NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
|
|
1.
|
ORGANIZATION AND OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
|
CSW Industrials, Inc. (“CSWI,” the “Company,” “we,” “our” or “us”) is a diversified industrial growth company with well-established, scalable platforms and domain expertise across
three
segments: Industrial Products; Coatings, Sealants and 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, RailPlex
®
tank car coatings, Deacon
®
high temperature sealants, AC Leak Freeze
®
refrigerant leak repair solutions and Greco Aluminum Railings™. Our products are well known in the specific markets 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.
Restructuring
During the quarter ended
September 30,
2016
we initiated restructuring programs related to our Coatings, Sealants & Adhesives and our Industrial Products segments. The programs were initiated in response to excess capacity due to contraction in the markets we serve, which caused us to perform a facility rationalization analysis. Restructuring charges are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance/
Retention
|
|
Asset Write-
down
|
|
Other (a)
|
|
Total
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
Cost of revenues
|
$
|
29
|
|
|
$
|
69
|
|
|
$
|
327
|
|
|
$
|
425
|
|
Selling, general and administrative
|
—
|
|
|
—
|
|
|
37
|
|
|
37
|
|
Total
|
$
|
29
|
|
|
$
|
69
|
|
|
$
|
364
|
|
|
$
|
462
|
|
|
|
|
|
|
|
|
|
Inception to Date Restructuring Charges
|
|
|
|
|
|
|
|
Cost of revenues
|
$
|
597
|
|
|
$
|
69
|
|
|
$
|
994
|
|
|
$
|
1,660
|
|
Selling, general and administrative
|
451
|
|
|
2,800
|
|
|
212
|
|
|
3,463
|
|
Total
|
$
|
1,048
|
|
|
$
|
2,869
|
|
|
$
|
1,206
|
|
|
$
|
5,123
|
|
|
|
|
|
|
|
|
|
Total Expected Restructuring Charges (b)
|
|
|
|
|
|
|
|
Cost of revenues
|
$
|
597
|
|
|
$
|
69
|
|
|
$
|
1,094
|
|
|
$
|
1,760
|
|
Selling, general and administrative
|
451
|
|
|
2,800
|
|
|
212
|
|
|
3,463
|
|
Total
|
$
|
1,048
|
|
|
$
|
2,869
|
|
|
$
|
1,306
|
|
|
$
|
5,223
|
|
|
|
(a)
|
Other consists of moving costs related to relocation of manufacturing activities, consulting fees for production and efficiency support, recruiting fees to increase staff in locations where production is being relocated and duplicate and inefficient labor incurred during the transition and relocation. These charges will be expensed as incurred.
|
|
|
(b)
|
Total expected restructuring charges represent management's best estimate to date. As the execution of the program is still in process, the amount and nature of actual restructuring charges incurred could vary from total expected charges.
|
As of
June 30, 2017
, the restructuring reserve attributable to these programs consisted entirely of anticipated severance expense recorded during the
fiscal year ended March 31, 2017
and is included in accrued and other current liabilities on our condensed consolidated balance sheet.
Basis of Presentation
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2017
(“Quarterly Report”) includes all revenues, costs, assets and liabilities directly attributable to CSWI and have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).
The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of CSWI’s financial position as of
June 30, 2017
, and the results of operations for
three months ended June 30, 2017
and
2016
, respectively. All adjustments are of a normal, recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation.
The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in CSWI’s Annual Report on Form 10-K for the fiscal year ended
March 31, 2017
(the “Annual Report”).
Accounting Policies
We have consistently applied the accounting policies described in our Annual Report in preparing these condensed consolidated financial statements. We have not made any changes in significant accounting policies disclosed in the Annual Report.
Accounting Developments
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which has been subsequently amended with additional ASUs including ASU No. 2016-12, issued in May 2016, and ASU No. 2016-20, issued in December 2016. 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 and ASU 2016-12 on our consolidated financial condition and results of operations and do not believe the adoption of the new standard will have a material impact. We will adopt the standard for our annual reporting period beginning April 1, 2018 and interim periods within this annual reporting period using the modified retrospective approach.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Subtopic 330): Simplifying the Measurement of Inventory.” This ASU simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Entities will continue to apply their existing impairment models to inventories that are accounted for using LIFO and retail inventory methods. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. The new guidance must be applied prospectively after the date of adoption. We adopted the amendments of this ASU during the quarter ended June 30, 2017, and it did not have a material impact on our consolidated financial condition and results of operations.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. 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),” Improvements to Employee Share-Based Payment Accounting." The ASU affects the accounting for employee share-based payment transactions as it relates to accounting for income taxes, accounting for forfeitures, and statutory tax withholding requirements. We adopted the provisions of ASU 2016-09 as of April 1, 2017. Our adoption resulted in a
$0.5 million
one-time, cumulative adjustment to beginning retained earnings related to the accounting for income taxes.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments,” which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows and how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The new guidance should be applied on a retrospective basis for each period presented. ASU 2016-15 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU No. 2016-15 to have a material impact on our consolidated financial condition and results of operations.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” to improve the accounting for the income tax consequences arising from these types of transfers. This ASU aligns the recognition of the income tax consequences with International Financial Reporting Standards. Specifically, International Accounting Standards No. 12, “Income Taxes,” requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (including inventory) when the transfer occurs. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU No. 2016-16 to have a material impact on our consolidated financial condition and results of operations.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)," which requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The adoption of ASU No. 2016-18 will not have an impact on our consolidated financial condition and results of operations.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this ASU require that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. The amendments in this update should be applied prospectively on or after the effective date, however early adoption is permitted. We do not expect the adoption of ASU No. 2017-01 to have a material impact on our consolidated financial condition and results of operations.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The amendments in this ASU should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU No. 2017-04 will only impact our consolidated financial condition and results of operations to the extent that we incur a future goodwill impairment.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which requires that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. The amendments in this update should be applied retrospectively on or after the effective date, however early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. We, in partnership with our actuaries, are currently evaluating the impact of ASU No. 2017-07 on our consolidated financial condition and results of operations.
Greco Aluminum Railings
On
February 28, 2017
, we acquired the equity of Greco Aluminum Railings (“Greco”), based in Windsor, Ontario, Canada, for
$28.2 million
, net of cash acquired, funded through our revolving credit facility. Greco is a leading manufacturer of high-quality engineered railing and safety systems for multi-family and commercial structures in the U.S. and Canada. The excess of the purchase price over the fair value of the identifiable assets acquired was
$13.6 million
and was allocated to goodwill. Goodwill represents the value expected to be obtained from a more extensive portfolio of architecturally-specified building products, which help make buildings safer and more aesthetically pleasing, while enabling compliance with building codes and leveraging our larger distributor network. The preliminary allocation of the fair value of the net assets acquired included customer lists, trademarks, non-compete agreements and a favorable leasehold of
$10.3 million
,
$1.0 million
,
$0.8 million
and
$0.1 million
, respectively, as well as property, plant and equipment and inventory of
$0.8 million
and
$0.5 million
, respectively, net of a deferred tax liability
of
$3.4 million
. Customer lists, the non-compete agreement and the favorable leasehold are being amortized over
15
years,
five
years and approximately
nine
years (remaining life of the leasehold), respectively, while trademarks and goodwill are not being amortized. Greco activity has been included in our Industrial Products segment since the acquisition date. Greco contributed
$1.2 million
and
$0.2 million
in net sales and operating income, respectively, for the fiscal year ended
March 31, 2017
and
$4.7 million
and
$1.1 million
in net sales and operating income, respectively, for the quarter ended
June 30, 2017
. No pro forma information has been provided due to immateriality.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
March 31, 2017
|
Raw materials and supplies
|
$
|
24,038
|
|
|
$
|
21,717
|
|
Work in process
|
5,480
|
|
|
6,272
|
|
Finished goods
|
28,767
|
|
|
29,538
|
|
Total inventories
|
58,285
|
|
|
57,527
|
|
Less: LIFO reserve
|
(5,295
|
)
|
|
(5,295
|
)
|
Less: Obsolescence reserve
|
(1,796
|
)
|
|
(1,831
|
)
|
Inventories, net
|
$
|
51,194
|
|
|
$
|
50,401
|
|
The following table provides information about our intangible assets (in thousands, except years):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
March 31, 2017
|
|
Wtd Avg Life
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
(Years)
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
Patents
|
12
|
|
$
|
9,629
|
|
|
$
|
(5,009
|
)
|
|
$
|
9,576
|
|
|
$
|
(4,779
|
)
|
Customer lists and amortized trademarks
|
12
|
|
81,473
|
|
|
(24,653
|
)
|
|
81,121
|
|
|
(22,935
|
)
|
Non-compete agreements
|
5
|
|
1,726
|
|
|
(327
|
)
|
|
1,819
|
|
|
(334
|
)
|
Other
|
12
|
|
4,917
|
|
|
(1,000
|
)
|
|
4,849
|
|
|
(828
|
)
|
|
|
|
$
|
97,745
|
|
|
$
|
(30,989
|
)
|
|
$
|
97,365
|
|
|
$
|
(28,876
|
)
|
Trade names and trademarks not being amortized
|
|
|
$
|
22,138
|
|
|
$
|
—
|
|
|
$
|
22,121
|
|
|
$
|
—
|
|
Amortization expense for the
three
month periods ended
June 30, 2017
and
2016
was
$2.1 million
and
$2.0 million
, respectively. The following table shows the estimated future amortization for intangible assets as of
June 30, 2017
, for the remainder of the current fiscal year and the next five years ending March 31 (in thousands):
|
|
|
|
|
2018
|
$
|
5,985
|
|
2019
|
7,250
|
|
2020
|
7,007
|
|
2021
|
6,784
|
|
2022
|
6,335
|
|
2023
|
6,092
|
|
|
|
5.
|
SPIN-OFF EXECUTIVE COMPENSATION
|
On
August 28, 2014
, the Board of Directors of Capital Southwest (our former parent company) adopted an executive compensation plan consisting of grants of nonqualified stock options, restricted stock and cash incentive awards to executive officers of Capital Southwest (the “Spin-Off Executive Compensation Plan”). The Spin-Off Executive Compensation Plan was intended to align the compensation of Capital Southwest’s executive officers with Capital Southwest’s key strategic objective of
increasing the market value of Capital Southwest’s shares through a transformative transaction for the benefit of Capital Southwest’s shareholders. Under the Spin-Off Executive Compensation Plan, Joseph B. Armes, Kelly Tacke and Bowen S. Diehl were to receive an amount equal to
6.0%
of the aggregate appreciation in Capital Southwest’s share price from August 28, 2014 (using a base price of
$36.16
per share) to the Trigger Event Date (later to be determined to be
December 29, 2015
, as discussed below) (the “Total Payment Amount”). The initial plan component consisted of nonqualified options awarded to purchase a total of
258,000
shares of Capital Southwest common stock. The second plan component consisted of total awards of
127,000
shares of Capital Southwest restricted common stock, which have voting rights, but do not have cash dividend rights. The final plan component consisted of cash incentive payments awarded to each of Mr. Armes, Ms. Tacke and Mr. Diehl in an amount equal to the excess of each awardee’s allocable portion of the Total Payment Amount over the aggregate value of the awardee’s restricted common stock and nonqualified option awards under the Spin-Off Executive Compensation Plan, calculated as of the Trigger Event Date. The equity based awards vest and become exercisable 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 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. 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.
On
September 8, 2015
, the Board of Directors of Capital Southwest designated the Share Distribution as a transformative transaction for purposes of the Spin-Off Executive Compensation Plan and amended the award agreements granted under the Spin-Off Executive Compensation Plan to provide for accelerated vesting of the awards held by an executive in the event of a termination of such executive’s 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 Spin-Off 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 retained the obligation to fund the cash incentive awards granted under the Spin-Off Executive Compensation Plan, and all liabilities with respect to such cash incentive awards remained liabilities of Capital Southwest. During the
three
months ended
June 30, 2017
, we recorded total executive compensation expense for the cash incentive payments of
$0.2 million
for Mr. Armes and total stock compensation expense of
$0.1 million
. During the
three
months ended
June 30, 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
$1.1 million
. Within those amounts were $
1.2 million
and $
1.0 million
of cash incentive and stock compensation expense, respectively, that were accelerated as a result of Ms. Tacke's, former chief financial officer, transition in
June 2016
.
6. SHARE-BASED COMPENSATION
In September 2015, CSWI adopted and Capital Southwest approved (as our sole stockholder) our 2015 Equity and Incentive Compensation Plan (the “2015 Plan”), which provides for the issuance of up to
1,230,000
shares of CSWI common stock through the grant of stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units or other share-based awards, to employees, officers and non-employee directors. As of
June 30, 2017
,
982,231
shares were available for issuance under the 2015 Plan. Additionally, in September 2015, in connection with the Spin-Off Executive Compensation Plan and Share Distribution, we issued
510,447
shares of common stock to adjust outstanding Capital Southwest equity-based awards to represent both Capital Southwest and CSWI equity-based awards. These conversion grants were issued on substantially the same terms and conditions as the prior Capital Southwest equity-based grants, and they were issued separate and apart from the 2015 Plan's
1,230,000
share authorization.
We recorded share-based compensation as follows for the
three
month periods ended
June 30, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
Stock Options
|
|
Restricted Shares
|
|
Total
|
Share-based compensation expense
|
$
|
54
|
|
|
$
|
791
|
|
|
$
|
845
|
|
Related income tax benefit
|
(16
|
)
|
|
(280
|
)
|
|
(296
|
)
|
Net share-based compensation expense
|
$
|
38
|
|
|
$
|
511
|
|
|
$
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
Stock Options
|
|
Restricted Shares
|
|
Total
|
Share-based compensation expense
|
$
|
471
|
|
|
$
|
799
|
|
|
$
|
1,270
|
|
Related income tax benefit
|
(165
|
)
|
|
(280
|
)
|
|
(445
|
)
|
Net share-based compensation expense
|
$
|
306
|
|
|
$
|
519
|
|
|
$
|
825
|
|
Stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
|
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
(Years)
|
|
(in millions)
|
Outstanding at April 1, 2017
|
251,635
|
|
|
$
|
24.44
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Canceled
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at June 30, 2017
|
251,635
|
|
|
$
|
24.44
|
|
|
6.6
|
|
$
|
3.6
|
|
Exercisable at June 30, 2017
|
170,412
|
|
|
$
|
24.12
|
|
|
6.5
|
|
$
|
2.5
|
|
At
June 30, 2017
, we had unrecognized compensation cost related to non-vested stock options of
$0.1 million
, which will be amortized into net income over the remaining weighted average vesting period of approximately
1.0
years. No options were granted, exercised or vested during the
three
month period ended
June 30, 2017
. The total fair value of stock options vested for the
three
month period ended
June 30, 2016
was
$0.3 million
. No options were granted or exercised during the
three
month period ended
June 30, 2016
.
Restricted share activity was as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
Number of Shares
|
|
Weighted Average Grant
Date Fair Value
|
Outstanding at April 1, 2017
|
209,489
|
|
|
$
|
26.53
|
|
Granted
|
43,856
|
|
|
49.59
|
|
Vested
|
(993
|
)
|
|
33.55
|
|
Canceled
|
(1,392
|
)
|
|
31.75
|
|
Outstanding at June 30, 2017
|
250,960
|
|
|
$
|
30.50
|
|
During the restriction period, the holders of restricted shares are entitled to vote and receive dividends, except for conversion awards issued under the Spin-Off Executive Compensation Plan (as discussed in Note 5). At
June 30, 2017
, we had unrecognized compensation cost related to unvested restricted shares of $
5.5 million
, which will be amortized into net income over the remaining weighted average vesting period of approximately
2.1 years
. The total fair value of restricted shares vested for the
three
month periods ended
June 30, 2017
and
2016
was
$0.1 million
and
$0.4 million
, respectively.
Performance-based restricted share units granted during the
three
month periods ended
June 30, 2017
and
2016
includes
42,860
and
49,373
shares (at target), respectively, with performance-based vesting provisions, and vesting ranges from
0
-
200%
and
0%
-
100%
, respectively based on pre-defined performance targets with market conditions. Performance shares do not have the rights to vote or receive cash dividends until vesting, if at all. Performance-based restricted share units are earned upon the achievement of performance targets, and are payable in common shares. Compensation expense is recognized over a
36
-month cliff vesting period based on the fair market value of our common shares on the date of grant.
Debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
March 31, 2017
|
Revolving Credit Facility, interest rate of 2.48% and 2.23%, respectively
|
$
|
54,750
|
|
|
$
|
60,625
|
|
Whitmore term loan, interest rate of 2.88% and 2.98%, respectively
|
12,441
|
|
|
12,582
|
|
Total debt
|
67,191
|
|
|
73,207
|
|
Less: Current portion
|
(561
|
)
|
|
(561
|
)
|
Long-term debt
|
$
|
66,630
|
|
|
$
|
72,646
|
|
Revolving Credit Facility Agreement
On
December 11, 2015
, we entered into a
five
-year
$250.0 million
revolving credit facility agreement (“Revolving Credit Facility”), with an additional
$50.0 million
accordion feature, with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. Borrowings under this facility bear interest at a rate of prime plus
0.50%
or London Interbank Offered Rate (“LIBOR”) plus
1.50%
, which may be adjusted based on our leverage ratio. We pay a commitment fee of
0.20%
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. During the
three
months ended
June 30, 2017
we repaid
$5.9 million
of the outstanding borrowings under this facility, and as of
June 30, 2017
and
March 31, 2017
, we had a remaining outstanding balance of
$54.8 million
and
$60.6 million
, respectively, which resulted in borrowing capacity of
$245.2 million
and
$239.4 million
, respectively, inclusive of the accordion feature. The Revolving Credit Facility contains certain customary restrictive covenants, including a requirement to maintain a minimum fixed charge coverage ratio of
1.25
to
1.00
and a maximum leverage ratio of Funded Debt to EBITDA (as defined in the agreement) of
3.00
to
1.00
. Covenant compliance is tested quarterly and we were in compliance with all covenants as of
June 30, 2017
.
Whitmore Term Loan
As of
June 30, 2017
, Whitmore Manufacturing (one of our wholly-owned operating subsidiaries) had a secured term loan outstanding related to a warehouse and corporate office building and the remodel of an existing manufacturing and research and development facility. The term loan matures on
July 31, 2029
, with payments of
$140,000
due each quarter. Borrowings under this term loan bear interest at a variable annual rate equal to one month LIBOR plus
2.0%
. As of
June 30, 2017
and
March 31, 2017
, Whitmore had
$12.4 million
and
$12.6 million
, respectively, in outstanding borrowings under the term loan.
|
|
8.
|
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
June 30, 2017
and
March 31, 2017
, we had
$42.2 million
and
$43.2 million
, respectively, of notional amount in outstanding designated interest rate swaps with third parties. All interest rate swaps are highly effective. At
June 30, 2017
, the maximum remaining length of any interest rate swap contract in place was approximately
12.0 years
. The fair value of interest rate swaps designated as hedging instruments are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
March 31, 2017
|
Current derivative assets
|
$
|
42
|
|
|
$
|
—
|
|
Current derivative liabilities
|
186
|
|
|
199
|
|
Non-current derivative liabilities
|
538
|
|
|
420
|
|
The impact of changes in fair value of interest rate swaps is included in Note 15.
On
June 17, 2016
, we entered into a foreign exchange forward contract, not designated as a hedging instrument, to hedge our exposure associated with assets denominated in British pounds. The forward contract was settled on
September 29, 2016
resulting in a net gain of
$0.2 million
, which was included in other income (expense), net on our condensed consolidated statements of income for the fiscal year ended
March 31, 2017
.
Current derivative assets are reported in our condensed consolidated balance sheets in prepaid expenses and other current assets. Current and non-current derivative liabilities are reported in our condensed consolidated balance sheets in accrued and other current liabilities and other long-term liabilities, respectively.
We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluation of our counterparties and expect all counterparties to meet their obligations. We have not experienced credit losses from our counterparties.
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings per share for the
three
month periods ended
June 30, 2017
and
2016
(amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
Net income for basic and diluted earnings per share
|
$
|
8,514
|
|
|
$
|
4,096
|
|
|
Weighted average shares:
|
|
|
|
|
Common stock
|
15,637
|
|
|
15,478
|
|
|
Participating securities
|
209
|
|
|
239
|
|
|
Denominator for basic earnings per common share
|
15,846
|
|
|
15,717
|
|
|
Potentially dilutive securities
|
77
|
|
|
61
|
|
|
Denominator for diluted earnings per common share
|
15,923
|
|
|
15,778
|
|
|
Earnings per common share:
|
|
|
|
|
Basic
|
$
|
0.54
|
|
|
$
|
0.26
|
|
|
Diluted
|
0.54
|
|
|
0.26
|
|
|
On
November 11, 2016
, we announced that our Board of Directors authorized a program to repurchase up to
$35.0 million
of our common stock over the next
two years
. These shares may be repurchased in the open market or in privately negotiated transactions. Repurchases will be made from time to time at our discretion, based on ongoing assessments of the capital needs of the business, the market price of its common stock and general market conditions. The program may be limited or terminated at any time at our discretion without notice. Through
June 30, 2017
,
no
shares have been repurchased under this program.
|
|
11.
|
FAIR VALUE MEASUREMENTS
|
The fair value of interest rate swaps and foreign exchange forward contracts (as discussed in Note 8) 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
June 30, 2017
and
March 31, 2017
due to their short-term nature.
The fair values of acquisition-related contingent payments are estimated using Level 3 inputs. The contingent payment related to the acquisition of assets from SureSeal Manufacturing (“SureSeal”) utilized the weighted average probability method using forecasted sales and gross margin. The most significant factor in the valuation is projected net revenues resulting from sales of SureSeal products. The following table sets forth the changes in fair value recognized within the selling, general and administrative expenses of our condensed consolidated statements of income (in thousands):
|
|
|
|
|
|
|
Three Months Ended
June 30, 2017
|
|
|
SureSeal
|
|
Balance at April 1, 2017
|
$
|
6,390
|
|
|
Change due to accretion
|
255
|
|
|
Change in estimate
|
(255
|
)
|
|
Balance at June 30, 2017
|
$
|
6,390
|
|
|
On
August 3, 2017
, we entered into an agreement with the sellers of the SureSeal product line assets that, among other things, amended the purchase agreement to eliminate the potential contingent payment in exchange for a cash payment materially equivalent to what we had accrued as of
June 30, 2017
. The cash payment will be paid during the fiscal quarter ending
September 30, 2017
.
Refer to Note 12 to our consolidated financial statements included in our Annual Report for a description of our retirement and post-retirement benefits.
The following tables set forth the combined net pension benefit recognized in our condensed consolidated financial statements for all plans (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2017
|
|
2016
|
Service cost, benefits earned during the period
|
$
|
14
|
|
|
$
|
23
|
|
Interest cost on projected benefit obligation
|
636
|
|
|
675
|
|
Expected return on assets
|
(980
|
)
|
|
(989
|
)
|
Amortization of net actuarial loss
|
7
|
|
|
4
|
|
Net pension benefit
|
$
|
(323
|
)
|
|
$
|
(287
|
)
|
From time to time, we are involved in various claims and legal actions that 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.
For the three months ended
June 30, 2017
, we earned
$13.3 million
before taxes and provided for income taxes of
$4.8 million
, resulting in an effective tax rate of
36.1%
. For the
three
months ended
June 30, 2016
, we earned
$7.2 million
before taxes and provided for income taxes of
$3.1 million
, resulting in an effective tax rate of
43.1%
. The variance from the U.S. federal statutory rate for the
three
months ended
June 30, 2017
, was primarily attributable to domestic operations in states with higher statutory rates, offset by foreign operations activity in countries with lower statutory rates. The provision for income taxes for the
three
months ended
June 30, 2016
was impacted by
$0.6 million
relating to reserves for uncertain tax positions and the effect of changes in tax rates, which increased our anticipated effective rate by
8.5%
for the
three
months ended
June 30, 2016
.
|
|
15.
|
OTHER COMPREHENSIVE INCOME (LOSS)
|
The following table provides an analysis of the changes in accumulated other comprehensive income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
2017
|
|
2016
|
Currency translation adjustments:
|
|
|
|
Balance at beginning of period
|
$
|
(8,132
|
)
|
|
$
|
(5,248
|
)
|
Adjustments for foreign currency translation
|
1,676
|
|
|
(1,324
|
)
|
Balance at end of period
|
$
|
(6,456
|
)
|
|
$
|
(6,572
|
)
|
Interest rate swaps:
|
|
|
|
Balance at beginning of period
|
$
|
(402
|
)
|
|
$
|
(1,221
|
)
|
Unrealized losses, net of taxes of $117 and $167, respectively (a)
|
(375
|
)
|
|
(309
|
)
|
Reclassification of losses included in interest expense, net of taxes of $14 and $(47), respectively
|
334
|
|
|
86
|
|
Other comprehensive loss
|
(41
|
)
|
|
(223
|
)
|
Balance at end of period
|
$
|
(443
|
)
|
|
$
|
(1,444
|
)
|
Defined benefit plans:
|
|
|
|
Balance at beginning of period
|
$
|
(1,901
|
)
|
|
$
|
(1,229
|
)
|
Amortization of net loss, net of taxes of $(1) and $(5), respectively
|
(9
|
)
|
|
10
|
|
Balance at end of period
|
$
|
(1,910
|
)
|
|
$
|
(1,219
|
)
|
|
|
(a)
|
Unrealized gains (losses) are reclassified to earnings as underlying cash interest payments are made. We expect to recognize a loss of
$0.1 million
, net of deferred taxes, over the next twelve months related to designated cash flow hedges based on their fair values at
June 30, 2017
.
|
We conduct our operations through
three
business segments based on type of product and how we manage the business:
|
|
•
|
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.
|
|
|
•
|
Coatings, Sealants & Adhesives
is comprised of coatings and penetrants, pipe thread sealants, firestopping sealants and caulks and adhesives/solvent cements.
|
|
|
•
|
Specialty Chemicals
includes lubricants and greases, drilling compounds, anti-seize compounds, chemical formulations and degreasers and cleaners.
|
Our corporate headquarters does not constitute a separate segment. We evaluate segment performance and allocate resources based on each reportable segment’s operating income. The Eliminations and Other segment information is included to reconcile segment data to the consolidated financial statements and includes assets and expenses primarily related to corporate and other functions. No individual customer accounted for more than 10% of consolidated net revenues. Currently, we do not allocate interest expense, net or other income (expense), net by segment.
Three Months Ended June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Industrial
Products
|
|
Coatings,
Sealants and
Adhesives
|
|
Specialty
Chemicals
|
|
Subtotal –
Reportable
Segments
|
|
Eliminations and
Other
|
|
Total
|
Revenues, net
|
$
|
53,261
|
|
|
$
|
23,382
|
|
|
$
|
21,382
|
|
|
$
|
98,025
|
|
|
$
|
2
|
|
|
$
|
98,027
|
|
Operating income
|
13,633
|
|
|
990
|
|
|
1,911
|
|
|
16,534
|
|
|
(2,271
|
)
|
|
14,263
|
|
Three Months Ended June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Industrial
Products
|
|
Coatings,
Sealants and
Adhesives
|
|
Specialty
Chemicals
|
|
Subtotal –
Reportable
Segments
|
|
Eliminations and
Other
|
|
Total
|
Revenues, net
|
$
|
43,475
|
|
|
$
|
23,424
|
|
|
$
|
17,187
|
|
|
$
|
84,086
|
|
|
$
|
21
|
|
|
$
|
84,107
|
|
Operating income
|
10,607
|
|
|
1,649
|
|
|
1,121
|
|
|
13,377
|
|
|
(5,967
|
)
|
|
7,410
|
|