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.
We are
subject to interest rate risk on our variable rate indebtedness. Fluctuations in interest rates have a direct effect on interest expense associated with our outstanding indebtedness. As of March 31, 2016, we had outstanding variable rate
indebtedness of $43.3 million, after consideration of interest rate swaps. We manage, or hedge, interest rate risks related to our borrowings by means of interest rate swap agreements. At March 31, 2016, we had interest rate swap agreements
that covered $46.4 million of the $89.7 million of our total outstanding indebtedness. At March 31, 2016, unhedged variable rate indebtedness of $43.3 million had a weighted average interest rate of 2.18%. Each quarter point change in interest
rates would result in a change of less than $0.2 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.
We conduct a small portion of our operations outside of the U.S. in currencies other than the U.S. dollar. Our non-U.S. operations are
conducted primarily in their local currencies, which are also their functional currencies, and include the British pound, Canadian dollar and Australian dollar. Foreign currency exposures arise from translation of foreign-denominated assets and
liabilities into U.S. dollars and from transactions denominated in a currency other than a non-U.S. operations functional currency. We realized net (losses) gains associated with foreign currency translation of $(1.4) million, $(5.3) million
and $0.4 million for the fiscal years ended March 31, 2016, 2015 and 2014, respectively, which are included in other comprehensive income (loss). We recognized foreign currency transaction net losses of $0.1 million, $0.3 million and $0.2
million for the fiscal years ended March 31, 2016, 2015 and 2014, respectively, which are included in other (expense) income, net in the consolidated statements of income.
Based on a sensitivity analysis at March 31, 2016, a 10% change in the foreign currency exchange rates for the fiscal year ended
March 31, 2016 would have impacted our net earnings by a negligible amount. This calculation assumes that all currencies change in the same direction and proportion relative to the U.S. dollar and that there are no indirect effects, such as
changes in non-U.S. dollar sales volumes or prices.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
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ORGANIZATION AND OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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CSW Industrials, Inc. (CSWI, the Company, we, our or us) is a
diversified industrial growth company with well-established, scalable platforms and domain expertise across three segments: Industrial Products; Coatings, Sealants & Adhesives; and Specialty Chemicals. Our broad portfolio of leading
products provides performance optimizing solutions to our customers. Our products include mechanical products for heating, ventilating and air conditioning (HVAC) and refrigeration applications, coatings and sealants and high performance
specialty lubricants. Drawing on our innovative and proven technologies, we seek to deliver solutions to our professional customers that require superior performance and reliability. Our diverse product portfolio includes more than 100 highly
respected industrial brands including RectorSeal No. 5 thread sealants, KOPR KOTE anti-seize lubricants, Safe-T-Switch
®
condensate overflow shutoff devices, KATS
®
coatings, Air Sentry
®
breathers, and RailPlex
®
tank car coatings. Additionally,
we recently acquired Deacon
®
high temperature sealants and AC Leak Freeze
®
to stop refrigerant leaks. Our products are well known in
the specific industries we serve and have a reputation for high quality and reliability. Markets that we serve include HVAC, industrial, rail, plumbing, architecturally-specified building products, energy, mining, and other general industrial
markets.
The Share Distribution
On December 2, 2014, Capital Southwest Corporation (Capital Southwest)
announced its plan to spin-off certain of its industrial products, coatings, sealants and adhesives and specialty chemicals businesses by means of a distribution of the outstanding shares of common stock of CSWI on a pro rata basis to holders of
Capital Southwest common stock (the Share Distribution). The Share Distribution occurred on September 30, 2015, and CSWI became an independent, publicly traded company. Prior to the Share Distribution, Capital Southwest contributed
to CSWI all of the outstanding capital stock of The RectorSeal Corporation (RectorSeal), The Whitmore Manufacturing Company (Whitmore), Jet-Lube, Inc. (Jet-Lube), Strathmore Holdings, LLC.
(Strathmore), Balco, Inc. (Balco), Smoke Guard, Inc. (Smoke Guard) and CapStar Holdings Corporation (CapStar), $13.0 million in cash and pension assets of $10.4 million (CSWI assumed both the pension
plan assets and obligations associated with the defined benefit pension plan), and net of $0.3 million in equity issuance costs. The following is a brief description of each business:
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RectorSeal
formulates and manufactures specialty chemical products including pipe thread sealants, firestop sealants, plastic solvent cements and other formulations. RectorSeal also makes specialty tools for
tradesmen and innovative systems for containing flames and smoke from building fires.
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Whitmore
manufactures high performance, specialty lubricants for heavy equipment used in surface mining, railroad and other industries. Whitmore also manufactures lubrication equipment, specifically for rail
applications, and lubrication-centric reliability solutions for a wide variety of industries, and produces water-based coatings for the automotive and primary metals industries.
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Jet-Lube
is a world leader in anti-seize compounds, thread sealants and specialty lubrication products and greases for the energy industry.
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Strathmore
is engaged in the manufacturing of paint for sale to industrial clients and is a leading manufacturer of specialized industrial coating products including urethanes, epoxies, acrylics and alkyds.
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Balco
is engaged in the fabrication of aluminum and plastic extrusions and other materials related to safety, slip resistance and emergency egress.
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Smoke Guard
manufactures certified custom safety products for the commercial construction market and other markets requiring smoke and fire protection.
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CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
CSWI began operations on September 30, 2015 as a
result of the Share Distribution. With the exception of cash funded at inception and the contributed capital stock of the businesses discussed above, we did not own any material assets prior to the Share Distribution. The historical financial
position, results of operations and cash flows included in this Annual Report on Form 10-K for the fiscal year ended March 31, 2016 (Annual Report) represent the consolidated financial statements of the businesses discussed above.
As these businesses were under common control of Capital Southwest for all periods prior to September 30, 2015, the financial statements have been consolidated for all historical periods and equity accounts presented in the balance sheet as of
March 31, 2015 represent the combined equity accounts of these businesses. Equity accounts presented in the balance sheet as of March 31, 2016 represent the equity of CSWI. The consolidated financial statements have been prepared on a
standalone basis and are derived from the underlying accounting records of the underlying businesses in conformity with United States (U.S.) generally accepted accounting principles (GAAP).
The consolidated financial statements include all revenues, costs, assets and liabilities directly attributable to the businesses discussed
above. However, the consolidated financial statements for periods prior to the Share Distribution may not include all of the expenses that would have been incurred had the businesses been operating as separate publicly-traded
(standalone) companies during those periods and may not reflect the consolidated results of operations, financial position and cash flows as a standalone company during all periods presented. All significant intercompany balances and
transactions have been eliminated in consolidation.
Certain prior period balances have been reclassified to conform to current period
presentation with no effect on previously reported total assets, equity, net income or cash flows from operations.
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:
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Timing and amount of revenue recognition;
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Deferred taxes and tax reserves;
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Valuation of goodwill and indefinite-lived intangible assets.
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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 Federal Deposit Insurance Corporation (FDIC) insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC
insurance coverage. We had deposits in domestic banks of $17.6 million and $10.3 million, of which $15.2 million and $8.3 million, at March 31, 2016 and 2015 respectively, were in excess of FDIC limits.
Cash and cash equivalent balances of $8.4 million and $10.1 million are held in foreign currencies in foreign banks at March 31, 2016 and
2015, respectively, of which $5.0 million and $3.0 million exceeded insurance limits at March 31, 2016 and 2015, respectively.
Restricted Cash
Restricted cash includes compensating cash balances related to certain credit facilities and cash held in
escrowrelated to real estate sales.
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CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank Time Deposits
Bank time deposits include investments with maturities of
over three months that are redeemable within one year of the fiscal year end without significant penalty. Our bank time deposits of $13.3 million and $9.2 million as of March 31, 2016 and 2015, respectively, are certificates of deposit. Of the
$13.3 million and $9.2 million of bank time deposits held at March 31, 2016 and 2015, respectively, $10.4 million and $6.5 million, respectively, are fully insured by the province of Alberta, Canada or the Financial Services Compensation Scheme
(U.K.).
Allowance for Doubtful Accounts
We estimate a bad debt reserve under the allowance method. Using payment history in
light of current economic conditions, management examines the status of customer accounts on the aged accounts receivable report. With this information, management estimates an appropriate allowance for doubtful accounts. Accounts receivable are
written off when it is determined that the receivable will not be collected.
Inventories and Related Reserves
Inventories
are stated at the lower of cost or market and include raw materials, supplies, direct labor, and manufacturing overhead. Cost is determined using the last-in, first-out (LIFO) method for valuing inventories at our primary domestic
operations. Our foreign subsidiaries use either the first-in, first out method or the weighted average cost method to value inventory. Foreign inventories represent approximately 8% and 10% of total inventories as of March 31, 2016 and
March 31, 2015, 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 to 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:
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Land improvements
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5 to 40 years
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Buildings and improvements
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7 to 40 years
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Plant, office and lab equipment
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5 to 40 years
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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
Goodwill represents the excess of the aggregate purchase price over the fair value of identifiable net
assets acquired in a business combination. We test goodwill at least annually for impairment. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying
amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Qualitative assessments use an evaluation of events and circumstances such as macroeconomic conditions, industry and market considerations,
cost factors, financial performance factors, entity specific events, and changes in carrying value to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill.
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CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If a reporting unit fails the qualitative assessment, then valuation models and other
relevant data are used to estimate the reporting units fair value. The valuation models require the input of subjective assumptions. We use an income approach for impairment testing of goodwill and indefinite lived intangible assets, using a
discounted cash flow method. Estimates of future revenue and expense are made for five years, growth estimates are made to calculate terminal value, and a discount rate is used that approximates our weighted average cost of capital. We perform
qualitative or quantitative assessments to test asset carrying values for impairment at January 31, which is the annual impairment testing date. No impairment loss was recognized as a result of the impairment tests for the fiscal years ended
March 31, 2016, 2015 or 2014.
Intangible Assets
We have intangible assets consisting of patents, trademarks, customer
lists and non-compete agreements. Definite-lived intangible assets are assessed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. In addition, we have other trademarks and license
agreements that are considered to have indefinite lives. We review indefinite-lived intangible assets at least annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Significant assumptions used in the impairment test include the discount rate, royalty rate, future projections and terminal value growth rate. These inputs are considered non-recurring level three inputs within the fair value hierarchy. An
impairment loss would be recognized when estimated future cash flows are less than their carrying amount. We recorded an impairment of intangible assets of $0, $0.7 million and $1.3 million for the fiscal years ended March 31, 2016, 2015 and
2014, respectively.
Property Held for Investment
Capstar holds and manages certain excess non-operating properties.
Properties are disposed of as opportunities arise to maximize value. Properties are valued at lower of cost or market.
Deferred Loan
Costs
Deferred loan costs, which are reported in other assets and consist of fees and other expenses associated with debt financing, are amortized over the term of the associated debt using the effective interest method.
Fair Values of Financial Instruments
Our financial instruments are presented at fair value in our consolidated balance sheets,
with the exception of our long-term debt. 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 liabilitys 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 instruments anticipated life.
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CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level III Inputs reflect managements best estimate of what market participants
would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Recurring fair value measurements are limited to investments in derivative instruments and reserves for contingent consideration. The fair
value measurements of our derivative instruments are determined using models that maximize the use of the observable market inputs including interest rate curves and both forward and spot prices for currencies, and are classified as Level II under
the fair value hierarchy. The fair values of our derivative instruments are included in Note 9. The fair value measurements of our reserves for contingent consideration are classified as Level III and are generally determined using a weighted
average probability model based primarily on projected net revenues, with the following exception: contingent consideration related to the acquisition of Strathmore utilized the Monte Carlo simulation methodology and employed 200,000 trials using a
risk neutral Geometric Brownian Motion methodology. The volatility used in the Monte Carlo analysis was based on the observed equity volatility of comparable companies, and the risk free discount rate was the U.S. treasury rate corresponding to the
respective term of each earn-out. The most significant factor in the valuation is Strathmores projected earnings before interest, taxes, depreciation and amortization.
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 income. See Note 9 for further discussion of interest rate swaps.
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 would adjust the values of our derivative contracts for our or our counterparties credit risk.
Pension
Obligations
Determination of pension benefits 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.
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Discount rates are estimated using high quality corporate bond yields with a duration matching the expected
benefit payments. The discount rate is obtained from a universe of Aa-rated non-callable
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CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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bonds across the full maturity spectrum to establish a weighted average discount rate. Our discount rate assumptions are impacted by changes in general economic and market conditions that affect
interest rates on long-term high-quality debt securities, as well as the duration of our plans liabilities.
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The expected rates of return on plan assets are derived from reviews of asset allocation strategies, expected future experience for trust asset returns, risks and other factors adjusted for our specific investment
strategy. These rates are impacted by changes in general market conditions, but because they are long-term in nature, short-term market changes do not significantly impact the rates. Changes to our target asset allocation also impact these rates.
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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.
Revenue Recognition
We generally recognize revenue upon shipment of product, at
which time title and risk of loss passes to the customer. Additionally, we require that all of the following circumstances are satisfied: a) persuasive evidence of an arrangement exists, b) price is fixed or determinable, c) collectability is
reasonably assured and d) delivery has occurred or services have been rendered. Net revenues represent gross revenues invoiced to customers less certain related charges for contractual discounts or rebates. Discounts provided to customers at the
point of sale are recognized as reductions in revenue as the products are sold. Rebate amounts are recorded as reduction of revenue on a monthly basis using estimates of customer participation and performance. Freight charges billed to customers are
included in net revenues and the related shipping costs are included in cost of revenues in our consolidated statements of income.
Research and Development
Research and development costs are expensed as incurred. Costs incurred for research and development
primarily include salaries and benefits and consumable supplies, as well as rent, professional fees, utilities and the depreciation of property and equipment used in research and development activities. Research and development costs included in
selling, general and administrative expense were $4.5 million, $5.7 million and $5.5 million for the fiscal years ended March 31, 2016, 2015 and 2014, 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 Stock Market, LLC on the date of grant, which is the date such grants are authorized by our Board of Directors. The fair value of
performance-based restricted share awards is determined using a Monte Carlo simulation model incorporating all possible outcomes against a defined peer group. The fair value of share-based payment arrangements is amortized on a straight-line basis
to compensation expense over the period in which the restrictions lapse based on the expected number of shares that will vest. To cover the exercise of options and vesting of restricted shares, we generally issue new shares from our authorized but
unissued share pool, although we may instead issue treasury shares in certain circumstances.
Income Taxes, Deferred Taxes, Tax
Valuation Allowances and Tax Reserves
We apply the liability method in accounting and reporting for income taxes. Under the liability approach, deferred tax assets and liabilities are determined based upon the difference between the
financial statement carrying amounts and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax rates expected to be in effect when these differences are expected to reverse. The
effect on deferred tax assets and liabilities resulting from a change in tax rates is recognized in the period that includes the enactment date. The deferred income tax assets are adjusted by a valuation allowance, if necessary, to recognize future
tax benefits only to the extent, based on available evidence, that it is more likely than not to be realized. This analysis is
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CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
performed on a jurisdictional basis and reflects our ability to utilize these deferred tax assets through a review of past, current and estimated future taxable income in addition to the
establishment of viable tax strategies that will result in the utilization of the deferred assets. We recognize income tax related interest and penalties, if any, as a component of income tax expense.
Unremitted Earnings
We consider the earnings of non-U.S. subsidiaries to be indefinitely invested outside the United States on
the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. Should we decide to repatriate foreign earnings, a deferred tax
liability will be recorded and our income tax provision will be adjusted in the period we determined that the earnings will no longer be indefinitely invested outside the U.S. We provide deferred taxes for the temporary differences associated with
our investment in foreign subsidiaries that have a financial reporting basis that exceeds tax basis, unless we can assert permanent reinvestment in foreign jurisdictions. Financial reporting basis and tax basis differences in investments in foreign
subsidiaries consist of both unremitted earnings and losses, as well as foreign currency translation adjustments.
Uncertain Tax
Positions
We establish income tax liabilities to remove some or all of the income tax benefit of any of our income tax positions based upon one of the following: (1) the tax position is not more likely than not to be
sustained, (2) the tax position is more likely than not to be sustained, but for a lesser amount or (3) the tax position is more likely than not to be sustained, but not in the financial period in which the tax
position was originally taken. The amount of income taxes we pay 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. For the fiscal year ended
March 31, 2016, we recognized an uncertain tax position related to state taxes in the amount of $0.9 million, and we recognized $0.4 million in interest and penalties in income tax expense. We did not recognize any uncertain tax positions or
interest and penalties in income tax expense for the fiscal years ended March 31, 2015 or 2014.
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. As the holders of restricted stock 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 8 is prepared on a combined basis and is presented
as earnings per common share. Diluted earnings per share is based on the weighted average number of shares as determined for basic earnings per share plus shares potentially issuable in conjunction with stock options.
Foreign Currency Translation
Assets and liabilities of our foreign subsidiaries are translated to U.S. dollars at exchange rates
prevailing at the balance sheet date, while income and expenses are translated at
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CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 income.
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.
Segment Reporting
We conduct our operations through three business segments based on type of product and how we manage the
business. The products for our segments are distributed both domestically and internationally. For decision-making purposes, our Chief Executive Officer and other members of senior executive management use financial information generated and
reported at the reportable segment level. We evaluate segment performance and allocate resources based on each reportable segments operating income. Our reportable segments are as follows:
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Industrial Products includes specialty mechanical products, fire and smoke protection products, architecturally-specified building products and storage, filtration and application equipment for use with our specialty
chemicals and other products for general industrial application.
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Coatings, Sealants & Adhesives is comprised of coatings and penetrants, pipe thread sealants, firestopping sealants and caulks and adhesives/solvent cements.
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Specialty Chemicals includes lubricants and greases, drilling compounds, anti-seize compounds, chemical formulations and degreasers and cleaners.
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Intersegment sales and transfers are recorded at cost plus a profit margin, with the sales and related margin on such sales eliminated in consolidation. We do
not allocate interest expense, interest income or other (expense) income, net to our segments. Our corporate headquarters does not constitute a separate segment. The Eliminations and Other segment information is included to reconcile segment data to
the consolidated financial statements and includes assets and expenses primarily related to CapStar and corporate functions.
Accounting Developments
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was subsequently amended by ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net), and ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU No. 2014-09, as amended, supersedes the revenue recognition
requirements in Revenue Recognition (Topic 605). The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue when it
transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. There are also expanded disclosure requirements in this ASU. In July
2015, the FASB voted to delay the effective date of ASU 2014-09 by one year. As a result, public entities will apply the new standard for annual reporting periods beginning after December 15, 2017, including interim periods within those
reporting periods. Early adoption as of the original public entity effective date is permitted. We are currently evaluating the impact of ASU No. 2014-09 on our consolidated financial condition and results of operations.
In April 2015, the FASB issued ASU No. 2015-03, Interest Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs. This ASU requires debt issuance costs be presented in the
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CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
balance sheet as a direct deduction from the carrying value of the associated debt liability. Amortization of those costs should be reported as interest expense. This ASU is effective for
financial statements issued for annual and interim periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The new guidance should be applied on a retrospective
basis for each period presented in the balance sheet. We do not believe that adoption of this ASU will have a material impact on our consolidated financial condition and results of operations.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles Goodwill and Other Internal-Use Software (Subtopic
350-40): Customers Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU provides guidance to customers about whether a cloud computing arrangement includes software. If a cloud computing arrangement includes a software
license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account
for the arrangement as a service contract. The new guidance does not change the accounting for a customers accounting for service contracts. This ASU is effective for annual periods, including interim periods within those annual periods,
beginning after December 15, 2015, and early adoption is permitted. We adopted the amendments of this ASU for the year ended March 31, 2016, and it did not have a material impact on our consolidated financial condition and results of
operations.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement Period
Adjustments, which eliminates the requirement to retrospectively account for measurement period adjustments related to a business combination. This ASU is effective for annual periods, including interim periods within those annual periods,
beginning after December 15, 2015, and is to be applied prospectively. Early adoption is permitted. We adopted the amendments of this ASU for the year ended March 31, 2016, and it did not have an impact on our consolidated financial
condition and results of operations.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of
Deferred Taxes, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for annual periods, including interim periods within those annual
periods, beginning after December 15, 2016, and may be applied prospectively or retrospectively. Early adoption is permitted. We retrospectively adopted the amendments of this ASU as of March 31, 2016, and as a result, $2.7 million of
current deferred tax assets that were included in prepaid expenses and other current assets at March 31, 2015 have been reclassified to noncurrent deferred tax assets, which are included in other assets in the consolidated balance sheet.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among
organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the
lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly
changed from previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Modified retrospective application is permitted with certain practical
expedients. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2016-02 on our consolidated financial condition and results of operations.
In March 2016, the FASB issued ASU No. 2016-09, Compensation Stock Compensation (Topic 718), which simplifies the
accounting for share-based compensation. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences,
58
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual periods, including interim periods within those
annual periods, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2016-09 on our consolidated financial condition and results of operations.
AC Leak Freeze
On
December 16, 2015, we acquired substantially all of the assets of AC Leak Freeze
TM
(Leak Freeze), based in Baltimore, Maryland for $16.3 million in cash funded by borrowings under
CSWIs Revolving Credit Facility (discussed in Note 7). Leak Freeze is a leading manufacturer of original equipment manufacturer-approved air conditioning and refrigerant leak repair solutions. The excess of the purchase price over the fair
value of the identifiable assets acquired was $5.7 million and was allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from a more extensive specialty chemical product
portfolio for the HVAC market and leveraging our larger distributor network. The allocation of the fair value of the assets acquired included customer lists, trademarks and trade names and a non-compete agreement of $8.1 million, $1.4 million and
$0.2 million, respectively, as well as inventory in the amount of $0.7 million. Customer lists and the non-compete agreement are being amortized over 10 years and five years, respectively, while trademarks and trade names and goodwill are not being
amortized. Leak Freeze activity has been included in our Specialty Chemicals segment since the acquisition date. No pro forma information has been provided due to immateriality.
Deacon Industries, Inc.
On
October 1, 2015, we acquired substantially all of the assets of Deacon Industries, Inc. (Deacon), based in Washington, Pennsylvania for $12.6 million. The acquisition was funded by $11.0 million of borrowings under the RectorSeal
Line of Credit and $1.1 million cash on hand. The remaining $0.5 million of the purchase price represents a payment contingent upon the achievement of certain performance metrics during the fiscal year ending March 31, 2017. Deacon is a leading
manufacturer of high temperature sealants and injectable packings with applications in a variety of industrial end markets, both on an emergency and maintenance basis. The excess of the purchase price over the fair value of the identifiable assets
acquired was $4.1 million and was allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from a more extensive sealant and injectable packing product portfolio and leveraging
our larger distributor network. The allocation of the fair value of the assets acquired included customer lists, know-how, trademarks and trade names and a non-compete agreement of $2.9 million, $2.6 million, $1.1 million, and $0.1 million,
respectively, as well as property, plant, and equipment and inventory in the amounts of $0.9 million and $0.5 million, respectively. Customer lists, know-how and the non-compete agreement are being amortized over 15 years, 10 years and five years,
respectively, while trademarks and trade names and goodwill are not being amortized. Deacon activity has been included in our Coatings, Sealants & Adhesives segment since the acquisition date. No pro forma information has been provided due
to immateriality.
Strathmore Products, Inc.
Effective April 1, 2015, we acquired the assets of Strathmore, a leading manufacturer of specialized industrial coating products including
urethanes, epoxies, acrylics and alkyds, for $68.8 million, plus up to an additional $16.5 million within a prescribed period of time following March 31, 2017, depending on the achievement of certain performance metrics during the fiscal years
ending March 31, 2016 and 2017. A liability
59
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of $2.0 million was recorded at acquisition based on the projected achievement of the performance metrics as estimated using the Monte Carlo simulation methodology. This liability was reduced to
$0 during the quarter ended December 31, 2015 based on expected achievement of performance metrics. The acquisition was funded from borrowings of $70.0 million (as discussed in Note 7). Transaction costs incurred in connection with the
acquisition were $2.7 million (including $0.2 million incurred during the fiscal year ended March 31, 2015) and are reported in selling, general and administrative expense in the accompanying consolidated statements of income. The preliminary
excess of the purchase price over the fair value of the identifiable assets acquired was $15.1 million and was allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be achieved from an
increased market presence in the industrial coatings sector and a platform from which to grow through end-market and geographic expansion. During the quarter ended December 31, 2015, a measurement period adjustment was recorded to recognize
$2.7 million in prepaid compensation cost, which reduced the preliminary estimate of goodwill to $12.4 million. Prepaid compensation is being amortized ratably to expense over the vesting period, which ends March 31, 2018. The preliminary fair
value of the assets acquired included trade names and trademarks, customer relationships and non-compete agreements of $14.9 million, $27.4 million and $0.4 million, respectively. During the quarter ended March 31, 2016, we finalized our
allocation of the purchase price and recorded a measurement period adjustment, which resulted in a change in the fair values of customer relationships and trade names and trademarks to $23.7 million and $13.6 million, respectively, which resulted in
an increase of $5.0 million to goodwill. Customer relationships and the non-compete agreements are being amortized over 15 years and five years, respectively, while trade names, trademarks and goodwill are not being amortized.
The following table summarizes the fair values of assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Accounts receivable
|
|
$
|
4,902
|
|
Inventory
|
|
|
8,447
|
|
Property, plant and equipment
|
|
|
3,761
|
|
Intangible assets
|
|
|
37,650
|
|
Other, net
|
|
|
2,941
|
|
Current liabilities
|
|
|
(4,297
|
)
|
|
|
|
|
|
Net tangible and intangible assets
|
|
|
53,404
|
|
Goodwill
|
|
|
17,395
|
|
|
|
|
|
|
Purchase price
|
|
$
|
70,799
|
|
|
|
|
|
|
Strathmore has been included in the Coatings, Sealants & Adhesives segment since its effective
acquisition date. Net revenue attributable to Strathmore since the date of acquisition was $52.9 million. Pro forma information regarding Strathmore is provided below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues, net
|
|
$
|
319,831
|
|
|
$
|
325,025
|
|
Operating income
|
|
|
47,486
|
|
|
|
50,443
|
|
Net income
|
|
|
25,471
|
|
|
|
32,012
|
|
Earnings per share Basic
|
|
|
1.63
|
|
|
|
2.05
|
|
Earnings per share Diluted
|
|
|
1.62
|
|
|
|
2.05
|
|
SureSeal Manufacturing
On January 2, 2015, we acquired selected assets and the SureSeal brand from SureSeal Manufacturing in Tacoma, Washington, a producer and
distributor of waterless floor drain trap seals for an initial purchase price of
60
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$8.1 million. Of the total purchase price, $3.2 million has been paid using $2.9 million funded from borrowings and $0.3 million from available cash. The remaining purchase price is contingent
upon SureSeal achieving certain performance metrics during the three- and six-year periods following the acquisition, and is based on a multiple of the lesser of gross margin or 67% of net sales during the final 12 months of the measurement period.
A liability of $4.9 million was originally recorded based on the achievement of the performance metrics as estimated using a weighted average probability model. The excess of the purchase price over the fair value of the identifiable assets acquired
was $4.5 million and was allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from a more extensive product portfolio and leveraging our larger distributor network. The
identifiable tangible and intangible assets included customer lists, trademarks and names, patents and a non-compete agreement of $1.8 million, $0.9 million, $0.6 million, and $0.1 million, respectively, as well as equipment of $0.2 million.
Patents, customer lists and the non-compete agreement are being amortized over 15 years, 10 years and five years, respectively, while trademarks and goodwill are not being amortized. The SureSeal product line activity has been included in the
Industrial Products segment since its acquisition date. No pro forma information has been provided due to immateriality.
Evo-Crete and Polyslab
product lines
On August 15, 2014, we acquired the Evo-Crete and Polyslab product lines for $4.5 million from the Evolve Group
located in Brisbane, Queensland and formed a new entity, RectorSeal Australia, Pty. Ltd. RectorSeal Australia focuses on the plumbing, HVAC and irrigation markets. Evo-Crete and Polyslab continue to be manufactured in Australia. The purchase was
funded from borrowings of $3.0 million with the remainder funded from internal working capital. The excess of the purchase price over the fair value of the identifiable assets acquired was $1.5 million and was allocated to goodwill, which will be
deductible for income tax purposes. Goodwill represents the value expected to be obtained from a more extensive HVAC product portfolio, especially in the condensate management niche, and expansion of existing RectorSeal product sales into the
Australian market. The fair value of the assets acquired included customer lists, patents, trademarks and a non-compete agreement of $1.2 million, $0.7 million, $0.4 million, and $0.1 million, respectively, as well as property, plant, and equipment
in the amount of $0.7 million. Customer lists, patents and the non-compete agreement are being amortized over 15 years, 10 years and five years, respectively, while trademarks and goodwill are not being amortized. The RectorSeal Australia activity
has been included in the Industrial Products segment since the acquisition date. No pro forma information has been provided due to immateriality.
Fluid Defense Systems, LLC.
On
January 31, 2014, we acquired the assets of Fluid Defense Systems, LLC (Fluid Defense), a manufacturer of fully integrated lubricant storage and handling solutions sold under the Oil
Safe
®
brand, for $5.6 million. The purchase was funded from borrowings of $5.0 million with the remainder funded from available cash. The excess of the purchase price over the fair value of
the identifiable assets acquired was $1.7 million and was allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from a more extensive lubrication solution product portfolio and
leveraging our larger distributor network. The fair value of the assets acquired included customer lists, trademarks and patents and technology of $1.1 million, $1.0 million and $0.1 million, respectively, as well as working capital and property,
plant, and equipment in the amounts of $1.4 million and $0.3 million, respectively. Trademarks, customer lists and patents and technology are being amortized over 20 years, 10 years and five to seven years, respectively, while goodwill is not being
amortized. Fluid Defense activity has been included in the Industrial Products segment since the acquisition date. No pro forma information has been provided due to immateriality.
61
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Resource Conservation Technologies, Inc.
On January 2, 2014, we acquired the assets of Resource Conservation Technologies, Inc. (RCT) for $18.5 million to enhance
product offerings to the HVAC market. The purchase was funded from borrowings of $18.3 million with the remainder funded from available cash. The excess of the purchase price over the fair value of the identifiable assets acquired was $8.5 million
and was allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from a more extensive HVAC product portfolio and leveraging our larger distributor network. The fair value of the
assets acquired included customer lists, patents, trademarks and a non-compete agreement of $5.8 million, $2.3 million, $1.7 million, and $0.1 million, respectively, as well as property, plant, and equipment in the amount of $0.1 million. Customer
lists, patents and the non-compete agreement are being amortized over 10 years, five to 16 years and five years, respectively, while trademarks and goodwill are not being amortized. RCT activity has been included in the Industrial Products segment
since the acquisition date. No pro forma information has been provided due to immateriality.
3.
|
GOODWILL AND INTANGIBLE ASSETS
|
The changes in the carrying amount of goodwill for the fiscal years ended March 31, 2016 and 2015 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Products
|
|
|
Coatings,
Sealants and
Adhesives
|
|
|
Specialty
Chemicals
|
|
|
Total
|
|
Balance at April 1, 2014
|
|
$
|
30,996
|
|
|
$
|
920
|
|
|
$
|
3,402
|
|
|
$
|
35,318
|
|
Acquisition of SureSeal
|
|
|
4,502
|
|
|
|
|
|
|
|
|
|
|
|
4,502
|
|
Currency translation and other
|
|
|
825
|
|
|
|
|
|
|
|
|
|
|
|
825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2015
|
|
|
36,323
|
|
|
|
920
|
|
|
|
3,402
|
|
|
|
40,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Strathmore
|
|
|
|
|
|
|
17,395
|
|
|
|
|
|
|
|
17,395
|
|
Acquisition of Deacon
|
|
|
|
|
|
|
4,105
|
|
|
|
|
|
|
|
4,105
|
|
Acquisition of Leak Freeze
|
|
|
|
|
|
|
|
|
|
|
5,741
|
|
|
|
5,741
|
|
Currency translation
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2016
|
|
$
|
36,194
|
|
|
$
|
22,420
|
|
|
$
|
9,143
|
|
|
$
|
67,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provided information about out intangible assets for the fiscal years ended March 31,
2016 and 2015 (in thousands, except years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
Wtd Avg
Life
(Years)
|
|
|
Ending
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Ending
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
12
|
|
|
$
|
14,458
|
|
|
$
|
(8,600
|
)
|
|
$
|
14,284
|
|
|
$
|
(7,608
|
)
|
Customer lists and amortized trademarks
|
|
|
12
|
|
|
|
71,475
|
|
|
|
(17,080
|
)
|
|
|
37,091
|
|
|
|
(11,516
|
)
|
Non-compete agreements (a)
|
|
|
5
|
|
|
|
1,310
|
|
|
|
(405
|
)
|
|
|
2,877
|
|
|
|
(2,458
|
)
|
Other
|
|
|
12
|
|
|
|
3,769
|
|
|
|
(354
|
)
|
|
|
412
|
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,012
|
|
|
$
|
(26,439
|
)
|
|
$
|
54,664
|
|
|
$
|
(21,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names and trademarks not being amortized:
|
|
|
|
|
|
$
|
24,154
|
|
|
$
|
|
|
|
$
|
8,052
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a)
|
During the fiscal year ended March 31, 2016, we wrote off $2.9 million of expired and fully amortized non-compete agreements.
|
Amortization expense for the years ended March 31, 2016, 2015 and 2014 was $7.1 million, $4.6 million and $3.9 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):
|
|
|
|
|
2017
|
|
$
|
7,363
|
|
2018
|
|
|
7,233
|
|
2019
|
|
|
6,385
|
|
2020
|
|
|
6,142
|
|
2021
|
|
|
5,919
|
|
4.
|
EXECUTIVE COMPENSATION
|
On August 28, 2014, the board of directors of Capital Southwest adopted an executive compensation plan consisting of
grants of nonqualified stock options, restricted stock and cash incentive awards to executive officers of Capital Southwest. The plan was intended to align the compensation of Capital Southwests executive officers with Capital Southwests
key strategic objective of increasing the market value of Capital Southwests shares through a transformative transaction for the benefit of Capital Southwests shareholders. Under the plan, Joseph B. Armes, Kelly Tacke, and Bowen S.
Diehl, receive an amount equal to 6.0% of the aggregate appreciation in Capital Southwests share price from August 28, 2014 (using a base price of $36.16 per share) to the Trigger Event Date (December 29, 2015). Effective immediately with
the spin-off of CSWI, both Joseph B. Armes and Kelly Tacke became employees of CSWI and Bowen Diehl remained an employee of Capital Southwest. The initial plan component consists of nonqualified options awarded to purchase a total of 258,000 shares
of common stock. The second plan component consists of total awards of 127,000 shares of restricted stock, which have voting rights, but do not have cash dividend rights. The final plan component consists of cash incentive payments awarded to each
of Mr. Armes, Ms. Tacke and Mr. Diehl in an amount equal to the excess of each awardees allocable portion of the Total Payment Amount over the aggregate value as of the Trigger Event Date of the awardees restricted common
stock and nonqualified option awards under the plan. The equity based awards vest or become exercisable, as applicable, as follows: (1) 1/3 on the Trigger Event Date; (2) 1/3 on the first anniversary of the Trigger Event Date; and
(3) 1/3 on the second anniversary of the Trigger Event Date. Generally, entitlement to such awards is conditioned on the awardee remaining in the employment of the Capital Southwest or its subsidiaries on the vesting date, or in the event the
employment of the awardee was transferred to CSWI, continuing employment by CSWI.
On September 8, 2015, the board of directors of
Capital Southwest designated the Share Distribution as a transformative transaction for purposes of the executive compensation plan and amended the award agreements granted under the plan to provide for accelerated vesting of the awards held by an
executive in the event of a termination of such executives service effected by the executive for good reason, by the employer without cause, or as a result of the disability or death of the executive. As a result of the Share Distribution
completed on September 30, 2015, the Trigger Event Date was determined to be December 29, 2015.
As of December 29, 2015,
the cash component of the executive compensation plan was calculated based on the volume weighted average price of Capital Southwest and CSWI common stock for the 20 trading days ended December 29, 2015. Effective with the Share Distribution,
CSWI entered into an Employee Matters Agreement with Capital Southwest. Under this agreement, Capital Southwest will retain the obligation to fund the cash incentive awards granted under the Executive Compensation Plan, and all liabilities with
respect to such cash
63
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
incentive awards will remain liabilities of Capital Southwest. During the fiscal year ended March 31, 2016, we recorded total executive compensation expense for the cash incentive payments
of $1.3 million for Mr. Armes and Ms. Tacke, and total stock compensation expense of $0.3 million. The remaining cash and stock compensation of $2.4 million and $1.2 million, respectively, will be recognized as compensation expense over
the remaining vesting period.
5.
|
SHARE-BASED COMPENSATION
|
In September 2015, in connection with the Share Distribution, we adopted our 2015 Equity and Incentive Compensation Plan
(the 2015 Plan), which provides for the issuance of up to 2,000,000 shares of CSWI common stock through the grant of stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance
units or other share-based awards, to employees, officers and non-employee directors, as well as the issuance of awards in connection with the Share Distribution. As of March 31, 2016, 1,404,083 shares were available for issuance under the 2015
Plan, which includes the impact of 510,447 shares issued in connection with the Share Distribution and discussed below.
In connection
with the Share Distribution, all stock option and restricted stock awards granted by Capital Southwest, including awards granted under the executive compensation plan discussed in Note 4, were adjusted and each holder of an award received both
Capital Southwest and CSWI stock options and restricted stock awards.
|
|
|
Each Capital Southwest stock option was converted into both a Capital Southwest stock option and a CSWI stock option, with adjustments made to the exercise prices and number of shares subject to each option in order to
preserve the aggregate intrinsic value of the original Capital Southwest stock option as measured immediately before and immediately after the Share Distribution, subject to rounding. The adjusted Capital Southwest stock options and CSWI stock
options are subject to substantially the same terms, vesting conditions, post-termination exercise rules and other restrictions that applied to the original Capital Southwest stock options immediately before the Share Distribution. Options generally
expire 10 years from the date of grant and generally vest on or after the first anniversary of the date of grant in five annual installments. The fair value of stock options is determined using the Black-Scholes pricing model and such fair value is
expensed on a straight-line basis over the requisite service period.
|
|
|
|
The Capital Southwest restricted stock awards will remain outstanding and the awardees additionally received one share of CSWI restricted stock for each share of Capital Southwest restricted stock held, which shares are
subject to substantially the same terms, vesting conditions and other restrictions applicable to the Capital Southwest restricted stock award immediately before the Share Distribution. Restricted Stock awards generally have full voting and dividend
rights, but are restricted with regard to sale or transfer. Unless otherwise specified in the award agreement, the restrictions do not expire for a minimum of one year and a maximum of five years and are subject to forfeiture during the restriction
period. Typically, restricted share grants have staggered vesting periods over one to five years from the grant date. The fair value of restricted stock is based on the closing price of common stock on the date of grant and such fair value is
expensed on a straight-line basis over the requisite service period.
|
The issuance of share-based compensation awards
discussed above occurred in conjunction with the Share Distribution after the market closed on September 30, 2015. We record compensation expense for share-based awards granted by CSWI to CSWI employees and share-based awards granted by Capital
Southwest to employees who are now employed by CSWI.
64
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recorded share-based compensation as follows for the fiscal year ended March 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2016
|
|
|
|
Stock Options
|
|
|
Restricted Stock
|
|
|
Total
|
|
Share-based compensation expense
|
|
$
|
206
|
|
|
$
|
750
|
|
|
$
|
956
|
|
Related income tax benefit
|
|
|
(72
|
)
|
|
|
(263
|
)
|
|
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net share-based compensation expense
|
|
$
|
134
|
|
|
$
|
487
|
|
|
$
|
621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No share-based compensation expense was recorded prior to October 1, 2015.
Stock option activity, which represents outstanding CSWI awards, including awards held by Capital Southwest employees is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2016
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value (in
Millions)
|
|
Outstanding at April 1, 2015
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
368,487
|
|
|
|
24.40
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,974
|
)
|
|
|
16.11
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
362,513
|
|
|
$
|
24.53
|
|
|
|
8.0
|
|
|
$
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2016
|
|
|
131,161
|
|
|
$
|
23.67
|
|
|
|
7.5
|
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016, we had unrecognized compensation cost related to non-vested stock options of $0.8
million, which will be amortized into net income over the remaining weighted average vesting period of approximately 1.9 years. The calculation of unrecognized compensation cost and weighted average periods include share-based awards granted by CSWI
to CSWI employees and share-based awards granted by Capital Southwest to employees who are now employed by CSWI. Other than options granted in conjunction with the Share Distribution, which were granted at a weighted average fair value of $6.67 per
share, no options were granted during the fiscal year ended March 31, 2016. No options were exercised during the fiscal year ended March 31, 2015. The total fair value of stock options vested during the fiscal year ended March 31,
2016 was $0.5 million.
Restricted stock activity, which represents outstanding CSWI awards, including awards held by Capital Southwest
employees is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding at April 1, 2015
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
230,706
|
|
|
|
22.14
|
|
Vested
|
|
|
(45,453
|
)
|
|
|
15.41
|
|
Canceled
|
|
|
(3,276
|
)
|
|
|
28.21
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
181,977
|
|
|
$
|
23.72
|
|
|
|
|
|
|
|
|
|
|
65
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the restriction period, the holders of restricted stock are entitled to vote and
receive dividends, except for restricted shares awarded under the executive compensation plan discussed in Note 4. At March 31, 2016, we had unrecognized compensation cost related to unvested restricted shares of $3.0 million, which will be
amortized into net income over the remaining weighted average vesting period of approximately 2.0 years. The calculation of unrecognized compensation cost and weighted average periods include share-based awards granted by CSWI to CSWI employees and
share-based awards granted by Capital Southwest to employees who are now employed by CSWI. The total fair value of restricted shares vested during the fiscal year ended March 31, 2016 was $0.7 million.
Restricted stock granted during the fiscal year ended March 31, 2016 includes 17,449 shares with market-based vesting provisions, and
vesting ranges from 0-100% based on pre-defined performance targets. Market-based restricted stock is earned upon the achievement of performance targets and is payable in common shares. Compensation expense is recognized over a 36-month cliff
vesting period.
6.
|
DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS
|
Accounts receivable, net
consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accounts receivable trade
|
|
$
|
53,423
|
|
|
$
|
50,487
|
|
Other receivables
|
|
|
422
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,845
|
|
|
|
50,633
|
|
Less: Allowance for doubtful accounts
|
|
|
(1,208
|
)
|
|
|
(1,692
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
52,637
|
|
|
$
|
48,941
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials and supplies
|
|
$
|
26,019
|
|
|
$
|
21,837
|
|
Work in process
|
|
|
5,432
|
|
|
|
5,626
|
|
Finished goods
|
|
|
26,087
|
|
|
|
25,325
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
57,538
|
|
|
|
52,788
|
|
Less: LIFO reserve
|
|
|
(5,302
|
)
|
|
|
(5,456
|
)
|
Less: Obsolescence reserve
|
|
|
(602
|
)
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
51,634
|
|
|
$
|
47,175
|
|
|
|
|
|
|
|
|
|
|
66
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, plant and equipment, net
, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land improvements
|
|
$
|
2,129
|
|
|
$
|
2,129
|
|
Buildings and improvements
|
|
|
46,004
|
|
|
|
42,191
|
|
Plant, office and laboratory equipment
|
|
|
65,732
|
|
|
|
62,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,865
|
|
|
|
106,678
|
|
Less: Accumulated depreciation
|
|
|
(59,035
|
)
|
|
|
(52,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
54,830
|
|
|
|
53,724
|
|
Land
|
|
|
2,610
|
|
|
|
1,242
|
|
Construction in progress
|
|
|
6,917
|
|
|
|
1,871
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
64,357
|
|
|
$
|
56,837
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment was $7.0 million, $5.9 million and $5.2 million for the fiscal
years ended March 31, 2016, 2015 and 2014, respectively. Of these amounts, cost of revenues includes $4.6 million, $3.9 million and $3.2 million, respectively.
Other assets
consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Property held for investment (a)
|
|
$
|
9,290
|
|
|
$
|
9,300
|
|
Deferred income taxes
|
|
|
|
|
|
|
5,651
|
|
Retirement assets in excess of benefit obligations
|
|
|
2,063
|
|
|
|
338
|
|
Other
|
|
|
4,545
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
15,898
|
|
|
$
|
15,746
|
|
|
|
|
|
|
|
|
|
|
|
(a) As of March 31, 2016, $6.2 million in assets were held
for sale.
|
|
Accrued and other current expenses
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Compensation and related benefits
|
|
$
|
12,502
|
|
|
$
|
9,212
|
|
Rebates and marketing agreements
|
|
|
1,976
|
|
|
|
1,515
|
|
Commissions
|
|
|
1,378
|
|
|
|
1,157
|
|
Sales and property taxes
|
|
|
517
|
|
|
|
373
|
|
Other accrued expenses
|
|
|
4,717
|
|
|
|
3,744
|
|
|
|
|
|
|
|
|
|
|
Accrued and other current liabilities
|
|
$
|
21,090
|
|
|
$
|
16,001
|
|
|
|
|
|
|
|
|
|
|
67
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other liabilities
consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Contingent consideration
|
|
$
|
5,854
|
|
|
$
|
5,115
|
|
Deferred income taxes
|
|
|
3,793
|
|
|
|
|
|
Other
|
|
|
2,173
|
|
|
|
2,595
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
11,820
|
|
|
$
|
7,710
|
|
|
|
|
|
|
|
|
|
|
Debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revolving Credit Facility, interest rate of 2.18%
|
|
$
|
76,539
|
|
|
$
|
|
|
RectorSeal line of credit, interest rate of 1.77%
|
|
|
|
|
|
|
13,000
|
|
Whitmore term loan, interest rate of 2.43% and 2.17%, respectively
|
|
|
13,143
|
|
|
|
13,704
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
89,682
|
|
|
|
26,704
|
|
Less: Current portion
|
|
|
(561
|
)
|
|
|
(13,561
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
89,121
|
|
|
$
|
13,143
|
|
|
|
|
|
|
|
|
|
|
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. Borrowings under this facility bear interest at a rate of prime plus 0.75% or London Interbank Offered Rate
(LIBOR) plus 1.75%, which may be adjusted based on our leverage ratio. We pay a commitment fee of 0.25% 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 maturity. This facility is secured by substantially all of our assets. Borrowings under this facility were used as follows: (1) to repay the principal and interest outstanding under the RectorSeal Line of
Credit and the Strathmore Acquisition Term Loan, (2) to pay fees incurred to enter into the agreement and (3) to acquire Leak Freeze. As of March 31, 2016, we had $76.5 million in outstanding borrowings under this facility. The
agreement contains certain restrictive covenants, including requiring us to maintain a minimum fixed charge coverage of ratio of 1.25 to 1.00 and a maximum leverage ratio of EBITDA to Funded Debt (as defined in the agreement) of 3.00 to 1.00.
Covenant compliance is tested quarterly and we were in compliance with all covenants as of March 31, 2016. Interest payments related to a portion of the outstanding balance under the Revolving Credit Facility are hedged under an interest rate
swap agreement as described in Note 9.
During April 2016, we repaid $5.0 million of the amount that was outstanding at March 31,
2016 under this facility.
RectorSeal Line of Credit
RectorSeal had a $30.0 million secured line of credit with a bank available for acquisitions and general corporate purposes, which was
scheduled to mature on July 31, 2016. Quarterly interest payments were required.
68
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Borrowings under the line of credit bore interest at a variable annual rate of either the one month LIBOR plus 1.5% or 0.75% less than the bank floating rate. The line of credit was secured by
accounts receivable, inventory, equipment, investments, and other assets of RectorSeal (excluding its subsidiaries). As of March 31, 2015, RectorSeal had $13.0 million in outstanding borrowings under the line of credit. The remaining principal
balance of $6.5 million was repaid on December 11, 2015 with borrowings under the Revolving Credit Facility, and the line of credit was terminated.
Strathmore Acquisition Term Loan
Whitmore had a $70.0 million secured term loan outstanding to support the acquisition of Strathmore. The term loan was scheduled to mature on
April 27, 2020 and was secured by the assets of Whitmore and Strathmore, excluding certain real property. Borrowings under the term loan bore interest at a variable annual rate equal to one month LIBOR plus 3.0%. We made quarterly payments of
$875,000 in both July 2015 and October 2015. The remaining principal balance of $68.3 million was repaid on December 11, 2015 with borrowings under the Revolving Credit Facility, and the term loan was terminated.
Whitmore Line of Credit
Whitmore
had a $20.0 million secured line of credit with a syndicate of four commercial banks available for general corporate purposes, which was scheduled to mature on April 27, 2020. Borrowings under the line of credit bore interest at a variable
annual rate of 0.5% less than the bank floating rate. Whitmore repaid the entire balance during the quarter ended December 31, 2014. This line of credit was terminated in conjunction with our Revolving Credit Facility.
Whitmore Term Loan
As of
March 31, 2016, Whitmore had a secured term loan outstanding related to a newly constructed warehouse and corporate office building and the remodel of an existing manufacturing and research and development facility. The term loan matures on
July 31, 2029, and Whitmore has quarterly payments of $140,000 due in each of the next four quarters. Borrowings under the term loan bear interest at a variable annual rate equal to one month LIBOR plus 2.0%. As of March 31, 2016 and 2015,
Whitmore had $13.1 million and $13.7 million, respectively, in outstanding borrowings under the term loan. Interest payments under the Whitmore term loan are hedged under an interest rate swap agreement as described in Note 9.
Balco Line of Credit
Balco had a
$1.5 million unsecured revolving line of credit with a bank available for working capital purposes that matured on October 29, 2015 and was not renewed. Borrowings under the line of credit bore interest at a variable annual rate of 0.5% less
than the U.S. prime interest rate, with a floor of 3.75%. As of March 31, 2015, Balco had no outstanding borrowings under the line of credit.
69
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future Minimum Debt Payments
Future minimum debt payments are as follows for fiscal years ending March 31 (in thousands):
|
|
|
|
|
2017
|
|
$
|
561
|
|
2018
|
|
|
561
|
|
2019
|
|
|
561
|
|
2020
|
|
|
561
|
|
2021
|
|
|
77,100
|
|
Thereafter
|
|
|
10,338
|
|
|
|
|
|
|
Total
|
|
$
|
89,682
|
|
|
|
|
|
|
Operating Leases
We have entered into non-cancelable operating leases with initial terms in excess of one year for manufacturing and office facilities. The
leases expire at various times through 2031. Future minimum lease payments under these leases for fiscal years ending March 31 are as follows (in thousands):
|
|
|
|
|
2017
|
|
$
|
2,364
|
|
2018
|
|
|
1,733
|
|
2019
|
|
|
1,467
|
|
2020
|
|
|
1,404
|
|
2021
|
|
|
1,238
|
|
Thereafter
|
|
|
4,648
|
|
|
|
|
|
|
Total
|
|
$
|
12,854
|
|
|
|
|
|
|
Rental expense under operating leases was $2.6 million, $2.4 million and $2.1 million for the fiscal years
ended March 31, 2016, 2015 and 2014, respectively.
On September 30, 2015, 15.6 million CSWI common shares were distributed to Capital Southwest shareholders in
connection with the Share Distribution. For comparative purposes, and to provide a more meaningful calculation for weighted average shares, this amount was assumed to be outstanding throughout all periods presented up to and including
September 30, 2015 in the calculation of basic weighted average shares. In addition, for the dilutive weighted average share calculations, the dilutive securities outstanding at September 30, 2015 were also assumed to be outstanding
throughout all periods presented up to and including September 30, 2015.
70
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the reconciliation of the numerator and the denominator of
basic and diluted earnings per share for the fiscal years ended March 31, 2016, 2015 and 2014 (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net income for basic and diluted earnings per share
|
|
$
|
25,471
|
|
|
$
|
29,705
|
|
|
$
|
24,732
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
15,443
|
|
|
|
15,441
|
|
|
|
15,441
|
|
Participating securities
|
|
|
182
|
|
|
|
142
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share
|
|
|
15,625
|
|
|
|
15,583
|
|
|
|
15,583
|
|
Potentially dilutive securities (a)
|
|
|
50
|
|
|
|
41
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share
|
|
|
15,675
|
|
|
|
15,624
|
|
|
|
15,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.63
|
|
|
$
|
1.91
|
|
|
$
|
1.59
|
|
Diluted
|
|
|
1.62
|
|
|
|
1.90
|
|
|
|
1.58
|
|
(a)
|
No shares were excluded for anti-dilution for the fiscal year ended March 31, 2016. We have excluded 29,877 shares for each of the fiscal years ended March 31, 2015 and 2014 as their effect would have been
anti-dilutive.
|
9.
|
DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING
|
We enter into interest rate swap agreements to hedge exposure to floating interest rates on certain portions of our debt. As
of March 31, 2016 and 2015, we had $46.4 million and $13.7 million, respectively, of notional amount in outstanding designated interest rate swaps with third parties. All interest rate swaps are highly effective. At March 31, 2016, the
maximum remaining length of any interest rate swap contract in place was approximately 13.3 years.
We are exposed to risk from
credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluation of our counterparties under interest rate swap agreements and expect all counterparties to meet their obligations. We
have not experienced credit losses from our counterparties.
The fair value of interest rate swaps designated as hedging instruments are
summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current derivative liabilities
|
|
$
|
511
|
|
|
$
|
|
|
Non-current derivative liabilities
|
|
|
1,366
|
|
|
|
1,206
|
|
10.
|
FAIR VALUE MEASUREMENTS
|
The fair value of interest rate swaps discussed in Note 9 are determined using Level 2 inputs. The carrying value of our
debt, included in Note 7, approximates fair value as it bears interest at floating rates. The carrying amounts of other financial instruments (i.e., cash and cash equivalents, restricted cash, bank time deposits, accounts receivable, net, accounts
payable) approximated their fair values at March 31, 2016 and 2015 due to their short-term nature.
71
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of contingent payments was $5.9 million, which includes the addition of a $0.4
million contingent payment for Deacon, and $5.1 million as of March 31, 2016 and 2015, respectively. During the fiscal year ended March 31, 2016, the fair value of the contingent payment related to the SureSeal acquisition increased by
$0.4 million, net to $5.5 million due primarily to accretion. During the fiscal year ended March 31, 2016, the fair value of the contingent payment recorded related to the Strathmore acquisition was reduced by $2.0 million to $0 due to a
decline in the probability that Strathmore would meet the minimum threshold for payment. All changes in the fair value of contingent payments are recorded in selling, general and administrative expense.
Defined Benefit Plans
We maintain a qualified defined benefit pension plan (the Qualified Plan) that covers substantially all of our U.S. employees.
Benefits are based on years of service and an average of the highest five consecutive years of compensation during the last ten years of employment. The Qualified Plan is closed to any employees hired or re-hired on or after January 1, 2015.
The Qualified Plan has been amended to freeze benefit accruals and to modify certain ancillary benefits provided under the Qualified Plan effective as of September 30, 2015. A remeasurement was performed at September 30, 2015 to reflect
the amendment of the Qualified Plan that froze participation and all future benefit accruals. The freeze of the Qualified Plan as of September 30, 2015 required the immediate recognition of a curtailment gain due to the accelerated recognition
of all remaining prior service costs (benefits) and the decrease in the projected benefit obligation. The freeze of the Qualified Plan will reduce net periodic pension expense for the remainder of the current year based on the remeasurement.
The funding policy of the plan is to contribute annual amounts that are currently deductible for federal income tax purposes. No contributions
were made in the fiscal year ended March 31, 2016, 2015 or 2014.
The following are assumptions related to the Qualified Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Assumptions used to determine benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.50
|
%
|
|
|
4.25
|
%
|
|
|
5.00
|
%
|
Rate of compensation increases
|
|
|
(a
|
)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Assumptions used to determine net pension expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.25
|
%
|
|
|
5.00
|
%
|
|
|
4.50
|
%
|
Expected return on plan assets
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
Rate of compensation increases
|
|
|
(a
|
)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
(a) Rate of compensation increase is no longer relevant due to
the freeze of the Qualified Plan.
|
|
The factors used in determination of these assumptions are described in Note 1.
72
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net pension expense for the Qualified Plan was (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Service cost benefits earned during the year
|
|
$
|
2,042
|
|
|
$
|
3,039
|
|
|
$
|
2,965
|
|
Interest cost on projected benefit obligation
|
|
|
2,666
|
|
|
|
2,513
|
|
|
|
2,066
|
|
Expected return on assets
|
|
|
(3,226
|
)
|
|
|
(2,406
|
)
|
|
|
(2,115
|
)
|
Net amortization and deferral
|
|
|
(27
|
)
|
|
|
58
|
|
|
|
363
|
|
Curtailment benefit
|
|
|
(8,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension (benefit) expense
|
|
$
|
(6,596
|
)
|
|
$
|
3,204
|
|
|
$
|
3,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated prior service costs and the estimated net loss for the Qualified Plan that will be amortized
from accumulated other comprehensive loss into pension expense in the fiscal year ended March 31, 2017 is $0 and $0, respectively.
The following is a summary of the changes in the Qualified Plans pension obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Benefit obligation at beginning of year
|
|
$
|
64,015
|
|
|
$
|
50,344
|
|
Service cost
|
|
|
2,042
|
|
|
|
3,039
|
|
Interest cost
|
|
|
2,666
|
|
|
|
2,513
|
|
Actuarial loss
|
|
|
(2,589
|
)
|
|
|
9,033
|
|
Benefits paid
|
|
|
(1,410
|
)
|
|
|
(914
|
)
|
Curtailment impact
|
|
|
(14,238
|
)
|
|
|
|
|
Impact of Share Distribution (a)
|
|
|
8,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
58,815
|
|
|
$
|
64,015
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
58,815
|
|
|
$
|
50,081
|
|
|
|
|
|
|
|
|
|
|
|
(a) Additional obligations were included related to employees
who transferred from Capital Southwest to CSWI upon completion of the Share Distribution.
|
|
The following is a reconciliation of the Qualified Plans assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Fair value of plan assets at beginning of year
|
|
$
|
43,087
|
|
|
$
|
42,124
|
|
Actual return on plan assets
|
|
|
578
|
|
|
|
1,877
|
|
Benefits paid
|
|
|
(1,410
|
)
|
|
|
(914
|
)
|
Impact of Share Distribution (a)
|
|
|
18,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
60,878
|
|
|
$
|
43,087
|
|
|
|
|
|
|
|
|
|
|
|
(a) Assets previously held by Capital Southwest were
contributed to CSWI in conjunction with the Share Distribution.
|
|
73
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the net pension asset (liability) for the Qualified Plan (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Plan assets at fair value
|
|
$
|
60,878
|
|
|
$
|
43,087
|
|
Benefit obligation
|
|
|
(58,815
|
)
|
|
|
(64,015
|
)
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
2,063
|
|
|
$
|
(20,928
|
)
|
|
|
|
|
|
|
|
|
|
The following summarizes amounts recognized in the balance sheet for the Qualified Plan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Noncurrent assets
|
|
$
|
2,063
|
|
|
$
|
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
(20,928
|
)
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
2,063
|
|
|
$
|
(20,928
|
)
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accumulated other comprehensive (loss) income at beginning of year
|
|
$
|
(4,707
|
)
|
|
$
|
1,493
|
|
Amortization of net loss
|
|
|
|
|
|
|
74
|
|
Amortization of prior service credit
|
|
|
(18
|
)
|
|
|
(36
|
)
|
Curtailment impact
|
|
|
5,233
|
|
|
|
|
|
Impact of Share Distribution
|
|
|
35
|
|
|
|
|
|
Net loss arising during the year
|
|
|
(1,433
|
)
|
|
|
(6,238
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss at end of year
|
|
$
|
(890
|
)
|
|
$
|
(4,707
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recorded in accumulated other comprehensive loss consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net prior service cost
|
|
$
|
|
|
|
$
|
279
|
|
Net loss
|
|
|
(890
|
)
|
|
|
(4,986
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(890
|
)
|
|
$
|
(4,707
|
)
|
|
|
|
|
|
|
|
|
|
74
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The current target allocations for managed plan assets are 25% 43% equity securities,
40% 65% for fixed income securities and 5% 15% for alternatives. The actual asset allocations for the Qualified Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
Asset category
|
|
2016
|
|
|
2015
|
|
Equity securities
|
|
|
35
|
%
|
|
|
58
|
%
|
Fixed income securities
|
|
|
59
|
%
|
|
|
36
|
%
|
Other
|
|
|
2
|
%
|
|
|
3
|
%
|
Cash and cash equivalents
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The Qualified Plans financial instruments, shown below, are presented at fair value, as described in
Note 1. The fair values of our Qualified Plan assets were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
|
As of March 31, 2015
|
|
|
|
|
|
|
Hierarchical Levels
|
|
|
|
|
|
Hierarchical Levels
|
|
Asset category
|
|
Total
|
|
|
I
|
|
|
II
|
|
|
III
|
|
|
Total
|
|
|
I
|
|
|
II
|
|
|
III
|
|
Equity securities (a)
|
|
$
|
21,183
|
|
|
$
|
2,455
|
|
|
$
|
18,728
|
|
|
$
|
|
|
|
$
|
24,928
|
|
|
$
|
13,647
|
|
|
$
|
11,281
|
|
|
$
|
|
|
Fixed income securities (b)
|
|
|
35,719
|
|
|
|
3,979
|
|
|
|
31,740
|
|
|
|
|
|
|
|
15,400
|
|
|
|
1,488
|
|
|
|
13,912
|
|
|
|
|
|
Other (c)
|
|
|
1,474
|
|
|
|
935
|
|
|
|
539
|
|
|
|
|
|
|
|
1,252
|
|
|
|
754
|
|
|
|
498
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,502
|
|
|
|
2,502
|
|
|
|
|
|
|
|
|
|
|
|
1,507
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,878
|
|
|
$
|
9,871
|
|
|
$
|
51,007
|
|
|
$
|
|
|
|
$
|
43,087
|
|
|
$
|
17,396
|
|
|
$
|
25,691
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
This category includes investment in equity securities of large, medium and small companies and equity investments in foreign companies. Mutual funds included in this category are valued using the net asset value per
unit as of the valuation date. These investments include shares of Capital Southwest common stock. As of March 31, 2016 and 2015, Capital Southwest common stock represented 1.2% and 17.7%, respectively, of the fair value of the plan assets and
CSWI common stock represented 1.9% and 0%, respectively, of the fair value of the plan assets.
|
(b)
|
This category includes investments in investment grade fixed income instruments, primarily U.S. government obligations.
|
(c)
|
This category includes investments in commodity linked and real estate funds within the U.S.
|
The following table summarizes the expected cash benefit payments for the Qualified Plan for fiscal years ending March 31 (in millions):
|
|
|
|
|
2017
|
|
$
|
2.1
|
|
2018
|
|
|
2.3
|
|
2019
|
|
|
2.5
|
|
2020
|
|
|
2.8
|
|
2021
|
|
|
2.9
|
|
2022-2026
|
|
|
16.9
|
|
One of our foreign subsidiaries has a defined benefit plan covering substantially all of its employees.
Assets, liabilities and expenses related to this plan are immaterial to CSWI.
75
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restoration Plan
We maintain an unfunded retirement restoration plan (the Restoration Plan) that is a non-qualified plan providing for the payment
to participating employees, upon retirement, 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 following are assumptions related to the Restoration Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Assumptions used to determine benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.50
|
%
|
|
|
4.25
|
%
|
|
|
5.00
|
%
|
Rate of compensation increases
|
|
|
(a
|
)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Assumptions used to determine net pension expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.25
|
%
|
|
|
5.00
|
%
|
|
|
4.50
|
%
|
Rate of compensation increases
|
|
|
(a
|
)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
(a) Rate of compensation increase is no longer relevant due to
the freeze of the Qualified Plan.
|
|
The factors used in determination of these assumptions are described in Note 1.
Net pension expense for the Restoration Plan was (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Service cost benefits earned during the year
|
|
$
|
27
|
|
|
$
|
66
|
|
|
$
|
65
|
|
Interest cost on projected benefit obligation
|
|
|
73
|
|
|
|
66
|
|
|
|
61
|
|
Net amortization and deferral
|
|
|
36
|
|
|
|
63
|
|
|
|
66
|
|
Curtailment expense
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
167
|
|
|
$
|
195
|
|
|
$
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated prior service costs and the estimated net loss for the Restoration Plan that will be amortized
from accumulated other comprehensive loss into pension expense in the fiscal year ended March 31, 2017 is $0 and less than $0.1 million, respectively.
The following is a summary of the changes in the Restoration Plans pension obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Benefit obligation at beginning of year
|
|
$
|
1,616
|
|
|
$
|
1,513
|
|
Service cost
|
|
|
27
|
|
|
|
66
|
|
Interest cost
|
|
|
73
|
|
|
|
66
|
|
Actuarial loss (gain)
|
|
|
304
|
|
|
|
(29
|
)
|
Curtailment impact
|
|
|
(555
|
)
|
|
|
|
|
Benefits paid
|
|
|
(6
|
)
|
|
|
|
|
Impact of Share Distribution (a)
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
1,746
|
|
|
$
|
1,616
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
1,746
|
|
|
$
|
1,423
|
|
|
|
|
|
|
|
|
|
|
76
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(a)
|
Additional obligations were included related to employees who transferred from Capital Southwest to CSWI upon completion of the Share Distribution.
|
|
The following summarizes amounts recognized in the balance sheet for the Restoration Plan (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Noncurrent liabilities
|
|
$
|
(1,746
|
)
|
|
$
|
(1,616
|
)
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(1,746
|
)
|
|
$
|
(1,616
|
)
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accumulated other comprehensive loss at beginning of year
|
|
$
|
(503
|
)
|
|
$
|
(396
|
)
|
Amortization of net loss
|
|
|
20
|
|
|
|
14
|
|
Amortization of prior service (credit) cost
|
|
|
(3
|
)
|
|
|
6
|
|
Curtailment impact
|
|
|
(20
|
)
|
|
|
|
|
Impact of Share Distribution (a)
|
|
|
(502
|
)
|
|
|
|
|
Net gain (loss) arising during the year
|
|
|
669
|
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss at end of year
|
|
$
|
(339
|
)
|
|
$
|
(503
|
)
|
|
|
|
|
|
|
|
|
|
|
(a) Deferred losses attributable to obligations related to
employees who transferred from Capital Southwest to CSWI upon completion of the Share Distribution.
|
|
Amounts recorded in accumulated other comprehensive loss consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net prior service credit
|
|
$
|
|
|
|
$
|
(23
|
)
|
Net loss
|
|
|
(339
|
)
|
|
|
(480
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(339
|
)
|
|
$
|
(503
|
)
|
|
|
|
|
|
|
|
|
|
The following table summarizes the expected cash benefit payments for the Restoration Plan for fiscal years
ending March 31 (in millions):
|
|
|
|
|
2017
|
|
$
|
0.1
|
|
2018
|
|
|
0.1
|
|
2019
|
|
|
0.1
|
|
2020
|
|
|
0.1
|
|
2021
|
|
|
0.1
|
|
2022-2026
|
|
|
0.5
|
|
Defined Contribution Plan
Effective October 1, 2015, we began to sponsor a defined contribution plan covering substantially all of our U.S. employees. Employees may
contribute to this plan, and these contributions are matched by us up to the first
77
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6.0% contributed by the employee. Additionally, we contribute 3.0% of eligible earnings to employees regardless of their level of participation in the plan, which is discretionary and subject to
adjustment based on profitability. Contributions to the defined contribution plan were $1.7 million for the year ended March 31, 2016.
Employee
Stock Ownership Plan
Prior to the Share Distribution, RectorSeal and Whitmore each sponsored qualified, non-leveraged employee stock
ownership plans (ESOP) in which eligible domestic employees of RectorSeal, Jet-Lube, Smoke Guard and Whitmore were eligible to participate following the completion of one year of service. The ESOPs provided annual discretionary
contributions of up to the maximum amount that is deductible under the Internal Revenue Code. Contributions to the ESOPs were invested in Capital Southwest common stock. A participants interest in contributions to the ESOPs fully vests after
three years of credited service or upon retirement, permanent disability (each, as defined in the plan document) or death. RectorSeal and Whitmore recorded total contributions to the ESOPs of $1.6 million and $2.3 million during the fiscal years
ended March 31, 2015 and 2014, respectively. The ESOPs held 929,600 and 898,177 shares of Capital Southwest common stock as of March 31, 2015 and 2014, respectively.
Effective with the Share Distribution, Whitmores ESOP was merged into RectorSeals ESOP, sponsorship of RectorSeals ESOP was
transferred to CSWI and eligible domestic employees of CSWI and Balco were included. Employees of Strathmore will become eligible for participation in the fiscal year ending March 31, 2017. During the fiscal year ended March 31, 2016, $1.7
million was contributed to the ESOP based on performance in the fiscal year ended March 31, 2015. Future contributions to the ESOP will be invested in CSWI common stock. During the fiscal year ended March 31, 2016, $2.1 million was
recorded to expense based on performance in the fiscal year ended March 31, 2016 and is expected to be contributed to the ESOP in the fiscal year ending March 31, 2017. The ESOP held 907,748 shares of both Capital Southwest and CSWI common
stock as of March 31, 2016.
Income before income taxes was comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
U.S. Federal
|
|
$
|
40,981
|
|
|
$
|
39,511
|
|
|
$
|
31,241
|
|
Foreign
|
|
|
3,244
|
|
|
|
5,417
|
|
|
|
6,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
44,225
|
|
|
$
|
44,928
|
|
|
$
|
37,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Fiscal year ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
9,210
|
|
|
$
|
7,573
|
|
|
$
|
16,783
|
|
State and local
|
|
|
1,368
|
|
|
|
(136
|
)
|
|
|
1,232
|
|
Foreign
|
|
|
914
|
|
|
|
(175
|
)
|
|
|
739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
11,492
|
|
|
$
|
7,262
|
|
|
$
|
18,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended March 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
14,920
|
|
|
$
|
(1,848
|
)
|
|
$
|
13,072
|
|
State and local
|
|
|
933
|
|
|
|
3
|
|
|
|
936
|
|
Foreign
|
|
|
1,637
|
|
|
|
(422
|
)
|
|
|
1,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
17,490
|
|
|
$
|
(2,267
|
)
|
|
$
|
15,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
11,570
|
|
|
$
|
(567
|
)
|
|
$
|
11,003
|
|
State and local
|
|
|
475
|
|
|
|
(74
|
)
|
|
|
401
|
|
Foreign
|
|
|
1,374
|
|
|
|
16
|
|
|
|
1,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
13,419
|
|
|
$
|
(625
|
)
|
|
$
|
12,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense differed from the amounts computed by applying the U.S. federal statutory income tax rate
of 35% to income before income taxes as a result of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Computed tax expense at statutory rate
|
|
$
|
15,479
|
|
|
$
|
15,727
|
|
|
$
|
13,225
|
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
|
1,399
|
|
|
|
529
|
|
|
|
542
|
|
FIN 48 liability
|
|
|
1,277
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net of federal benefits
|
|
|
1,055
|
|
|
|
569
|
|
|
|
205
|
|
Foreign rate differential
|
|
|
(642
|
)
|
|
|
(75
|
)
|
|
|
(168
|
)
|
Domestic production activity deduction
|
|
|
(420
|
)
|
|
|
(817
|
)
|
|
|
(719
|
)
|
Difference in U.S. rate
|
|
|
(107
|
)
|
|
|
(45
|
)
|
|
|
108
|
|
Other, net
|
|
|
713
|
|
|
|
(665
|
)
|
|
|
(399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
18,754
|
|
|
$
|
15,223
|
|
|
$
|
12,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rates for the fiscal years ended March 31, 2016, 2015 and 2014 were 42.4%, 33.9% and
34.1%, respectively. The current year tax rate was higher, compared to the prior years, as a result of transaction costs incurred with the Share Distribution that are not deductible for tax purposes, a reserve for uncertain tax positions and
acquisition-related costs. Other items impacting the effective tax rate include foreign operations activities in countries with lower statutory rates and domestic operations activity in states with higher statutory rates.
79
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at March 31 are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory reserves
|
|
$
|
2,319
|
|
|
$
|
1,540
|
|
Accrued compensation
|
|
|
1,712
|
|
|
|
694
|
|
Accrued expenses
|
|
|
370
|
|
|
|
138
|
|
Net operating loss carryforwards
|
|
|
160
|
|
|
|
|
|
Pension and other employee benefits
|
|
|
38
|
|
|
|
8,370
|
|
Other, net
|
|
|
2,289
|
|
|
|
1,119
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
6,888
|
|
|
|
11,861
|
|
Valuation allowance
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
|
6,781
|
|
|
|
11,861
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(5,819
|
)
|
|
|
(4,239
|
)
|
Goodwill and intangible assets
|
|
|
(2,567
|
)
|
|
|
(1,473
|
)
|
FIN 48 liability
|
|
|
(1,277
|
)
|
|
|
|
|
1031 Exchanges
|
|
|
(716
|
)
|
|
|
(460
|
)
|
Other, net
|
|
|
(195
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(10,574
|
)
|
|
|
(6,210
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax (liabilities) assets
|
|
$
|
(3,793
|
)
|
|
$
|
5,651
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016, we had $0.2 million in tax effected net operating loss carryforwards. Net operating
loss carryforwards will expire in periods beyond the next five years. No provision is made for U.S. income and foreign withholding taxes applicable to undistributed earnings of certain foreign entities since these earnings are considered to be
permanently reinvested.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
Balance at March 31, 2015
|
|
$
|
|
|
Increases related to prior year tax positions
|
|
|
900
|
|
|
|
|
|
|
Balance at March 31, 2016
|
|
$
|
900
|
|
|
|
|
|
|
We have accrued interest and penalties on uncertain tax positions of $0.2 million and $0.2 million,
respectively for the year ended March 31, 2016. We did not recognize any interest and penalties for uncertain tax positions for the fiscal years ended March 31, 2015 or 2014. We are currently not under examination for any of our U.S.
federal income taxes. For the fiscal year ended March 31, 2016, as a member of a controlled group, our subsidiaries were allocated certain federal tax brackets such that $10.0 million was taxed at 34%.
13.
|
RELATED PARTY TRANSACTIONS
|
We paid $0.2 million, $0.5 million and $0.5 million in management fees for the fiscal years ended March 31, 2016, 2015
and 2014 to a management company subsidiary of Capital Southwest for services rendered
80
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
during each respective fiscal year. These amounts are presented in Selling, general and administrative expenses in the consolidated income statements, and payments ceased in connection with the
Share Distribution.
We paid $0.3 million, $8.3 million and $8.7 million in dividends to Capital Southwest during the fiscal years ended
March 31, 2016, 2015 and 2014, respectively, as Capital Southwest was our sole shareholder until the Share Distribution.
As of
March 31, 2016, 907,748 shares of Capital Southwest stock were held under the ESOP and 52,570 shares of Capital Southwest stock were held in the Qualified Plan.
Tax Matters Agreement
We entered into a tax matters agreement with Capital Southwest (the Tax Matters Agreement).
The Tax Matters Agreement generally governs our and Capital Southwests respective rights, responsibilities and obligations with respect to taxes in connection with the Share Distribution. The Tax Matters Agreement provides that we will be
liable for taxes incurred by Capital Southwest as a result of our taking or failing to take certain actions that result in the Share Distribution failing to meet the requirements of a tax-free distribution under the Internal Revenue Code. The Tax
Matters Agreement also restricts our and Capital Southwests ability to take actions that could cause the Share Distribution to fail to meet the requirements of a tax-free distribution under the Code. These restrictions may prevent us and
Capital Southwest from entering into transactions that might be advantageous to us or our stockholders. The term of the Tax Matters Agreement is perpetual, unless the agreement is terminated by mutual consent of both parties.
Employee Matters Agreement
We entered into an employee matters agreement with Capital Southwest prior to the Distribution Date
(the Employee Matters Agreement). The Employee Matters Agreement allocates liabilities and responsibilities between us and Capital Southwest relating to employee compensation and benefit plans and programs, including the treatment of
certain employment agreements, outstanding annual and long-term incentive awards, and health and welfare benefit obligations and provide for the cooperation between us and Capital Southwest in the sharing of employee information.
In general, following the Share Distribution, we will be responsible for all employment and benefit-related obligations and liabilities
related to those individuals employed by Capital Southwest or one of the contributed businesses prior to the Share Distribution and whose employment was transferred to us in connection with the Share Distribution. In general, Capital Southwest will
be responsible for any employment and benefit-related obligations and liabilities of any employees who continue to be employees of Capital Southwest following the Share Distribution. The term of the Employee Matters Agreement is perpetual, unless
the agreement is terminated by mutual consent of both parties.
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.
81
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15.
|
OTHER COMPREHENSIVE INCOME
|
The following table provides an analysis of the changes in accumulated other comprehensive income (loss) (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Currency translation adjustments:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(3,877
|
)
|
|
$
|
1,400
|
|
Adjustments for foreign currency translation
|
|
|
(1,371
|
)
|
|
|
(5,277
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(5,248
|
)
|
|
$
|
(3,877
|
)
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1,206
|
)
|
|
$
|
|
|
Unrealized gains, net of taxes of $219 and $649, respectively
|
|
|
(407
|
)
|
|
|
(1,206
|
)
|
Reclassification of losses included in interest expense, net, net of taxes of $(211)
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(15
|
)
|
|
|
(1,206
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(1,221
|
)
|
|
$
|
(1,206
|
)
|
|
|
|
|
|
|
|
|
|
Defined benefit plans:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(5,210
|
)
|
|
$
|
1,097
|
|
Amortization of net prior service benefit, net of taxes of $11 and $16,
respectively
(a)
|
|
|
(21
|
)
|
|
|
(30
|
)
|
Amortization of net loss, net of taxes of $(11) and $(47), respectively (a)
|
|
|
20
|
|
|
|
88
|
|
Net loss arising during the year, net of tax of $411 and $3,427, respectively
|
|
|
(764
|
)
|
|
|
(6,365
|
)
|
Impact of Share Distribution, net of tax of $251
|
|
|
(467
|
)
|
|
|
|
|
Curtailment, net of taxes of $(2,807)
|
|
|
5,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
3,981
|
|
|
|
(6,307
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(1,229
|
)
|
|
$
|
(5,210
|
)
|
|
|
|
|
|
|
|
|
|
(a)
|
Amortization of prior service costs and actuarial losses out of accumulated other comprehensive loss are included in the computation of net periodic pension expenses. See Note 11 for additional information.
|
As described in Note 1, we conduct our operations through three business segments:
|
|
|
Coatings, Sealants & Adhesives; and
|
82
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the financial information of our reporting segments reconciled
to the amounts reported in the consolidated financial statements.
Year ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Industrial
Products
|
|
|
Coatings,
Sealants and
Adhesives
|
|
|
Specialty
Chemicals
|
|
|
Subtotal
Reportable
Segments
|
|
|
Eliminations
and Other
|
|
|
Total
|
|
Revenues, net
|
|
$
|
138,594
|
|
|
$
|
106,035
|
|
|
$
|
74,930
|
|
|
$
|
319,559
|
|
|
$
|
272
|
|
|
$
|
319,831
|
|
Operating income
|
|
|
31,075
|
|
|
|
10,911
|
|
|
|
12,490
|
|
|
|
54,476
|
|
|
|
(6,990
|
)
|
|
|
47,486
|
|
Year ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Industrial
Products
|
|
|
Coatings,
Sealants and
Adhesives
|
|
|
Specialty
Chemicals
|
|
|
Subtotal
Reportable
Segments
|
|
|
Eliminations
and Other
|
|
|
Total
|
|
Revenues, net
|
|
$
|
118,422
|
|
|
$
|
52,119
|
|
|
$
|
89,738
|
|
|
$
|
260,279
|
|
|
$
|
1,555
|
|
|
$
|
261,834
|
|
Operating income
|
|
|
19,711
|
|
|
|
11,420
|
|
|
|
13,016
|
|
|
|
44,147
|
|
|
|
(113
|
)
|
|
|
44,034
|
|
Year ended March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Industrial
Products
|
|
|
Coatings,
Sealants and
Adhesives
|
|
|
Specialty
Chemicals
|
|
|
Subtotal
Reportable
Segments
|
|
|
Eliminations
and Other
|
|
|
Total
|
|
Revenues, net
|
|
$
|
93,043
|
|
|
$
|
46,950
|
|
|
$
|
90,744
|
|
|
$
|
230,737
|
|
|
$
|
976
|
|
|
$
|
231,713
|
|
Operating income
|
|
|
12,593
|
|
|
|
9,360
|
|
|
|
15,877
|
|
|
|
37,830
|
|
|
|
83
|
|
|
|
37,913
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Industrial
Products
|
|
|
Coatings,
Sealants and
Adhesives
|
|
|
Specialty
Chemicals
|
|
|
Subtotal
Reportable
Segments
|
|
|
Eliminations
and Other
|
|
|
Total
|
|
March 31, 2016
|
|
$
|
154,583
|
|
|
$
|
128,886
|
|
|
$
|
97,539
|
|
|
$
|
381,008
|
|
|
$
|
11,252
|
|
|
$
|
392,260
|
|
March 31, 2015
|
|
|
137,148
|
|
|
|
42,010
|
|
|
|
95,389
|
|
|
|
274,547
|
|
|
|
11,974
|
|
|
|
286,521
|
|
March 31, 2014
|
|
|
121,925
|
|
|
|
40,986
|
|
|
|
90,213
|
|
|
|
253,124
|
|
|
|
24,696
|
|
|
|
277,820
|
|
Geographic information
We attribute sales to different geographic areas based on the destination
of the product or service delivery. Long-lived assets are classified based on the geographic area in which the assets are located and exclude deferred taxes. No individual country, except for the U.S., accounted for more than 10% of consolidated net
revenues or total long-lived assets.
Sales and long-lived assets by geographic area are as follows (in thousands, except percent data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
|
|
2016
|
|
|
|
|
|
2015
|
|
|
|
|
|
2014
|
|
|
|
|
U.S.
|
|
$
|
257,941
|
|
|
|
80.6
|
%
|
|
$
|
197,944
|
|
|
|
75.6
|
%
|
|
$
|
168,473
|
|
|
|
72.7
|
%
|
Non-U.S. (a)
|
|
|
61,890
|
|
|
|
19.4
|
%
|
|
|
63,890
|
|
|
|
24.4
|
%
|
|
|
63,240
|
|
|
|
27.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
$
|
319,831
|
|
|
|
100.0
|
%
|
|
$
|
261,834
|
|
|
|
100.0
|
%
|
|
$
|
231,713
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
CSW INDUSTRIALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a)
|
No individual country within this group represents 10% or more of consolidated totals for any period presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2016
|
|
|
|
|
|
2015
|
|
|
|
|
|
2014
|
|
|
|
|
U.S.
|
|
$
|
220,878
|
|
|
|
94.4
|
%
|
|
$
|
134,117
|
|
|
|
90.3
|
%
|
|
$
|
135,296
|
|
|
|
90.9
|
%
|
Non-U.S.
|
|
|
12,990
|
|
|
|
5.6
|
%
|
|
|
14,457
|
|
|
|
9.7
|
%
|
|
|
13,572
|
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets (a)
|
|
$
|
233,868
|
|
|
|
100.0
|
%
|
|
$
|
148,574
|
|
|
|
100.0
|
%
|
|
$
|
148,868
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Long-lived assets consists 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 represent 10% or more of consolidated net revenues for any of the fiscal years presented.
17.
|
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
The following presents a summary of the unaudited quarterly data for the fiscal years ending March 31, 2016 and 2015
(amounts in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended March 31, 2016
|
|
Quarter
|
|
4th
|
|
|
3rd
|
|
|
2nd
|
|
|
1st
|
|
Revenues, net
|
|
$
|
76.3
|
|
|
$
|
70.9
|
|
|
$
|
83.7
|
|
|
$
|
88.9
|
|
Gross profit
|
|
|
34.6
|
|
|
|
32.1
|
|
|
|
40.8
|
|
|
|
40.4
|
|
Income before income taxes
|
|
|
6.0
|
|
|
|
4.8
|
|
|
|
19.8
|
|
|
|
13.6
|
|
Net income
|
|
|
1.8
|
|
|
|
2.0
|
|
|
|
13.0
|
|
|
|
8.7
|
|
Net earnings per common share (a)(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.13
|
|
|
$
|
0.83
|
|
|
$
|
0.56
|
|
Diluted
|
|
|
0.12
|
|
|
|
0.13
|
|
|
|
0.83
|
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended March 31, 2015
|
|
Quarter
|
|
4th
|
|
|
3rd
|
|
|
2nd
|
|
|
1st
|
|
Revenues, net
|
|
$
|
64.0
|
|
|
$
|
60.9
|
|
|
$
|
68.1
|
|
|
$
|
68.8
|
|
Gross profit
|
|
|
30.7
|
|
|
|
28.7
|
|
|
|
33.2
|
|
|
|
33.8
|
|
Income before income taxes
|
|
|
8.0
|
|
|
|
9.8
|
|
|
|
12.6
|
|
|
|
14.5
|
|
Net income
|
|
|
5.4
|
|
|
|
6.4
|
|
|
|
8.2
|
|
|
|
9.7
|
|
Net earnings per common share (a)(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
|
$
|
0.41
|
|
|
$
|
0.53
|
|
|
$
|
0.63
|
|
Diluted
|
|
|
0.34
|
|
|
|
0.41
|
|
|
|
0.52
|
|
|
|
0.62
|
|
(a)
|
On September 30, 2015, 15.6 million CSWI common shares were distributed to Capital Southwest shareholders in connection with the Share Distribution. For comparative purposes, and to provide a more meaningful
calculation for weighted average shares, this amount was assumed to be outstanding throughout all periods presented up to and including September 30, 2015 in the calculation of basic weighted average shares. In addition, for the dilutive
weighted average share calculations, the dilutive securities outstanding at September 30, 2015 were also assumed to be outstanding throughout all periods presented up to and including September 30, 2015.
|
(b)
|
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.
|
84