term liabilities, as applicable
(in thousands)
SUPPLEMENTAL CASH FLOW
Cash paid for amounts included in the measurement of operating lease liabilities(a)
ROU assets obtained in exchange for new operating lease obligations
(a)
Included in our condensed consolidated statement of cash flows, operating activities in accounts payable and other current liabilities
OTHER INFORMATION FOR OPERATING LEASES
Weighted average remaining lease term (in years)
Weighted average discount rate (percent)
(in thousands)
MATURITIES OF OPERATING LEASE LIABILITIES WERE AS FOLLOWS (IN THOUSANDS):
2023
2024
2025
2026
2027
Thereafter
Total lease liabilities
Less: Imputed interest
PRESENT VALUE OF LEASE LIABILITIES
March 31,
2022
($)
9,893
326
10,219
2021
($)
5,243
377
5,620
March 31,
2022
($)
67,076
9,269
63,275
72,544
2021
($)
61,707
8,063
56,709
64,772
March 31,
2022
($)
9,974
8,464
2021
($)
5,578
114
7.9
2.2%
8.2
2.6%
$
$
10,723
10,640
10,465
10,142
9,920
27,324
79,214
(6,670)
72,544
| 2022 Annual Report
65
Part II
Item 8 Financial Statements and Supplementary Data
11. 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,
2022 and 2021, we had $9.8 million and $10.3 million, respectively, of notional amount in outstanding designated interest rate swaps
with third parties. All interest rate swaps are highly effective. At March 31, 2022, the maximum remaining length of any interest rate
swap contract in place was approximately 7.3 years.
The fair value of interest rate swaps designated as hedging instruments are summarized below (in thousands):
(in thousands)
Current derivative liabilities
Non-current derivative liabilities
March 31,
2022
($)
109
233
2021
($)
280
736
The impact of changes in the fair value of interest rate swaps is included in Note 19.
Current derivative assets are reported in our consolidated balance sheets in prepaid expenses and other current assets. Current
and non-current derivative liabilities are reported in our consolidated balance sheets in accrued and other current liabilities and other
long-term liabilities, respectively.
12. Earnings Per Share
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings per share for the
years ended March 31, 2022, 2021 and 2020:
(amounts in thousands, except per share data)
Income from continuing operations
Income from discontinued operations, net of tax
Income attributable to redeemable noncontrolling interest
2022
($)
67,319
—
(934)
March 31,
2021*
($)
40,099
—
—
2020*
($)
44,656
1,061
—
NET INCOME ATTRIBUTABLE TO CSW INDUSTRIALS, INC.
66,385
40,099
45,717
WEIGHTED AVERAGE SHARES:
Common stock
Participating securities
Denominator for basic earnings per common share
Potentially dilutive securities
DENOMINATOR FOR DILUTED EARNINGS PER COMMON SHARE
BASIC EARNINGS PER COMMON SHARE:
Continuing operations
Discontinued operations
NET INCOME ATTRIBUTABLE TO CSW INDUSTRIALS, INC.
DILUTED EARNINGS PER COMMON SHARE:
Continuing operations
Discontinued operations
NET INCOME ATTRIBUTABLE TO CSW INDUSTRIALS, INC.
15,646
109
15,755
52
15,807
4.21
—
4.21
4.20
—
4.20
14,919
96
15,015
111
15,126
2.67
—
2.67
2.65
—
2.65
14,928
111
15,039
167
15,206
2.97
0.07
3.04
2.94
0.07
3.01
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
66
| 2022 Annual Report
13. Shareholders’ Equity
Share Repurchase Programs
On November 7, 2018, we announced that our Board of Directors
authorized a program to repurchase up to $75.0 million of our
common stock over a two-year time period. On October 30,
2020, we announced that our Board of Directors authorized a
new program to repurchase up to $100.0 million of our common
stock, which replaced the previously announced $75.0 million
program. Under the current repurchase program, shares may
be repurchased from time to time in the open market or in
privately negotiated transactions. Repurchases will be made at
our discretion, based on ongoing assessments of the capital
needs of the business, the market price of our common stock
and general market conditions. Our Board of Directors has
established an expiration of December 31, 2022 for completion
of the new repurchase program; however, the program may
be limited or terminated at any time at our discretion without
14. Fair Value Measurements
The fair value of interest rate swaps discussed in Note 11 are
determined using Level II inputs. The carrying value of our debt,
included in Note 9, approximates fair value as it bears interest at
floating rates. The carrying amounts of other financial instruments
(i.e., cash and cash equivalents, accounts receivable, net,
accounts payable) approximated their fair values at March 31,
2022 and 2021 due to their short-term nature.
15. Retirement Plans
We had a frozen qualified defined benefit pension plan (the
“Qualified Plan”) that covered 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 amended to
freeze benefit accruals and to modify certain ancillary benefits
effective as of September 30, 2015. Benefits were based on
years of service and an average of the highest five consecutive
years of compensation during the last ten years of employment.
The funding policy of the Qualified Plan was to contribute annual
amounts that are currently deductible for federal income tax
purposes. No contributions were made during the years ended
March 31, 2022, 2021 or 2020. 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. During the
six months ended September 30, 2019, we offered lump sum
payments to eligible active and terminated vested participants,
representing approximately 42% of our remaining liability.
Approximately 74% of those participants accepted the lump sum
offer for an aggregate payment of $17.0 million in August 2019.
We entered into an annuity purchase contract for the remaining
liability in September 2019, and terminated the Qualified Plan
Part II
Item 8 Financial Statements and Supplementary Data
notice. During the year ended March 31, 2022, we repurchased
126,115 shares for an aggregate amount of $14.4 million under
the current repurchase program. During the year ended March 31,
2021, we repurchased 115,151 shares for an aggregate amount
of $7.3 million under the prior $75.0 million program.
Dividends
On April 4, 2019, we announced we had commenced a dividend
program and that our Board of Directors approved a regular
quarterly dividend of $0.135 per share. On April 15, 2021, we
announced a quarterly dividend increase to $0.15 per share. On
April 14, 2022, we announced another quarterly dividend increase
to $0.17 per share payable on May 13, 2022 to shareholders of
record as of April 29, 2022. Any future dividends at the existing
$0.17 per share quarterly rate or otherwise will be reviewed
individually and declared by our Board of Directors in its discretion.
Total dividends of $9.5 million and $8.1 million were paid during
the years ended March 31, 2022 and 2021, respectively.
The redeemable noncontrolling interest is recorded at the higher
of the redemption value or carrying value each reporting period.
The redemption value of the redeemable noncontrolling interest is
estimated using a discounted cash flow analysis, which requires
management judgment with respect to future revenue, operating
margins, growth rates and discount rates and is classified as
Level III under the fair value hierarchy. The redemption value of
the redeemable noncontrolling interest is discussed in Note 3.
effective September 30, 2019. The termination initially required
an additional contribution of $0.5 million, which was paid in
September 2019, and resulted in an overall termination charge
of $7.0 million ($5.4 million, net of tax) recorded in other (expense)
income, net, due primarily to the recognition of expenses that
were previously included in accumulated other comprehensive
loss and the recognition of additional costs associated with the
annuity purchase contract. After the participant data for the
annuity purchase contract was finalized in the fiscal fourth quarter
ended March 31, 2020, the Qualified Plan had excess funds of
$0.5 million, which were distributed into the Defined Contribution
Plan discussed below.
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. The Restoration Plan was closed to new
participants on January 1, 2015 and was amended to freeze
benefit accruals and to modify certain ancillary benefits effective
as of September 30, 2015.
| 2022 Annual Report
67
Part II
Item 8 Financial Statements and Supplementary Data
We maintain a registered defined benefit pension plan (the
“Canadian Plan”) that covers all of our employees based at our
facility in Alberta, Canada. The plan was amended to freeze
benefit accruals effective as of January 31, 2022. Employees were
eligible for membership in the plan following the completion of one
year of employment. Benefits accrued 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
The following are assumptions related to the Plans:
Assumptions used to determine benefit obligations:
Discount rate
Rate of compensation increases(a)
Assumptions used to determine net pension expense:
Discount rate
Expected return on plan assets
Rate of compensation increases(b)
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.
March 31,
2022
2021
2020
4.0%
—%
3.3%
4.8%
3.0%
3.3%
3.0%
3.6%
4.8%
3.0%
3.6%
3.0%
4.0%
4.8%
3.0%
(a) Rate of compensation increase is not relevant to the Restoration Plan and the Canadian Plan due to freezing benefit accruals.
(b) Rate of compensation increase is no longer relevant to the Restoration Plan due to freezing benefit accruals. Rate of compensation increase of $3.0% was used to
determine the fiscal 2022 expenses for the Canadian Plan.
The factors used in determination of these assumptions are described in Note 1.
Net pension (benefit) expense for the Plans was:
(in thousands)
Service cost – benefits earned during the year
Interest cost on projected benefit obligation
Expected return on assets
Net amortization and deferral
Pension plan termination(a)
Curtailment impact
NET PENSION EXPENSE
(a) Reflects impact of the termination of the Qualified Plan.
Year Ended March 31,
2022
($)
43
138
(120)
69
—
(30)
100
2021
($)
40
144
2020
($)
71
1,136
(96)
(1,361)
74
—
—
56
6,472
—
162
6,374
No estimated prior service costs or net loss for the Plans will be amortized from accumulated other comprehensive loss into pension
expense in the year ended March 31, 2023.
68
| 2022 Annual Report
The following is a summary of the changes in the Plans’ pension obligations:
Part II
Item 8 Financial Statements and Supplementary Data
(in thousands)
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial gain
Benefits paid
Curtailment impact
Currency translation impact
BENEFIT OBLIGATION AT END OF YEAR
ACCUMULATED BENEFIT OBLIGATION
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
Currency translation impact
FAIR VALUE OF PLAN ASSETS AT END OF YEAR
March 31,
2022
($)
4,291
43
138
(330)
(216)
(342)
12
3,596
3,596
March 31,
2022
($)
2,492
(6)
(110)
79
11
2,466
2021
($)
3,880
40
144
212
(265)
—
280
4,291
3,990
2021
($)
1,898
441
(159)
69
243
2,492
We contributed $0.1 million to the Canadian Plan in the year ended March 31, 2022. No contribution will be made in the year ending
March 31, 2023 due to the freezing of benefits and the funded position as at March 31, 2022.
The following summarizes the net pension asset for the Plans
(in thousands)
Plan assets at fair value
Benefit obligation
UNFUNDED STATUS
The following summarizes amounts recognized in the balance sheets for the Plans:
(in thousands)
Current liabilities
Noncurrent liabilities
UNFUNDED STATUS
March 31,
2022
($)
2,466
(3,596)
(1,130)
March 31,
2022
($)
(103)
(1,027)
(1,130)
2021
($)
2,492
(4,291)
(1,799)
2021
($)
(104)
(1,695)
(1,799)
| 2022 Annual Report
69
Part II
Item 8 Financial Statements and Supplementary Data
The following table presents the change in accumulated other comprehensive loss attributable to the components of the net cost and
the change in the benefit obligation:
(in thousands)
Accumulated other comprehensive loss at beginning of year
Amortization of net loss
Amortization of prior service cost
Curtailment impact
Net gain arising during the year
Currency translation impact
ACCUMULATED OTHER COMPREHENSIVE LOSS AT END OF YEAR
Amounts recorded in accumulated other comprehensive loss consist of:
(in thousands)
Net prior service cost
Net loss
ACCUMULATED OTHER COMPREHENSIVE LOSS
March 31,
2022
($)
(799)
59
(5)
311
154
(86)
(366)
March 31,
2022
($)
—
(366)
(366)
2021
($)
(871)
62
(31)
—
96
(55)
(799)
2021
($)
27
(826)
(799)
The Canadian Plan accounts for 100% of total assets, and has investments of $2.5 million primarily in high-quality fixed income
securities (Level II inputs in the fair value hierarchy) that are issued by governments and corporations. The actual asset allocations for
the Plans were as follows:
Asset category
Fixed income securities
Other
Cash and cash equivalents
TOTAL
March 31,
2022
2021
99%
—%
1%
100%
—%
100%
—%
100%
The following table summarizes the expected cash benefit payments for the Plans for fiscal years ending March 31 (in millions):
2023
2024
2025
2026
2027
Thereafter
$
0.2
0.2
0.2
0.2
0.2
1.1
Defined Contribution Plan
Effective October 1, 2015, we began to sponsor a defined contribution plan covering substantially all of our U.S. employees. Employees
may contribute to this plan, and these contributions are matched 100% by us up to 6.0% of eligible earnings. We also contribute an
additional percentage of eligible earnings to employees regardless of their level of participation in the plan, which is discretionary and
varies based on profitability. We made total contributions to the plan of $4.8 million and $3.9 million during the years ended March 31,
2022 and 2021, respectively.
70
| 2022 Annual Report
Part II
Item 8 Financial Statements and Supplementary Data
We recorded total contributions to the ESOP of $2.3 million,
$3.6 million and $3.2 million during the years ended March 31,
2022, 2021 and 2020, respectively, based on performance in the
prior year. During the year ended March 31, 2022, $3.0 million
was recorded to expense based on performance in the year
ended March 31, 2022 and is expected to be contributed to the
ESOP during the year ending March 31, 2023.
The ESOP held 549,863 and 628,289 shares of CSWI common
stock as of March 31, 2022 and 2021, respectively.
Employee Stock Ownership Plan
We sponsor a qualified, non-leveraged employee stock ownership
plan (“ESOP”) in which domestic employees are eligible to
participate following the completion of one year of service.
The ESOP provides annual discretionary contributions of up to the
maximum amount that is deductible under the Internal Revenue
Code. Contributions to the ESOP are invested in our common
stock. A participant’s interest in contributions to the ESOP fully
vests after three years of credited service or upon retirement,
permanent disability (each, as defined in the plan document) or
death.
16. Income Taxes
Income from continuing operations before income taxes was comprised of the following (in thousands):
U.S. Federal
Foreign
INCOME BEFORE INCOME TAXES
Year Ended March 31,
2022
($)
87,607
3,858
91,465
2021*
($)
48,142
2,726
50,868
2020*
($)
53,733
3,655
57,388
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
Income tax expense consists of the following (in thousands):
For the year ended:
March 31, 2022
U.S. Federal
State and local
Foreign
PROVISION FOR INCOME TAXES
March 31, 2021*
U.S. Federal
State and local
Foreign
PROVISION FOR INCOME TAXES
March 31, 2020*
U.S. Federal
State and local
Foreign
PROVISION FOR INCOME TAXES
Current
($)
Deferred
($)
Total
($)
20,139
5,271
638
26,048
6,773
3,561
1,641
11,975
8,466
1,999
1,968
12,433
(1,578)
761
(1,085)
(1,902)
(1,211)
(500)
505
18,561
6,032
(447)
24,146
5,562
3,061
2,146
(1,206)
10,769
621
(100)
(222)
299
9,087
1,899
1,746
12,732
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
| 2022 Annual Report
71
Part II
Item 8 Financial Statements and Supplementary Data
Income tax expense differed from the amounts computed by applying the U.S. federal statutory income tax rate of 21.0% to income
from continuing operations before income taxes as a result of the following (in thousands):
Computed tax expense at statutory rate
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal benefits
Nondeductible executive compensation
Vesting of stock-based compensation
Amended return items (pension and foreign withholding)
IRS audit adjustments
Global intangible low-taxed income ("GILTI") inclusion and foreign-derived intangible
income ("FDII") deduction
Foreign rate differential
Uncertain tax positions
Other permanent differences
Foreign tax credits
Valuation allowance
Repatriation tax, net of tax credit
Other, net
Year Ended March 31,
2022
($)
19,206
4,765
992
(1,916)
—
—
(522)
91
759
(143)
(450)
379
170
815
2021*
($)
2020*
($)
10,674
12,044
2,419
248
(741)
—
—
440
85
(4,717)
1,931
(554)
—
822
162
1,943
—
(542)
975
502
124
84
(1,615)
(4)
(479)
—
—
(300)
PROVISION FOR INCOME TAXES CONTINUING OPERATIONS
24,146
10,769
12,732
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
The effective tax rates for the years ended March 31, 2022, 2021 and 2020 were 26.4%, 21.2% and 22.2%, respectively. As compared
with the statutory rate for the year ended March 31, 2022, the provision for income taxes was primarily impacted by state tax expense
(net of federal benefits), which increased the provision by $4.8 million and effective rate by 5.2%, executive compensation limitation,
which increased the provision by $1.0 million and the effective tax rate by 1.1% and a net increase in uncertain tax positions, which
increased the provision by $0.8 million and the effective rate by 0.8%. This was offset by tax benefits related to the restricted stock
vesting, which decreased the provision by $1.9 million and the effective tax rate by 2.1%.
As compared with the statutory rate for the year ended March 31, 2021, the provision for income taxes was primarily impacted by
the state tax expense, which increased the provision by $2.4 million and the effective rate by 4.8%, the additional non-deductible
expenses, which increased the provision by $1.9 million and the effective rate by 2.1%, and the release of uncertain tax positions,
which decreased the provision by $4.7 million and the effective rate by 9.3%.
72
| 2022 Annual Report
Part II
Item 8 Financial Statements and Supplementary Data
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at
March 31, 2022 and 2021 are presented below (in thousands):
March 31,
Deferred tax assets:
Operating lease liabilities
Accrued compensation
Impairment
Pension and other employee benefits
Inventory reserves
Net operating loss carryforwards
Accrued expenses
Foreign tax credit carry-forward
State R&D credit carry-forward
Transaction Costs
Other, net
Deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Goodwill and intangible assets
Property, plant and equipment
Operating lease - ROU assets
Repatriation reserve
Other, net
Deferred tax liabilities
NET DEFERRED TAX LIABILITIES
2022
($)
17,774
4,826
15
412
3,720
145
1,010
379
75
714
1,477
30,547
(524)
30,023
(64,903)
(8,242)
(16,364)
(1,034)
(1,986)
(92,529)
(62,506)
2021*
($)
14,680
3,878
386
313
1,330
145
244
130
120
630
1,455
23,311
(145)
23,166
(65,070)
(7,816)
(13,631)
(942)
(1,425)
(88,884)
(65,718)
*
Year ended March 31, 2021 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the Consolidated
Financial Statements.
As the assets and liabilities of our discontinued Coatings
business discussed in Note 4 reside in a disregarded entity for
tax purposes, the tax attributes associated with the operations
of our Coatings business ultimately flow through to our corporate
parent, which files a consolidated federal return. Therefore,
corresponding deferred tax assets or liabilities expected to be
substantially realized by our corporate parent have been reflected
above as assets of our continuing operations and have not been
allocated to the balances of assets or liabilities of our discontinued
operations disclosed in Note 4.
As of both March 31, 2022 and 2021, we had no tax effected
net operating loss carryforwards, net of valuation allowances.
Net operating loss carryforwards will expire in periods beyond
the next 5 years.
Certain earnings of foreign subsidiaries continue to be
permanently invested outside of the United States. The earnings
related to these foreign subsidiaries for which taxes are not being
provided are $16.6 million. The calculation of the taxes on these
undistributed earnings are impracticable because it is unknown
how these earnings would be distributed.
| 2022 Annual Report
73
Part II
Item 8 Financial Statements and Supplementary Data
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at beginning of year
Increases related to prior year tax positions
Decreases related to prior year tax positions
Increases related to current year tax positions
BALANCE AT END OF YEAR
March 31,
2022
($)
10,212
—
(314)
36
9,934
2021
($)
498
13,895
(4,215)
34
10,212
During the year ended March 31, 2022, we released a $0.3
million reserve related to positions taken on tax returns for which
the statute has expired, and accrued interest and penalties of
$0.6 million and $0.5 million, respectively.
During the year ended March 31, 2021, we recorded total tax
contingency reserves of $17.3 million, including unrecognized tax
benefit of $13.6 million, accrued interest and penalty of $1.4 million
and $2.3 million, respectively, through purchase accounting as a
result of the TRUaire acquisition discussed in Note 2. During the
three months ended March 31, 2021, a tax benefit of $5.3 million,
including release of accrued interest ($0.6 million) and penalty
($0.6 million), was recognized through the income statement as
a result of receiving the audit closing letter from Internal Revenue
Service related to calendar 2017. For the year ended March 31,
2021, we recorded an additional net tax contingency reserve of
$0.2 million, accrued interest of $0.1 million and accrued penalty
of $0.2 million.
Our federal income tax returns for the years ended March 31,
2021, 2020 and 2019 remain subject to examination. Our income
tax returns for TRUaire’s pre-acquisition periods including calendar
years 2018, 2019 and 2020 remain subject to examinations. Our
income tax returns in certain state income tax jurisdictions remain
subject to examination for various periods for the period ended
September 30, 2015 and subsequent years.
17. Related Party Transactions
We had no related party transactions in the three years ended March 31, 2022, 2021 and 2020.
18. 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.
74
| 2022 Annual Report
Part II
Item 8 Financial Statements and Supplementary Data
19. Other Comprehensive Income (Loss)
The following table provides an analysis of the changes in accumulated other comprehensive loss (in thousands).
March 31,
Currency translation adjustments:
Balance at beginning of period
Foreign currency translation adjustments
BALANCE AT END OF PERIOD
Interest rate swaps:
Balance at beginning of period
Unrealized gain, net of taxes of $(82) and $(96), respectively(a)
Reclassification of losses included in interest expense, net of taxes of $(60) and $(60), 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 $1 and $8, respectively(b)
Amortization of net loss, net of taxes of $(16) and $(16), respectively(b)
Net gain arising during the year, net of taxes of $(41) and $(26), respectively(b)
Curtailment impact, net of taxes of $(83) and $0, respectively(b)
Currency translation impact
Other comprehensive income
BALANCE AT END OF PERIOD
2022
($)
(4,394)
(44)
(4,438)
(803)
309
224
533
(270)
(799)
(5)
59
154
311
(86)
433
(366)
2021
($)
(9,185)
4,791
(4,394)
(1,390)
362
225
587
(803)
(871)
(31)
62
96
—
(55)
72
(799)
(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, 2022.
(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 15 for additional information.
20. Revenue Recognition
We conduct our operations in three reportable segments:
Contractor Solutions, Engineered Building Solutions and
Specialized Reliability Solutions. With the adoption of ASC Topic
606, we have concluded that the disaggregation of revenues that
would be most useful in understanding the nature, timing and
extent of revenue recognition is the breakout of build-to-order
and book-and-ship, as defined below:
is not collectible until the overall construction project into which
our products are incorporated is complete. The lead times for
transfer to the customer can be up to 12 weeks. Revenue for
goods is recognized at a point in time, but installation services
are recognized over time as those services are performed.
Installation services represented approximately 3% of total
consolidated revenue for the year ended March 31, 2022.
Build-to-order products are architecturally-specified building
products generally sold into the construction industry.
Revenue generated from sales of products under build-to-
order transactions are currently reflected in the results of our
Engineered Building Solutions segment. Occasionally, our built-
to-order business lines enter into arrangements for the delivery
of a customer-specified product and the provision of installation
services. These orders are generally negotiated as a package
and are commonly subject to retainage by the customer, which
means the final 10% of the transaction price, when applicable,
Book-and-ship products are sold across all of our end
markets. Revenue generated from sales of products under
book-and-ship transactions have historically been presented
in the Contractor Solutions, Engineered Building Solutions
and Specialized Reliability Solutions. These sales are typically
priced on a product-by-product basis using price lists provided
to our customers. The lead times for transfer to the customer
is usually one week or less as these items are generally built to
stock. Revenue for products sold under these arrangements is
recognized at a point in time.
| 2022 Annual Report
75
Part II
Item 8 Financial Statements and Supplementary Data
Disaggregation of revenues reconciled to our reportable segments is as follows (in thousands):
Build-to-order
Book-and-ship
NET REVENUES
Build-to-order
Book-and-ship
NET REVENUES
Build-to-order
Book-and-ship
NET REVENUES
Year Ended March 31, 2022
Engineered
Building
Solutions
($)
88,690
8,606
97,296
Specialized
Reliability
Solutions
($)
—
115,932
115,932
Year Ended March 31, 2021
Engineered
Building
Solutions
($)
Specialized
Reliability
Solutions
($)
87,057
8,615
95,672
—
78,301
78,301
Year Ended March 31, 2020
Engineered
Building
Solutions
($)
82,357
8,524
90,881
Specialized
Reliability
Solutions
($)
—
104,569
104,569
Total
($)
88,690
537,745
626,435
Total
($)
87,057
332,148
419,205
Total
($)
82,357
303,514
385,871
Contractor
Solutions
($)
—
413,207
413,207
Contractor
Solutions
($)
—
245,232
245,232
Contractor
Solutions
($)
—
190,421
190,421
Contract liabilities, which are included in accrued and other current liabilities in our consolidated balance sheets were as follows (in
thousands):
Balance at April 1, 2021
Revenue recognized
New contracts and revenue added to existing contracts
BALANCE AT MARCH 31, 2022
21. Segments
$
1,018
(971)
979
$
1,026
During the quarter ended June 30, 2021, we revised our segment structure to align with how our chief operating decision maker (who
was determined to be our Chief Executive Officer) views our business, assesses performance and allocates resources to our business
components. Effective April 1, 2021, following the completion of various strategic transactions including the acquisition of TRUaire
and the formation of the Whitmore JV, our business is organized into three reportable segments:
z Contractor Solutions
z Engineered Building Solutions; and
z Specialized Reliability Solutions.
76
| 2022 Annual Report
Part II
Item 8 Financial Statements and Supplementary Data
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).
(in thousands)
Year Ended March 31, 2022
Contractor
Solutions
($)
Engineered
Building
Solutions
($)
Specialized
Reliability
Solutions
($)
Subtotal -
Reportable
Segments
($)
Eliminations
and
Other
($)
Total
($)
Revenues, net to external customers
413,207
97,296
115,932
626,435
—
626,435
Intersegment revenue
Operating income
Depreciation and amortization
3,280
96,115
27,879
—
11,101
2,063
110
9,007
6,016
3,390
116,223
35,958
(3,390)
(18,843)
450
—
97,380
36,408
(in thousands)
Year Ended March 31, 2021*
Contractor
Solutions
($)
Engineered
Building
Solutions
($)
Specialized
Reliability
Solutions
($)
Subtotal -
Reportable
Segments
($)
Eliminations
and
Other
($)
Revenues, net to external customers
245,232
95,672
78,301
419,205
Intersegment revenue
Operating income
Depreciation and amortization
296
59,007
14,415
—
14,066
2,014
64
581
5,744
360
73,654
22,173
—
(360)
(14,434)
545
(in thousands)
Year Ended March 31, 2020*
Contractor
Solutions
($)
Engineered
Building
Solutions
($)
Specialized
Reliability
Solutions
($)
Subtotal -
Reportable
Segments
($)
Eliminations
and
Other
($)
Revenues, net to external customers
190,421
90,881
104,569
385,871
Intersegment revenue
Operating income
Depreciation and amortization
275
58,236
5,887
—
14,278
2,074
72
7,690
6,181
347
80,204
14,142
—
(347)
(14,350)
494
Total
($)
419,205
—
59,220
22,718
Total
($)
385,871
—
65,854
14,636
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
In the fiscal quarter ended March 31, 2020, we recorded an impairment of $1.0 million on one of our unamortized trademarks in our
Contractor Solutions segment.
(Amounts in thousands)
March 31, 2022
March 31, 2021*
March 31, 2020*
TOTAL ASSETS
Contractor
Solutions
($)
782,267
687,508
161,508
Engineered
Building
Solutions
($)
Specialized
Reliability
Solutions
($)
Subtotal -
Reportable
Segments
($)
Eliminations
and
Other
($)
74,397
67,281
68,752
126,380
111,493
118,927
983,044
866,282
349,187
12,316
13,240
24,872
Total
($)
995,360
879,522
374,059
*
Years ended March 31, 2021 and 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the
Consolidated Financial Statements.
| 2022 Annual Report
77
Part II
Item 8 Financial Statements and Supplementary Data
Geographic information
We attribute revenues to different geographic areas based on the destination of the product or service delivery. Long-lived assets are
classified based on the geographic area in which the assets are located and exclude deferred taxes. No individual country, except for
the U.S., accounted for more than 10% of consolidated net revenues or total long-lived assets.
Revenues and long-lived assets by geographic area are as follows (in thousands, except percent data):
U.S.
Non-U.S.(a)
Revenues, net
2022
($)
559,296
67,139
626,435
Year Ended March 31,
2021
($)
367,169
52,036
89.3%
10.7%
87.6%
12.4%
100.0%
419,205
100.0%
(a) No individual country within this group represents 10% or more of consolidated totals for any period presented.
U.S.
Non-U.S.
Long-lived assets(a)
2022
($)
651,477
43,736
695,213
Year Ended March 31,
2021
($)
617,258
43,146
93.7%
6.3%
93.5%
6.5%
100.0%
660,404
100.0%
2020
($)
323,000
62,871
385,871
2020
($)
196,679
22,521
219,200
83.7%
16.3%
100.0%
89.7%
10.3%
100.0%
(a) Long-lived assets consist primarily of property, plant and equipment, intangible assets, goodwill and other assets, net of deferred taxes.
Major customer information
We have a large number of customers across our locations and do not believe that we have sales to any individual customer that
represented 10% or more of consolidated net revenues for any of the fiscal years presented.
22. Quarterly Financial Data (Unaudited)
The following presents a summary of the unaudited quarterly data for the years ended March 31, 2022 and 2021 (amounts in millions,
except per share data):
Quarter
Revenues, net
Gross profit
Income before income taxes
Net income
Net income attributable to CSW Industrials, Inc.
Earnings per share attributable to CSW Industrials, Inc.(a)
Basic
Diluted
Year Ended March 31, 2022
4th
($)
3rd
($)
173.3
136.3
72.3
27.6
18.5
18.4
1.17
1.17
51.3
12.1
9.7
9.3
0.59
0.59
2nd
($)
155.6
63.3
24.5
18.4
18.2
1.15
1.15
1st
($)
161.3
69.0
27.2
20.7
20.5
1.30
1.30
78
| 2022 Annual Report
Part II
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Quarter
Revenues, net
Gross profit
Income before income taxes
Net income
Net income attributable to CSW Industrials, Inc.
Earnings per share attributable to CSW Industrials, Inc.(a)
Basic
Diluted
Year Ended March 31, 2021*
4th
($)
133.4
54.9
11.9
10.4
10.4
0.66
0.66
3rd
($)
89.9
38.7
2.4
1.9
1.9
0.12
0.12
2nd
($)
104.9
48.3
21.1
16.0
16.0
1.09
1.08
1st
($)
91.0
42.6
15.5
11.9
11.9
0.81
0.80
*
Year ended March 31, 2021 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the Consolidated
Financial Statements.
(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.
No significant pre-tax adjustments were recorded in the quarter ended March 31, 2022. Significant pre-tax adjustments recorded in
the quarter ended March 31, 2021 included transaction expenses ($0.8 million), an indemnification expense ($5.0 million) related to
the TRUaire acquisition within our Contractor Solutions segment and the formation of a joint venture within our Specialized Reliability
Solutions segment ($1.6 million).
Item 9: Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure
None
| 2022 Annual Report
79
Part II
Financial Disclosure
Item 9: Changes in and Disagreements with Accountants on Accounting and
Part II
Item 9A Controls and Procedures
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 Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and
communicated to our management, including our Principal
Executive Officer and Principal Financial Officer, as appropriate
to allow timely decisions regarding required disclosure.
In connection with the preparation of this Annual Report on Form
10-K for the year ended March 31, 2022, 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, 2022 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, 2022.
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, 2022, based on the
criteria established in Internal Control - Integrated Framework
(2013), issued by the Committee of Sponsoring Organizations of
the Treadway Commission. In accordance with guidance issued
by the SEC, recently acquired businesses may be excluded
from management’s assessment of the effectiveness of the
Company’s internal control over financial reporting in the year of
acquisition. Accordingly, management excluded the Shoemaker
acquisition from management’s assessment of the effectiveness
of the Company’s internal control over financial reporting from
the December 15, 2021 acquisition date, which excluded total
assets and total net revenues representing approximately 5% and
1%, respectively, of the Company’s related consolidated financial
statement amounts as of and for the year ended March 31, 2022.
Based on this assessment, our management has concluded that
as of March 31, 2022, our internal control over financial reporting
was effective based on those criteria.
The effectiveness of our internal control over financial reporting
as of March 31, 2022, 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, 2022 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
80
| 2022 Annual Report
Part II
Financial Disclosure
Item 9: Changes in and Disagreements with Accountants on Accounting and
Part II
Item 9A Controls and Procedures
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, 2022, 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, 2022, based on criteria established in the
2013 Internal Control—Integrated Framework issued by COSO.
Basis for Opinion
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, 2022, and our report dated
May 18, 2022 expressed an unqualified opinion on those financial
statements.
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.
Our audit of and opinion on, the Company’s internal control
over financial reporting does not include the internal control over
financial reporting of Shoemaker Manufacturing LLC (“Acquired
Entity”) whose financial statements reflect total assets and
revenues constituting 5% and 1%, respectively of the related
consolidated financial statement amounts as of and for the year
ended March 31, 2022. As indicated in Management’s Report
on Internal Control over Financial Reporting, the Acquired Entity
was acquired on December 15, 2021. Management’s assertion of
the effectiveness of the Company’s internal control over financial
reporting excluded internal control over financial reporting of the
Acquired Entity.
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 18, 2021
| 2022 Annual Report
81
Part II
Item 9B Other Information
Item 9B: Other Information
82
| 2022 Annual Report
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 2022 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2022.
Item 11: Executive Compensation
The information required by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2022.
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 2022 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2022.
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 2022 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2022.
Item 14: Principal Accounting Fees and
Services
The information required by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the fiscal year ended March 31, 2022.
| 2022 Annual Report
83
Part IV
Item 15: Exhibits, Financial Statement
Schedules
The following documents are filed as a part of this Annual Report on Form 10-K:
(1) Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248)
CSW Industrials, Inc. Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 2022 and 2021
For each of the three years in the period ended March 31, 2022:
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
None.
(3) Exhibits
Exhibit Index
EXHIBIT
NUMBER
DESCRIPTION
37
39
40
41
42
43
45
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Third 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 15, 2018)
Amended and Restated Bylaws of the Company, adopted and effective August 14, 2018 (incorporated by reference to Exhibit 3.2 to
the Company’s Current Report on Form 8-K, filed on August 15, 2018)
Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit
4.1 to the Company’s Annual Report on Form 10-K, filed on May 20, 2020)
Second Amended and Restated Credit Facility Agreement, dated May 18, 2021, by and among CSW Industrials Holdings, LLC,
CSW Industrials, Inc., the other Loan Parties party thereto, the other lenders party thereto, and JPMorgan Chase Bank, N.A.,
individually and in its capacity as the Administrative Agent (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly
Report on Form 10-Q, filed on August 4, 2021)
Registration Rights Agreement, dated December 15, 2020, by and among CSW Industrials, Inc. and the Sellers party thereto
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on December 16, 2020)
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 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 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)+
84
| 2022 Annual Report
Part IV
Item 15 Exhibits, Financial Statement Schedules
EXHIBIT
NUMBER
DESCRIPTION
10.8
10.9
10.10
10.11
18.1*
21.1*
23.1*
31.1*
31.2*
32.1**
32.2**
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Form of Employee Performance Share Award Form of Employee Performance Share Award Agreement (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed on August 8, 2019) +
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 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) +
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) +
Preferability Letter of Independent Registered Public Accounting Firm
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
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
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith
** Furnished herewith
+ Management contracts and compensatory plans required to be filed as exhibits to this Annual Report on Form 10-K.
| 2022 Annual Report
85
Part IV
Signatures
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 18, 2022
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
/S/ JOSEPH B. ARMES
Chief Executive Officer
Joseph B. Armes
(Principal Executive Officer)
/S/ JAMES E. PERRY
Chief Financial Officer
James E. Perry
(Principal Financial and Accounting Officer)
/S/ MICHAEL R. GAMBRELL
Director
Michael R. Gambrell
/S/ BOBBY GRIFFIN
Bobby Griffin
Director
/S/ TERRY L. JOHNSTON
Director
Terry L. Johnston
/S/ LINDA A. LIVINGSTONE
Director
Linda A. Livingstone, Ph.D.
/S/ ROBERT M. SWARTZ
Director
Robert M. Swartz
/S/ J. KENT SWEEZEY
Director
J. Kent Sweezey
/S/ DEBRA L. VON STORCH
Director
Debra L. von Storch
Date
May 18, 2022
May 18, 2022
May 18, 2022
May 18, 2022
May 18, 2022
May 18, 2022
May 18, 2022
May 18, 2022
May 18, 2022
86
| 2022 Annual Report
CSW INDUSTRIALS Directors and Officers
Board of Directors
Joseph B. Armes
Chairman, Chief Executive
Officer And President
Michael R. Gambrell
Former Executive Vice
President of Dow Chemical
Bobby Griffin
Chief Diversity, Equity and
Inclusion Officer,
Rockwell Automation
Terry L. Johnston
Former Executive Vice President
and COO of Lennox International, Inc.
Commercial Segment
Linda A. Livingstone, PH.D.
President of Baylor University
Anne B. Motsenbocker
Former Managing Director,
J.P. Morgan Chase
Robert M. Swartz
Former Executive Vice
President and Chief Operating
Officer of Glazer’s Inc.
J. Kent Sweezy
Founding Partner of
Turnbridge Capital, LLC
Debra L. von Storch
Former Partner,
Ernst & Young LLP
Executive Officers
Joseph B. Armes
Chairman, Chief Executive
Officer and President
James E. Perry
Executive Vice President,
Chief Financial Officer
Donal J. Sullivan
Executive Vice President,
General Manager
Contractor Solutions
Luke E. Alverson
Senior Vice President,
General Counsel and Secretary
Corporate Information
Transfer Agent
AST
Brooklyn, New York
T (800) 937-5449
www.amstock.com
Stock Listing
NASDAQ Symbol: CSWI
Independent Public
Accountants
Grant Thornton LLP
Dallas, Texas
Annual Meeting
August 26, 2022
Contact information
CSW Industrials, Inc.
5420 Lyndon B. Johnson
Freeway
Suite 500
Dallas, Texas 75240
T (214) 884-3777
F (214) 279-7101
www.cswindustrials.com
5420 Lyndon B. Johnson Freeway
Suite 500
Dallas, Texas 75240
cswindustrials.com
C
S
W
I
n
d
u
s
t
r
i
a
s
,
l
I
n
c
.
2
0
2
2
A
n
n
u
a
l
R
e
p
o
r
t