CSW Industrials Reports 1Q Results
Sales for the fiscal first quarter of 2017 were $84.1 million, compared to the prior year period of $88.9 million. Lower sales in the quarter were primarily attributable to decreased volume in Coatings, Sealants and Adhesives and Specialty Chemicals business segments, specifically within the rail and energy end markets. This was partially offset by higher volumes in HVAC and architecturally-specified building products end markets and incremental revenue from acquisitions completed in the past 12 months.
Net income in the fiscal first quarter of 2017 was $4.1 million, or $0.26 per diluted share, compared to $8.7 million in the prior year. The effective tax rate for the quarter was 43.1% due to certain compensation costs that are non-recurring and non-deductible. Adjusted to exclude one-time expenses and a normalized tax rate, adjusted net income in the first quarter of 2017 was $8.0 million, or $0.51 per diluted share.
Joseph B. Armes, CSW Industrials’ Chief Executive Officer, commented, “Against the backdrop of anemic economic growth and stagnant capital spending, together with weakness in certain end markets, we worked diligently to manage costs and maintain segment level profitability. These efforts were supported by the exceptionally strong performance of our Industrial Products segment, which posted impressive growth in revenue and operating income.”
Armes continued, “While our Coatings, Sealants, and Adhesives and Specialty Chemical segments remain under pressure from direct and indirect exposure to lower commodities market activity, we have implemented the appropriate tactical actions to adapt to market dynamics. We are encouraged by the early results of our sales diversification program in Coatings, Sealants and Adhesives, which we expect to reduce cyclical exposure to the rail markets, as we have been selected by new customers in new end markets, such as industrial racking, propane tanks and automotive filter applications. In total, we expect to generate approximately $6 million of sales to these new customers on an annualized basis. We were also pleased to receive the Coatings Supplier of the Year award from Trinity Industries, as this reflects the quality products and customer service our businesses provide.”
Armes continued, “In addition to the sales diversification program, we are announcing today an initiative to further rationalize our manufacturing footprint in the Coatings, Sealants and Adhesive segment, which we expect will drive cost savings of $2.5 to $3.0 million annually, and we expect to have this effort completed by the end fiscal Q3 2017. We believe the actions we have previously taken and those we are announcing today will position our Company for sustainable profitability through the trough of the cycle and beyond.”
First Quarter Results of Operations
Industrial Products segment revenue increased during the quarter to $43.5 million, compared to the prior year level of $40.0 million. The increase in revenue was the result of higher sales volumes and favorable pricing trends. Industrial products segment operating income increased 9.3% to $10.6 million, over the prior year level of $9.7 million.
Coatings, Sealants and Adhesives segment revenue decreased to $23.4 million, compared to the prior year level of $28.4 million. Lower sales were mainly attributable to decreased sales volumes in the rail markets, partially offset by increased sales of architecturally-specified building products, improved pricing, and net revenues attributable to acquisitions. Segment operating income in the first quarter of 2017 decreased 10.6% to $1.6 million, over the prior year level of $1.8 million primarily as a result of lower sales volume.
Specialty Chemicals segment revenue decreased to $17.2 million, compared to the prior year level of $20.2 million. Lower sales were attributable to the weakness in the energy and rail end markets, partially offset by increased sales from acquisitions. Segment level operating income in the first quarter of 2017 decreased to $1.1 million, over the prior year level of $2.7 million as a result of lower volume and an unfavorable product mix.
Consolidated gross profit in the first quarter of fiscal 2017 was $38.2 million, a 5.5% decrease compared to the prior year level of $40.4 million. Gross margin as a percentage of sales was relatively flat at 45.4%, compared to 45.5% in the prior year period. The negative impact of decreased sales on our absorption of fixed manufacturing costs was mostly offset by changes in product mix, and benefits from strategic initiatives to rationalize the Company’s global footprint and achieve cost savings through its procurement program.
Consolidated operating expenses increased 17.7% to $30.8 million, or 36.6% of sales, compared to the prior year level of $26.2 million, or 29.4% of sales. Increased operating expenses were attributable to our CFO transition and other severance costs, other personnel and timing on outside professional services, and restructuring costs related to the consolidation of facilities. This was partially offset by transaction costs in the prior year that were non-recurring.
Consolidated operating income was $7.4 million, or 8.8% of revenue, compared with $14.3 million or 16.1% of revenue in the prior year. Adjusted operating income was $12.4 million, or 14.7% of revenue, compared with $16.5 million, or 18.6% of revenue in the prior-year. First quarter adjusted operating margin reflects relatively stable segment level operating margin, independent public company costs and investments made to integrate the business units compared to the prior year.
Consolidated net income for the first quarter was $4.1 million, or $0.26 per diluted share, compared with net income of $8.7 million in the prior year period. Adjusted for one-time items and a normalized tax rate (we expect the full year tax rate to be between 36 and 37 percent), net income was $8.0 million, or $0.51 per diluted share, compared to net income of $10.1 million in the prior year.
CSWI is a diversified industrial growth company with well-established, scalable platforms and domain expertise across three segments: Industrial Products; Coatings, Sealants & Adhesives; and Specialty Chemicals. CSWI's broad portfolio of leading products provides performance optimizing solutions to its customers. CSWI's products include mechanical products for heating, ventilation and air conditioning ("HVAC") and refrigeration applications, coatings and sealants and high performance specialty lubricants. Markets that CSWI serves include: HVAC, industrial, rail, plumbing, architecturally-specified building products, energy, mining and general industrial markets.
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