NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.ORGANIZATION AND OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
CSW Industrials, Inc. (“CSWI,” “we,” “our” or “us”) is a diversified industrial growth company with well-established, scalable platforms and domain expertise across two segments: Industrial Products and Specialty Chemicals. Our broad portfolio of leading products provides performance optimizing solutions to our customers. Our products include mechanical products for heating, ventilating, air conditioning and refrigeration (“HVAC/R”), sealants, architecturally-specified building products and high-performance specialty lubricants. Drawing on our innovative and proven technologies, we seek to deliver solutions to our professional customers that require superior performance and reliability. Our diverse product portfolio includes more than 100 highly respected industrial brands including RectorSeal No. 5® thread sealants, KOPR-KOTE® anti-seize lubricants, KATS Coatings®, Safe-T-Switch® condensate overflow shutoff devices, Air Sentry® breathers, Deacon® high temperature sealants, AC Leak Freeze® to stop refrigerant leaks and Greco Aluminum Railings.
Our products are well-known in the specific industries we serve and have a reputation for high quality and reliability. The markets that we serve include HVAC/R, architecturally-specified building products, industrial, plumbing, energy, rail, mining and other general industrial markets.
Basis of Presentation
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 (“Quarterly Report”), include all revenues, costs, assets and liabilities directly attributable to CSWI and have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).
The 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 September 30, 2019 and the results of operations for the three and six month periods ended September 30, 2019 and 2018. All adjustments are of a normal and 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, 2019 (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, with the exception of the lease accounting policy described below as a result of adopting the new lease standards.
Leases – We determine if a contract is or contains a lease at inception by evaluating whether the contract conveys the right to control the use of an identified asset. Right-of-Use (“ROU”) assets and lease liabilities are initially recognized at the commencement date based on the present value of remaining lease payments over the lease term calculated using our incremental borrowing rate, unless the implicit rate is readily determinable. ROU assets represent the right to use an underlying asset for the lease term, including any upfront lease payments made and excluding lease incentives. Lease liabilities represent the obligation to make future lease payments throughout the lease term. The lease term includes renewal periods when we are reasonably certain to exercise the option to renew. The ROU asset is amortized over the expected lease term. Lease and non-lease components, when present on our leases, are accounted for separately. Leases with an initial term of 12 months or less are excluded from recognition in the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term. We have certain lease contracts with terms and conditions that provide for variability in the payment amount based on changes in facts or circumstances occurring after the commencement date. These variable lease payments are recognized in our condensed consolidated income statements as the obligation is incurred. As of September 30, 2019, we did not have material leases that imposed significant restrictions or covenants, material related party leases or sale-leaseback arrangements.
Accounting Developments
Pronouncements Implemented
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which has been subsequently amended with additional ASUs including ASU No. 2018-10 and ASU No. 2018-11 issued in July 2018, and ASU No. 2018-20 issued in December 2018, 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 adopted this standard effective April 1, 2019, using the modified retrospective approach for leases existing at or entered into before the effective date. As such, the cumulative effect of the implementation has been recorded to the opening balance of retained earnings in the period of adoption and prior periods have not been adjusted. Upon adoption, we elected the package of three practical expedients permitted under the transition guidance, which include the carry forward of our leases without reassessing whether any contracts are leases or contain leases, lease classification and initial direct lease costs. We also elected the transition practical expedient to apply hindsight when determining the lease term and when assessing impairment of ROU assets at the adoption date, which allows us to update our assessments according to new information and changes in facts and circumstances that have occurred since lease inception. Adoption of this ASU resulted in recognition of ROU assets and lease liabilities of $16.9 million and $18.6 million, respectively, including leases classified as discontinued operations, as well as a reduction to opening retained earnings of $0.4 million, at the date of adoption. Refer to Note 8 for details of the impact of the adoption of this ASU.
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements of Accounting for Hedging Activities." The purpose of this ASU is to better align a company's risk management activities and financial reporting for hedging relationships. Additionally, the ASU simplifies the hedge accounting requirements and improves the disclosures of hedging arrangements. This ASU was amended by ASU 2018-16 to include the secured overnight financing rate as an acceptable reference rate. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Adoption of this ASU effective April 1, 2019, did not have a material impact on our consolidated financial condition or results of operations.
Pronouncements not yet implemented
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," as amended, which requires, among other things, the use of a new current expected credit loss ("CECL") model in order to determine our allowances for doubtful accounts with respect to accounts receivable. The CECL model requires that we estimate our lifetime expected credit loss with respect to our receivables and contract assets and record allowances that, when deducted from the balance of the receivables, represent the net amounts expected to be collected. We will also be required to disclose information about how we developed the allowances, including changes in the factors that influenced our estimate of expected credit losses and the reasons for those changes. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. We are currently evaluating the impact of this ASU on our consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement," which modifies the disclosure requirements on fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We do not expect adoption of this ASU to have a material impact on our consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU No. 2018-14, "Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans," which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. This ASU is effective, on a
retrospective basis, for fiscal years ending after December 15, 2020. Early adoption is permitted. We do not expect adoption of this ASU to have a material impact on our consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU No. 2018-15, "Customer's Accounting for the Implementation Costs Incurred in Cloud Computing Arrangement That is a Service Contract." The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. We do not expect adoption of this ASU to have a material impact on our consolidated financial condition and results of operations.
2. ACQUISITIONS
Petersen Metals
On April 2, 2019, we acquired the assets of Petersen Metals, Inc. (“Petersen”), based near Tampa, Florida, for $11.8 million, of which $11.5 million was paid at closing and funded through our revolving credit facility, and the remaining $0.3 million represented a working capital adjustment paid in July 2019. Petersen is a leading designer, manufacturer and installer of architecturally-specified, engineered metal products and railings, including aluminum and stainless steel railings products for interior and exterior applications. The excess of the purchase price over the fair value of the identifiable assets acquired was $6.1 million allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from enabling geographic, end market and product diversification and expansion as Petersen is a strategic complement to our existing line of architecturally-specified building products. The preliminary allocation of the fair value of the net assets acquired included customer lists of $3.2 million and backlog of $0.4 million, as well as accounts receivable, inventory and equipment of $2.2 million, $0.8 million and $0.7 million, respectively, net of current liabilities of $1.5 million. Customer lists are being amortized over 15 years, backlog is amortized over 1.5 years and goodwill is not being amortized. Petersen activity has been included in our Industrial Products segment since the acquisition date. No pro forma information has been provided due to immateriality.
MSD Research, Inc.
On January 31, 2019, we acquired the assets of MSD Research, Inc. (“MSD”), based in Boca Raton, Florida, for $10.1 million, funded through our revolving credit facility. MSD is a leading provider of condensate management products for commercial and residential HVAC/R systems, including float switches, drain line cleanouts and flush tools. The excess of the purchase price over the fair value of the identifiable assets acquired was $5.2 million allocated to goodwill, which will be deductible for income tax purposes. Goodwill represents the value expected to be obtained from a more extensive condensation management product portfolio for the HVAC/R market and leveraging our larger distributor network. The preliminary allocation of the fair value of the net assets acquired included customer lists, trademarks and technology of $3.3 million, $0.8 million and $0.4 million, respectively, as well as inventory and accounts receivable of $0.3 million and $0.1 million, respectively. Customer lists and technology are being amortized over 10 years and 5 years, respectively, while trademarks and goodwill are not being amortized. MSD activity has been included in our Industrial Products segment since the acquisition date. No pro forma information has been provided due to immateriality.
3. DISCONTINUED OPERATIONS
During the quarter ended December 31, 2017, we commenced a sale process to divest our Coatings business to allow us to focus resources on our core growth platforms. Our Coatings business manufactured specialized industrial coating products including urethanes, epoxies, acrylics and alkyds. As of December 31, 2017, the Coatings business met the held-for-sale criteria under ASC 360, "Property, Plant and Equipment," and accordingly, we classified and accounted for the assets and liabilities of the Coatings business as held-for-sale in the accompanying condensed consolidated balance sheets, and as discontinued operations, net of tax, in the accompanying condensed consolidated statements of income and cash flows. We completed an initial assessment of the assets and liabilities of the Coatings business and recorded a $46.0 million impairment based on our best estimates as of the date of issuance of financial results for the quarter ended December 31, 2017.
On July 31, 2018, we consummated a sale of assets related to our Coatings business to an unrelated third party, the terms of which were not disclosed due to immateriality. During the three months ended September 30, 2018, we received an aggregate
of $6.9 million for the sale of assets related to our Coatings business in multiple transactions. This resulted in gains on disposal of $6.9 million due to write-downs of long-lived assets in prior periods.
Summarized selected financial information for the Coatings business for the three and six months ended September 30, 2019 and 2018, is presented in the following table:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Six Months Ended
September 30,
|
|
|
(amounts in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues, net
|
$
|
—
|
|
|
$
|
1,938
|
|
|
$
|
—
|
|
|
$
|
5,303
|
|
(Loss) income from discontinued operations before income taxes
|
(69)
|
|
|
3,612
|
|
|
(224)
|
|
|
532
|
|
Income tax benefit
|
34
|
|
|
(880)
|
|
|
50
|
|
|
(132)
|
|
(Loss) income from discontinued operations, net
|
$
|
(35)
|
|
|
$
|
2,732
|
|
|
$
|
(174)
|
|
|
$
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
September 30, 2019
|
|
March 31, 2019
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Assets
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets (a)
|
$
|
—
|
|
|
$
|
21
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets (b)
|
2,061
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|
|
—
|
|
Total assets
|
$
|
2,061
|
|
|
$
|
21
|
|
|
|
|
|
Liabilities
|
|
|
|
Accounts payable, accrued expenses and other liabilities (b)
|
$
|
3,045
|
|
|
$
|
945
|
|
(a) The assets and liabilities of the Coatings business reside in a disregarded entity for tax purposes. Accordingly, the tax attributes associated with the operations of our Coatings business will ultimately flow through to the corporate parent, which files a consolidated federal return. Therefore, any corresponding tax assets or liabilities have been reflected as a component of our continuing operations.
(b) Adoption of the new lease standard resulted in recognition of ROU assets and lease liabilities of $1.9 million and $3.0 million, respectively, for the Coatings business. Refer to Note 8 for details and additional discussions on our adoption of the new lease standard.
4. INVENTORIES
Inventories consist of the following (in thousands):
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September 30, 2019
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|
March 31, 2019
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Raw materials and supplies
|
$
|
22,432
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|
|
$
|
20,267
|
|
Work in process
|
6,718
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|
|
6,483
|
|
Finished goods
|
31,035
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|
|
31,876
|
|
Total inventories
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60,185
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|
|
58,626
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|
Less: LIFO reserve
|
(5,026)
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|
|
(5,027)
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|
Less: Obsolescence reserve
|
(2,308)
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|
|
(2,170)
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|
Inventories, net
|
$
|
52,851
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|
|
$
|
51,429
|
|
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill as of September 30, 2019 and March 31, 2019 were as follows (in thousands):
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|
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|
|
Industrial Products
|
|
Specialty
Chemicals
|
|
Total
|
Balance at March 31, 2019
|
|
$
|
54,732
|
|
|
$
|
31,563
|
|
|
$
|
86,295
|
|
Petersen acquisition
|
|
6,128
|
|
|
|
—
|
|
|
|
6,128
|
|
Currency translation
|
|
(171)
|
|
|
|
—
|
|
|
|
(171)
|
|
Balance at September 30, 2019
|
|
$
|
60,689
|
|
|
|
$
|
31,563
|
|
|
|
$
|
92,252
|
|
The following table provides information about our intangible assets (in thousands, except years):
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|
|
September 30, 2019
|
|
|
|
March 31, 2019
|
|
|
|
Wtd Avg Life (Years)
|
Ending Gross Amount
|
|
Accumulated Amortization
|
|
Ending Gross Amount
|
|
Accumulated Amortization
|
Finite-lived intangible assets:
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|
|
|
|
|
|
|
|
Patents
|
11
|
$
|
9,634
|
|
|
$
|
(6,532)
|
|
|
$
|
9,835
|
|
|
$
|
(6,316)
|
|
Customer lists and amortized trademarks
|
12
|
62,965
|
|
|
(30,874)
|
|
|
60,065
|
|
|
(28,622)
|
|
Non-compete agreements
|
5
|
1,766
|
|
|
(1,336)
|
|
|
1,764
|
|
|
(1,066)
|
|
Other
|
8
|
5,134
|
|
|
(2,298)
|
|
|
4,808
|
|
|
(2,010)
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|
|
|
$
|
79,499
|
|
|
$
|
(41,040)
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|
|
$
|
76,472
|
|
|
$
|
(38,014)
|
|
Trade names and trademarks not being amortized:
|
|
$
|
12,013
|
|
|
$
|
—
|
|
|
$
|
12,008
|
|
|
$
|
—
|
|
Amortization expense for the three and six months ended September 30, 2019 were $1.7 million and $3.4 million, respectively. Amortization expense for the three and six months ended September 30, 2018, were $1.6 million and $3.1 million, respectively. The following table shows the estimated future amortization for intangible assets, as of September 30, 2019, for the remainder of the current fiscal year and the next five fiscal years ending March 31 (in thousands):
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2020
|
$
|
2,913
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2021
|
5,504
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2022
|
5,100
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2023
|
4,244
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2024
|
3,938
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|
6. SHARE-BASED COMPENSATION
Refer to Note 6 to our consolidated financial statements included in the Annual Report for a description of the 2015 Equity and Incentive Compensation Plan (the "2015 Plan"). As of September 30, 2019, 825,604 shares were available for issuance under the 2015 Plan.
We recorded share-based compensation expense as follows for the three and six months ended September 30, 2019 and 2018 (in thousands):
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|
Three months ended September 30, 2019
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|
Six months ended September 30, 2019
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|
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Stock Options
|
|
Restricted
Stock
|
|
Total
|
|
Stock Options
|
|
Restricted
Stock
|
|
Total
|
Share-based compensation expense
|
|
$
|
—
|
|
|
$
|
1,196
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|
|
$
|
1,196
|
|
|
$
|
—
|
|
|
$
|
2,409
|
|
|
$
|
2,409
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|
Related income tax benefit
|
|
—
|
|
|
(251)
|
|
|
(251)
|
|
|
—
|
|
|
(506)
|
|
|
(506)
|
|
Net share-based compensation expense
|
|
$
|
—
|
|
|
$
|
945
|
|
|
$
|
945
|
|
|
$
|
—
|
|
|
$
|
1,903
|
|
|
$
|
1,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
Six Months Ended September 30, 2018
|
|
|
|
|
|
|
Stock Options
|
|
Restricted
Stock
|
|
Total
|
|
Stock Options
|
|
Restricted
Stock
|
|
Total
|
Share-based compensation expense
|
|
$
|
3
|
|
|
$
|
862
|
|
|
$
|
865
|
|
|
$
|
19
|
|
|
$
|
1,775
|
|
|
$
|
1,794
|
|
Related income tax benefit
|
|
—
|
|
|
(198)
|
|
|
(198)
|
|
|
(2)
|
|
|
(398)
|
|
|
(400)
|
|
Net share-based compensation expense
|
|
$
|
3
|
|
|
$
|
664
|
|
|
$
|
667
|
|
|
$
|
17
|
|
|
$
|
1,377
|
|
|
$
|
1,394
|
|
Stock option activity was as follows:
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Remaining Contractual Life (Years)
|
|
Aggregate Intrinsic Value (in Millions)
|
Outstanding at April 1, 2019:
|
|
|
|
|
|
231,717
|
|
|
$
|
25.12
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
|
|
|
231,717
|
|
|
$
|
25.12
|
|
|
4.71
|
|
10.2
|
Exercisable at September 30, 2019
|
|
|
|
|
|
231,717
|
|
|
$
|
25.12
|
|
|
4.71
|
|
10.2
|
All compensation costs related to stock options were recognized prior to April 1, 2019. No options were granted or vested during the three and six months ended September 30, 2019 and 2018.
Restricted share activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at April 1, 2019:
|
|
|
|
|
|
|
|
|
|
213,622
|
|
|
$
|
45.42
|
|
Granted
|
|
|
|
|
|
|
|
|
|
33,178
|
|
|
78.70
|
|
Vested
|
|
|
|
|
|
|
|
|
|
(35,117)
|
|
|
24.29
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
(1,766)
|
|
|
23.77
|
|
Outstanding at September 30, 2019
|
|
|
|
|
|
|
|
|
|
209,917
|
|
|
$
|
54.40
|
|
During the restriction period, the holders of restricted shares are entitled to vote and receive dividends. Unvested restricted shares outstanding as of September 30, 2019 and March 31, 2019 included 93,126 and 96,282 shares (at target), respectively, with performance-based vesting provisions, having vesting ranges from 0%-200% based on pre-defined performance targets with market conditions. Performance-based awards accrue dividend equivalents, which are settled upon (and to the extent of) vesting of the underlying award, but do not have the right to vote until vested. Performance-based awards are earned upon the
achievement of objective performance targets and are payable in common shares. Compensation expense is calculated based on the fair market value as determined by a Monte Carlo simulation and is recognized over a 36-month cliff vesting period.
At September 30, 2019, we had unrecognized compensation cost related to unvested restricted shares of $6.0 million, which will be amortized into net income over the remaining weighted average vesting period of approximately 1.9 years. The total fair value of restricted shares granted during the three months ended both September 30, 2019 and 2018 was less than $0.1 million. The total fair value of restricted shares granted during the six months ended September 30, 2019 and 2018 was $2.6 million and $1.7 million, respectively. The total fair value of restricted shares vested during the three months ended September 30, 2019 and 2018 was zero and less than $0.1 million, respectively. The total fair value of restricted shares vested during the six months ended September 30, 2019 and 2018 was $2.1 million and $0.4 million, respectively.
7. LONG-TERM DEBT
Debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
March 31, 2019
|
Revolving Credit Facility, interest rate of 0.00% and 3.74%, respectively
|
|
$
|
—
|
|
|
$
|
20,000
|
|
Whitmore Term Loan, interest rate of 4.02% and 4.50%, respectively
|
|
11,179
|
|
|
11,459
|
|
Total debt
|
|
11,179
|
|
|
31,459
|
|
Less: Current portion
|
|
(561)
|
|
|
(561)
|
|
Long-term debt
|
|
$
|
10,618
|
|
|
$
|
30,898
|
|
Revolving Credit Facility
As discussed in Note 8 to our consolidated financial statements included in our Annual Report, we have a five-year, $250.0 million revolving credit facility agreement, with an additional $50.0 million accordion feature, which matures on September 15, 2022 (the “Revolving Credit Facility”). Borrowings under this facility bear interest at a rate of prime plus 0.25% or London Interbank Offered Rate ("LIBOR") plus 1.25%, which may be adjusted based on our leverage ratio. We pay a commitment fee of 0.15% for the unutilized portion of the Revolving Credit Facility. Interest and commitment fees are payable at least quarterly and the outstanding principal balance is due at the maturity date. The Revolving Credit Facility is secured by substantially all of our domestic assets. During the six months ended September 30, 2019, we borrowed $7.5 million and repaid $27.5 million under this facility, and as of September 30, 2019 and March 31, 2019, we had a remaining outstanding balance of $0 and $20.0 million, respectively, which resulted in borrowing capacity of $300.0 million and $280.0 million, respectively, inclusive of the accordion feature. Covenant compliance is tested quarterly, and we were in compliance with all covenants as of September 30, 2019.
Whitmore Term Loan
As of September 30, 2019, Whitmore Manufacturing (one of our wholly-owned operating subsidiaries) had a secured term loan ("Whitmore Term Loan") outstanding related to a warehouse and corporate office building and the remodel of an existing manufacturing and research and development facility. The Whitmore Term Loan matures on July 31, 2029 and requires 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 September 30, 2019 and March 31, 2019, Whitmore Manufacturing had $11.2 million and $11.5 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.
8. LEASES
We have operating leases for manufacturing facilities, offices, warehouses, vehicles and certain equipment. Our leases have remaining lease terms of 1 year to 10 years, some of which include escalation clauses and/or options to extend or terminate the leases. Leases related to discontinued operations have been omitted from the following disclosures (see Note 3 for information on leases included in discontinued operations).
We do not currently have any financing lease arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Six Months Ended September 30, 2019
|
Components of Operating Lease Expenses (in thousands)
|
|
|
|
Operating lease expense (a)
|
$
|
889
|
|
|
$
|
1,793
|
|
Variable lease expense (b)
|
144
|
|
|
194
|
|
Total operating lease expense
|
$
|
1,033
|
|
|
$
|
1,987
|
|
(a) Included in cost of revenues and selling, general and administrative expense
|
|
|
|
(b) Includes short-term leases, which are immaterial
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
Operating Lease Assets and Liabilities (in thousands)
|
|
|
|
ROU assets, net (c)
|
|
|
$
|
14,331
|
|
|
|
|
|
Short-term lease liabilities (d)
|
|
|
$
|
2,794
|
|
Long-term lease liabilities recorded (d)
|
|
|
12,188
|
|
Total operating lease liabilities
|
|
|
$
|
14,982
|
|
(c) Included in other assets, net
|
|
|
|
(d) Included in accrued and other current liabilities and other long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30, 2019
|
Supplemental Cash Flow (in thousands)
|
|
Cash paid for amounts included in the measurement of operating lease liabilities (a)
|
$
|
1,736
|
|
ROU assets obtained in exchange for new operating lease obligations
|
643
|
|
(a) Included in our condensed consolidated statement of cash flows, operating activities in accounts payable and other current liabilities
|
|
|
|
Other Information for Operating Leases
|
|
Weighted average remaining lease term (in years)
|
5.29
|
Weighted average discount rate (percent)
|
3.7
|
%
|
|
|
|
|
|
|
Maturities of operating lease liabilities were as follows (in thousands):
|
|
Year Ending March 31, 2020 (excluding the six months ended September 30, 2019)
|
$
|
1,748
|
|
2021
|
3,370
|
|
2022
|
2,840
|
|
2023
|
2,173
|
|
2024
|
2,024
|
|
Thereafter
|
5,793
|
|
Total lease liabilities
|
17,948
|
|
Less: Imputed interest
|
(2,966)
|
|
Present value of lease liabilities
|
$
|
14,982
|
|
As discussed in Note 1, we elected the transition practical expedient to apply hindsight when determining the lease term at the new lease standard adoption date. The increase in lease liabilities at September 30, 2019, as compared with future obligations as of March 31, 2019, represents the renewal period options that we were reasonably certain to exercise as of the adoption date.
The future minimum obligations under operating leases in effect as of March 31, 2019 having a noncancellable term in excess of one year as determined prior to the adoption of the new lease standard are as follows for the fiscal years ending March 31, (in thousands):
|
|
|
|
|
|
2020
|
$
|
3,048
|
|
2021
|
2,733
|
|
2022
|
1,645
|
|
2023
|
1,038
|
|
2024
|
921
|
|
Thereafter
|
1,010
|
|
Total future minimum lease payments
|
$
|
10,395
|
|
|
|
9. DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING
We have an interest rate swap agreement to hedge exposure to floating interest rates on a certain portion of our debt. As of September 30, 2019 and March 31, 2019, we had $11.2 million and $11.5 million, respectively, of notional amount outstanding designated as an interest rate swap with third parties. The interest rate swap is highly effective. At September 30, 2019, the maximum remaining length of the interest rate swap contract was approximately 10 years. The fair value of the interest rate swap designated as a hedging instrument is summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
March 31, 2019
|
|
|
|
|
Current derivative liabilities
|
$
|
135
|
|
|
$
|
56
|
|
Non-current derivative liabilities
|
1,014
|
|
|
443
|
|
The impact of changes in fair value of the interest rate swap is included in Note 12.
Current and non-current derivative assets are reported in our condensed consolidated balance sheets in prepaid expenses and other current assets and other assets, respectively. 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.
10. EARNINGS PER SHARE
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings per share for the three and six months ended September 30, 2019 and 2018 (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
Six Months Ended
September 30,
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Income from continuing operations
|
|
$
|
8,818
|
|
|
$
|
12,424
|
|
|
$
|
24,163
|
|
|
$
|
26,430
|
|
(Loss) income from discontinued operations
|
|
(35)
|
|
|
2,732
|
|
|
(174)
|
|
|
400
|
|
Net income
|
|
$
|
8,783
|
|
|
$
|
15,156
|
|
|
$
|
23,989
|
|
|
$
|
26,830
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
Common stock
|
|
14,909
|
|
|
15,366
|
|
|
14,909
|
|
|
15,512
|
|
Participating securities
|
|
115
|
|
|
158
|
|
|
115
|
|
|
161
|
|
Denominator for basic earnings per common share
|
|
15,024
|
|
|
15,524
|
|
|
15,024
|
|
|
15,673
|
|
Potentially dilutive securities
|
|
191
|
|
|
125
|
|
|
181
|
|
|
117
|
|
Denominator for diluted earnings per common share
|
|
15,215
|
|
|
15,649
|
|
|
15,205
|
|
|
15,790
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.59
|
|
|
$
|
0.80
|
|
|
$
|
1.61
|
|
|
$
|
1.69
|
|
Discontinued operations
|
|
(0.01)
|
|
|
0.18
|
|
|
(0.01)
|
|
|
0.02
|
|
Net income
|
|
$
|
0.58
|
|
|
$
|
0.98
|
|
|
$
|
1.60
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.58
|
|
|
$
|
0.79
|
|
|
$
|
1.59
|
|
|
$
|
1.67
|
|
Discontinued operations
|
|
—
|
|
|
0.18
|
|
|
(0.01)
|
|
|
0.03
|
|
Net income
|
|
$
|
0.58
|
|
|
$
|
0.97
|
|
|
$
|
1.58
|
|
|
$
|
1.70
|
|
11. SHAREHOLDERS' EQUITY
Share Repurchase Program
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 a two-year time period. We purchased 425,873 and 572,160 shares during the three and six months ended September 30, 2018, respectively, for an aggregate amount of $23.5 million and $30.8 million, respectively. As of October 31, 2018, a total of 656,203 shares had been repurchased for an aggregate amount of $35.0 million, and the program was completed.
On November 7, 2018, we announced that our Board of Directors authorized a new program to repurchase up to $75.0 million of our common stock over a two-year time period. These shares may be repurchased from time to time in the open market or in privately negotiated transactions. Repurchases will be made from time to time at our discretion, based on ongoing assessments of the capital needs of the business, the market price of our common stock and general market conditions. The program may be limited or terminated at any time at our discretion without notice. No shares were purchased under this program during the three and six months ended September 30, 2019. As of September 30, 2019, a total of 231,150 shares had been repurchased for an aggregate amount of $11.8 million.
Dividends
On April 4, 2019, we announced we had commenced a dividend program and that our Board of Directors approved a quarterly dividend of $0.135 per share. Total dividends of $2.0 million and $4.1 million were declared and paid during the three and six months ended September 30, 2019, respectively. On October 10, 2019, we announced a quarterly dividend of $0.135 per share payable on November 14, 2019 to shareholders of record as of October 31, 2019. Any future dividends at the existing $0.135 per share quarterly rate or otherwise will be reviewed individually and declared by our Board of Directors in its discretion.
12. FAIR VALUE MEASUREMENTS
The fair value of the interest rate swap contract (as discussed in Note 9) is determined using Level 2 inputs. The carrying value of our debt (discussed 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, accounts receivable, net, accounts payable) approximate their fair values at September 30, 2019 and March 31, 2019 due to their short-term nature.
13. RETIREMENT PLANS
Refer to Note 13 to our consolidated financial statements included in the 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
September 30,
|
|
|
|
Six Months Ended
September 30,
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Service cost, benefits earned during the period
|
|
$
|
18
|
|
|
$
|
19
|
|
|
$
|
35
|
|
|
$
|
38
|
|
Interest cost on projected benefit obligation
|
|
523
|
|
|
528
|
|
|
1,046
|
|
|
1,057
|
|
Expected return on assets
|
|
(653)
|
|
|
(663)
|
|
|
(1,307)
|
|
|
(1,327)
|
|
Amortization of net actuarial loss
|
|
12
|
|
|
10
|
|
|
25
|
|
|
19
|
|
Pension plan termination
|
|
|
7,019
|
|
|
—
|
|
|
|
7,019
|
|
|
—
|
|
Net pension benefit
|
|
$
|
6,919
|
|
|
$
|
(106)
|
|
|
$
|
6,818
|
|
|
$
|
(213)
|
|
The components of net periodic cost for retirement and postretirement benefits, other than service costs, are included in other (expense) income, net in our condensed consolidated statements of income.
During the six months ended September 30, 2019, we offered lump sum payments to eligible active and terminated vested participants in our qualified U.S. pension plan (the “Qualified Plan”), representing approximately 42% of our liability. Approximately 74% of those participants accepted the lump sum offer for an aggregate payment of $17.0 million in August 2019. We entered into an annuity purchase contract for the remaining liability in September 2019, and terminated the Qualified Plan effective September 30, 2019. The termination required an additional contribution of $0.5 million, which was paid in September 2019, and resulted in an overall termination charge of $7.0 million ($5.4 million, net of tax) recorded in other (expense) income, net, due primarily to the recognition of expenses that were previously included in accumulated other comprehensive loss and the recognition of additional costs associated with the annuity purchase contract.
14. CONTINGENCIES
From time to time, we are involved in various claims and legal actions that arise in the ordinary course of business. There are no matters pending that we currently believe have a reasonable possibility of having a material impact to our business, consolidated financial position, results of operations or cash flows.
15. INCOME TAXES
For the three months ended September 30, 2019, we earned $12.5 million from continuing operations before taxes and provided for income taxes of $3.6 million, resulting in an effective tax rate of 29.2%. For the six months ended September 30, 2019, we earned $32.2 million from continuing operations before taxes and provided for income taxes of $8.0 million, resulting in an effective tax rate of 24.9%. The provision for income taxes differed from the statutory rate for the three and six months ended September 30, 2019, primarily due to the provision for global intangible low-taxed income ("GILTI"), adjustments related to foreign items, excess tax deductions related to stock compensation and adjustments related to state tax returns.
For the three months ended September 30, 2018, we earned $16.9 million from continuing operations before taxes and provided for income taxes of $4.4 million, resulting in an effective tax rate of 26.3%. For the six months ended September 30, 2018, we earned $35.0 million from continuing operations before taxes and provided for income taxes of $8.5 million, resulting in an effective tax rate of 24.4%. The provision for income taxes differed from the statutory rate for the three and six months ended September 30, 2018 primarily due to an increase in income related to foreign operations, as well as increased operations in domestic jurisdictions with higher state rates.
16. OTHER COMPREHENSIVE INCOME (LOSS)
The following table provides an analysis of the changes in accumulated other comprehensive loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2019
|
|
2018
|
Currency translation adjustments:
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
(6,611)
|
|
|
$
|
(6,236)
|
|
Adjustments for foreign currency translation
|
|
|
(669)
|
|
|
(43)
|
|
Balance at end of period
|
|
|
$
|
(7,280)
|
|
|
$
|
(6,279)
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
(691)
|
|
|
$
|
(65)
|
|
Unrealized (losses) gains, net of taxes of $62 and $(51), respectively (a)
|
|
|
(232)
|
|
|
190
|
|
Reclassification of losses included in interest expense, net,
net of taxes of $(4) and $(5), respectively
|
|
|
15
|
|
|
19
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(217)
|
|
|
209
|
|
Balance at end of period
|
|
$
|
(908)
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
Defined benefit plans:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
(3,470)
|
|
|
$
|
(2,509)
|
|
Amortization of net losses, net of taxes of $(5) and $0,
respectively (b)
|
|
|
18
|
|
|
1
|
|
Pension plan termination, net of taxes of $(669) and $0, respectively
|
|
|
2,516
|
|
|
—
|
|
Other comprehensive income
|
|
|
2,534
|
|
|
1
|
|
Balance at end of period
|
|
|
$
|
(936)
|
|
|
$
|
(2,508)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30,
|
|
|
|
|
2019
|
|
2018
|
Currency translation adjustments:
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
(6,869)
|
|
|
$
|
(4,837)
|
|
Adjustments for foreign currency translation
|
|
|
(411)
|
|
|
(1,442)
|
|
Balance at end of period
|
|
|
$
|
(7,280)
|
|
|
$
|
(6,279)
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
(394)
|
|
|
$
|
(108)
|
|
Unrealized (losses) gains, net of taxes of $143 and $(61), respectively (a)
|
|
|
(538)
|
|
|
231
|
|
Reclassification of losses included in interest expense, net,
net of taxes of $(6) and $(10), respectively
|
|
|
24
|
|
|
37
|
|
Other adjustments (c)
|
|
|
—
|
|
|
(16)
|
|
Other comprehensive (loss) income
|
|
|
(514)
|
|
|
252
|
|
Balance at end of period
|
|
$
|
(908)
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
Defined benefit plans:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
(3,466)
|
|
|
$
|
(2,530)
|
|
Amortization of net losses, net of taxes of $(4) and $(6),
respectively (b)
|
|
|
14
|
|
|
22
|
|
Pension plan termination, net of taxes of $(669) and $0, respectively
|
|
|
2,516
|
|
|
—
|
|
Other comprehensive income
|
|
|
2,530
|
|
|
22
|
|
Balance at end of period
|
|
|
$
|
(936)
|
|
|
$
|
(2,508)
|
|
(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 September 30, 2019.
(b) Amortization of actuarial losses out of accumulated comprehensive loss are included in the computation of net periodic pension expense. See Note 13 for additional information.
(c) The other adjustments relate to changes in the effective tax rate.
17. REVENUE RECOGNITION
Refer to Note 18 to our consolidated financial statements included in the Annual Report for a description of our disaggregation of revenues. Disaggregation of revenues reconciled to our reportable segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2019
|
|
|
|
|
|
Six months ended September 30, 2019
|
|
|
|
|
|
|
Industrial Products
|
|
Specialty Chemicals
|
|
Total
|
|
Industrial Products
|
|
Specialty Chemicals
|
|
Total
|
Build-to-order
|
|
$
|
22,041
|
|
|
$
|
—
|
|
|
$
|
22,041
|
|
|
$
|
41,242
|
|
|
$
|
—
|
|
|
$
|
41,242
|
|
Book-and-ship
|
|
40,728
|
|
|
38,555
|
|
|
79,283
|
|
|
84,879
|
|
|
77,536
|
|
|
162,415
|
|
Net revenues
|
|
$
|
62,769
|
|
|
$
|
38,555
|
|
|
$
|
101,324
|
|
|
$
|
126,121
|
|
|
$
|
77,536
|
|
|
$
|
203,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
Six Months Ended September 30, 2018
|
|
|
|
|
|
|
Industrial Products
|
|
Specialty Chemicals
|
|
Total
|
|
Industrial Products
|
|
Specialty Chemicals
|
|
Total
|
Build-to-order
|
|
$
|
17,810
|
|
|
$
|
—
|
|
|
$
|
17,810
|
|
|
$
|
33,321
|
|
|
$
|
—
|
|
|
$
|
33,321
|
|
Book-and-ship
|
|
36,917
|
|
|
36,884
|
|
|
73,801
|
|
|
75,266
|
|
|
72,602
|
|
|
147,868
|
|
Net revenues
|
|
$
|
54,727
|
|
|
$
|
36,884
|
|
|
$
|
91,611
|
|
|
$
|
108,587
|
|
|
$
|
72,602
|
|
|
$
|
181,189
|
|
Contract liabilities, which are included in accrued and other current liabilities in our condensed consolidated balance sheets were as follows (in thousands):
|
|
|
|
|
|
Balance at April 1, 2019:
|
$
|
2,337
|
|
Revenue recognized during the period
|
(190)
|
|
|
|
New contracts during the period
|
750
|
|
Balance at September 30, 2019
|
$
|
2,897
|
|
18. SEGMENTS
As discussed in Note 19 to our consolidated financial statements in the Annual Report, we conduct our operations through two business segments based on type of product and how we manage the business: Industrial Products and Specialty Chemicals.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Industrial Products
|
|
Specialty Chemicals
|
|
Subtotal - Reportable Segments
|
|
Eliminations and Other
|
|
Total
|
Revenues, net
|
|
|
$
|
62,769
|
|
|
$
|
38,555
|
|
|
$
|
101,324
|
|
|
$
|
—
|
|
|
$
|
101,324
|
|
Operating income
|
|
|
16,413
|
|
|
7,142
|
|
|
23,555
|
|
|
(3,433)
|
|
|
20,122
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Industrial Products
|
|
Specialty Chemicals
|
|
Subtotal - Reportable Segments
|
|
Eliminations and Other
|
|
Total
|
Revenues, net
|
|
|
$
|
54,727
|
|
|
$
|
36,884
|
|
|
$
|
91,611
|
|
|
$
|
1
|
|
|
$
|
91,612
|
|
Operating income
|
|
|
14,212
|
|
|
6,158
|
|
|
20,370
|
|
|
(3,166)
|
|
|
17,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Industrial Products
|
|
Specialty Chemicals
|
|
Subtotal - Reportable Segments
|
|
Eliminations and Other
|
|
Total
|
Revenues, net
|
|
|
$
|
126,121
|
|
|
$
|
77,536
|
|
|
$
|
203,657
|
|
|
$
|
—
|
|
|
$
|
203,657
|
|
Operating income
|
|
|
33,456
|
|
|
13,765
|
|
|
47,221
|
|
|
(6,777)
|
|
|
40,444
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Industrial Products
|
|
Specialty Chemicals
|
|
Subtotal - Reportable Segments
|
|
Eliminations and Other
|
|
Total
|
Revenues, net
|
|
|
$
|
108,587
|
|
|
$
|
72,602
|
|
|
$
|
181,189
|
|
|
$
|
1
|
|
|
$
|
181,190
|
|
Operating income
|
|
|
28,105
|
|
|
12,631
|
|
|
40,736
|
|
|
(5,787)
|
|
|
34,949
|
|