Item 7:   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the accompanying consolidated financial statements and notes. See “Item 1A. Risk Factors” and the “Forward-Looking Statements” included in this Annual Report for a discussion of the risks, uncertainties and assumptions associated with these statements. Unless otherwise noted, all amounts discussed herein are consolidated.

 

Executive Overview

 

Our Company

 

We are a diversified industrial growth company with well-established, scalable platforms and domain expertise across two segments: Industrial Products and Specialty Chemicals. Our broad portfolio of leading products and systems provides performance optimizing solutions to our customers, helping contractors do their jobs better, faster and easier; making buildings safer and more aesthetically pleasing; protecting valuable assets from corrosion; and improving the reliability of mission critical equipment. Our products include mechanical products for heating, ventilation, air conditioning and refrigeration (“HVAC/R”), grilles, registers and diffusers, building safety solutions and high-performance specialty lubricants and sealants. End markets that we serve include HVAC/R, architecturally-specified building products, plumbing, energy, rail, mining and general industrial. Our manufacturing operations are concentrated in the United States (“U.S.”), Canada and Vietnam, and we have distribution operations in U.S., Australia, Canada and the United Kingdom (“U.K.”). Our products are sold directly or through designated channels both domestically and internationally.

 

Many of our products are used to protect the capital assets of our customers that are expensive to repair or replace and are critical to their operations. We have a source of recurring revenue from the maintenance, repair and overhaul and consumable nature of many of our products. We also provide some custom engineered products that strengthen and enhance our customer relationships. The reputation of our product portfolio is built on more than 100 well-respected brand names, such as RectorSeal No. 5, KOPR-KOTE, Jet-Lube, Smoke Guard, Safe-T-Switch, Mighty Bracket, Balco, Whitmore Rail, Air Sentry, Oil Safe, Deacon, Leak Freeze, Greco and TRUaire.

 

Business Developments

 

On April 1, 2021, Whitmore Manufacturing, LLC (“Whitmore”), a wholly-owned subsidiary of CSWI, completed the formation of the previously announced joint venture with Pennzoil-Quaker State Company dba SOPUS products (“Shell”), a wholly-owned subsidiary of Shell Oil Company that comprises Shell’s U.S. lubricants business. The formation was consummated through a transaction in which Whitmore sold to Shell a 50% interest in a wholly-owned subsidiary (containing certain existing operating assets) in exchange for consideration of $13.7 million from Shell in the form of cash and intangible assets.

 

On December 15, 2020, we acquired 100% of the outstanding equity of T.A. Industries, Inc. (“TRUaire”), a leading manufacturer of grilles, registers, and diffusers for the residential and commercial HVAC/R end market, based in Santa Fe Springs, California. The acquisition also included TRUaire’s wholly-owned manufacturing facility based in Vietnam. The acquisition is expected to extend the Company’s product offerings to the HVAC market as well as add new customers and provide strategic distribution facilities. The consideration paid for TRUaire included cash of $284 million and 849,852 shares of the Company’s common stock. The cash consideration was funded through a combination of cash on hand and borrowings under our revolving credit facility, and 849,852 shares of common stock were reissued from treasury shares. TRUaire activity has been included in our Industrial Products segment since the acquisition date.

 

During the quarter ended December 31, 2017, we committed to a plan to divest our Strathmore Products business (the “Coatings business”). This determination resulted in the reclassification of the assets comprising that business to assets held-for-sale, and a corresponding adjustment to our consolidated statements of operations to reflect discontinued operations for all periods presented. During the quarter ended September 30, 2018, we received an aggregate of $6.9 million for the sale of certain tangible and all intangible assets that related to our former Coatings business in multiple transactions. During the quarter ended March 31, 2020, we received $1.5 million for the sale of the last remaining real property owned by our former Coatings business and, as such, we do not expect to have results of discontinued operations resulting from the Coatings business in future years.

 

The COVID-19 pandemic continues to have an impact on human health, the global economy and society at large. The pandemic and its resulting impacts had an adverse impact on our financial results in the fiscal year ended March 31, 2021, as compared with the prior year, most notably within the first and second quarters of fiscal 2021. While the COVID-19 pandemic has contributed to increased demand in certain parts of our business, including the HVAC/R end market, we expect our overall results of operations and financial condition to continue to be adversely impacted through the duration of the pandemic when compared to pre-pandemic periods. Despite strong demand in certain of our end markets and signs of recovery in others, we cannot reasonably estimate the magnitude or length of the pandemic’s adverse impact, including the effects of any vaccine or its ultimate impact on our business or financial condition, due to continued uncertainty regarding (1) the duration and severity of the COVID-19 pandemic and (2) the continued potential for short and long-term impacts on our facilities and employees, customer demand and supply chain.

 

All of our operations and products support critical infrastructure and are considered “essential” in all of the relevant jurisdictions in which we operate. In response to the COVID-19 pandemic, we took numerous measures across our operating sites to ensure we continue to place the highest priority on the health, safety and well-being of our employees, while continuing to support our customers. Through the date of this filing, our businesses have continued to operate throughout the COVID-19 pandemic with appropriate safeguards for our employees and without any material disruptions.

 

Our Markets

 

HVAC/R

 

The HVAC/R market is our largest market served and it represented approximately 42% and 31% of our net revenues in the years ended March 31, 2021 and 2020, respectively. We provide an extensive array of products for installation, repair and maintenance of HVAC/R systems that includes condensate switches, pans and pumps, grilles, registers and diffusers, refrigerant caps, line set covers and other chemical and mechanical products. The industry is driven by replacement and repair of existing HVAC/R systems, as well as new construction projects. New HVAC/R systems are heavily influenced by macro trends in building construction, while replacement and repair of existing HVAC/R systems are dependent on weather and age of unit. The HVAC/R market tends to be seasonal with the peak sales season beginning in March and continuing through August. Construction and repair is typically performed by contractors, and we utilize our global distribution network to drive sales of our brands to such contractors.

 

Architecturally-Specified Building Products

 

Architecturally-specified building products represented approximately 27% and 29% of our net revenues in the years ended March 31, 2021 and 2020, respectively. We manufacture and sell products such as engineered railings, smoke and fire protection systems, expansion joints and stair edge nosings for commercial buildings, multi-family housing, healthcare, education and government facilities. Sales of these products are driven by architectural specifications and safety codes. The sales process is typically long as these can be multi-year construction projects. The construction market, both commercial and multi-family, is a key driver for sales of architecturally-specified building products.

 

General Industrial

 

The general industrial end market represented approximately 10% and 13% of our net revenues in the years ended March 31, 2021 and 2020, respectively. We provide products focused on asset protection and reliability, including lubricants, desiccant breathers and fluid management products. The general industrial market includes the manufacture of chemicals, steel, cement, food and beverage, pulp and paper and a wide variety of other processed materials. We serve this market primarily through a network of distributors. The growth trajectory of the general industrial end market is expected to reflect a blended average of the aforementioned end use markets.

 

Plumbing

 

The plumbing market represented approximately 10% and 11% of our net revenues in the years ended March 31, 2021 and 2020, respectively. We provide many products to the plumbing industry including thread sealants, solvent cements, fire-stopping products, condensate switches and trap guards, as well as other mechanical products, such as drain traps. Installation is typically performed by contractors, and we utilize our global distribution network to drive sales of our products to contractors.

 

Energy

 

The energy market represented approximately 4% and 6% of our net revenues in the years ended March 31, 2021 and 2020, respectively. We provide market-leading lubricants and anti-seize compounds, as well as greases, for use in oilfield drilling activity and maintenance of oilfield drilling and valve related equipment. We sell our products primarily through distributors that are strategically situated near the major oil and gas producing areas across the globe. The outlook for the energy industry is heavily dependent on the global demand expectations from developed and emerging economies, as well as oil price and local government policies relative to oil exploration, drilling, storage and transportation.

 

Rail

 

The rail market represented approximately 4% and 6% of our net revenues in the years ended March 31, 2021 and 2020, respectively. We provide an array of products into the rail industry, including lubricants and lubricating devices for rail lines, which increase efficiency, reduce noise and extend the life of rail equipment such as rails and wheels. We leverage our technical expertise to build relationships with key decision-makers to ensure our products meet required specifications. We sell our products primarily through a direct sales force, as well as through distribution partners. End markets for Rail include Class 1 Rail as the primary end market in North America and Transit Rail as the primary end market in all other geographies. Cyclical product classes such as farm products and petrochemical products can also impact volumes in Class 1 Rail. While coal transport is diminishing demand for Class 1 Rail in North America, global investment in Transit Rail systems is expected to more than offset this decline.

 

 

Mining

 

The mining market represented approximately 3% and 4% of our net revenues in the years ended March 31, 2021 and 2020, respectively. Across the globe, we provide market-leading lubricants to open gears used in large mining excavation equipment, primarily through direct sales agents, as well as a network of strategic distributors. The North American mining industry is heavily weighted toward coal production and has experienced headwinds due to continued decline in domestic coal demand, partially mitigated by the seaborne coal export market. Globally, coal demand has been robust, and focused efforts in coal markets outside of the U.S., coupled with enhanced focus on markets such as iron, gold, diamonds and uranium in Southeast Asia, South America, Africa and Russia, have delivered growth that has generally offset the weakness in North American coal demand. Outside of coal, the mining market tends to move with global industrial output as basic industrial metals such as copper, tin, aluminum, and zinc, which are critical inputs to many industrial products.

 

Our Outlook

 

We expect to maintain a strong balance sheet in fiscal year 2022, which provides us with access to capital through our cash on hand, internally-generated cash flow and availability under our revolving credit facility. Our capital allocation strategy continues to guide our investing decisions, with a priority to direct capital to the highest risk adjusted return opportunities, within the categories of organic growth, strategic acquisitions and the return of cash to shareholders through our share repurchase and dividend programs. With the strength of our financial position, we will continue to invest in financially and strategically attractive expanded product offerings, key elements of our long-term strategy of targeting long-term profitable growth. We will continue to invest our capital in maintaining our facilities and in continuous improvement initiatives. We recognize the importance of, and remain committed to, continuing to drive organic growth, as well as investing additional capital in opportunities with attractive risk-adjusted returns, driving increased penetration in the end markets we serve.

 

We remain disciplined in our approach to acquisitions, particularly as it relates to our assessment of valuation, prospective synergies, diligence, cultural fit and ease of integration, especially in light of the economic conditions due to the pandemic.

 

Results of Operations

 

The following discussion provides an analysis of our consolidated results of operations and results for each of our segments.

 

The operations of TRUaire have been included in our consolidated results of operations and in the operating results of our Industrial Products segment since December 15, 2020, the effective date of the acquisition. The operations of Petersen Metals, Inc. (“Petersen”) have been included in our consolidated results of operations and in the operating results of our Industrial Products segment since April 2, 2019, the effective date of the acquisition. The operations of MSD Research, Inc. (“MSD”) have been included in our consolidated results of operations and in the operating results of our Industrial Products segment since January 31, 2019, the effective date of the acquisition. All acquisitions are described in Note 2 to our consolidated financial statements included in Item 8 of this Annual Report.

 

Net Revenues

 

   Year Ended March 31,
   2021   2020   2019 
(Amounts in thousands)  ($)   ($)   ($) 
Revenues, net   419,205    385,871    350,155 

 

Net revenues for the year ended March 31, 2021 increased $33.3 million, or 8.6%, as compared with the year ended March 31, 2020. The increase was primarily due to the December 15, 2020 acquisition of TRUaire ($33.8 million or 8.8%). Excluding the acquisition impact, the organic sales remained relatively flat from the prior year with a slight sales decrease ($0.5 million in total or 0.1%) primarily due to decreased sales into general industrial ($9.0 million), energy ($7.5 million), rail ($5.5 million) and mining ($1.1 million) end markets, mostly offset by increased sales volumes into the HVAC/R ($22.2 million) and architecturally-specified building products ($2.0 million) end markets. Although the energy and mining end markets decreased over the prior fiscal year, those decreases occurred during the first nine months of the fiscal year, while the fourth fiscal quarter showed improvements as compared with the same period in the prior year. The plumbing end market experienced growth in the fourth fiscal quarter as compared with the same period in the prior year, offsetting the slight decreases in the first nine months of the fiscal year.

 

Net revenues for the year ended March 31, 2020 increased $35.7  million, or 10.2%, as compared with the year ended March  31, 2019. The increase was primarily due to recent acquisitions ($15.1 million or 4.3%) and organic sales increases ($20.6 million in total or 5.9%) driven by increased sales volumes into the HVAC/R ($12.0 million), plumbing ($3.2 million), architecturally-specified building products ($2.1 million), rail ($1.2  million), mining ($1.2 million) and general industrial ($0.9 million) end markets. Although the mining and rail end markets increased over the prior fiscal year, those increases occurred during the first nine months of the fiscal year, while the fourth fiscal quarter was relatively flat as compared with the same period in the prior year. The energy end market experienced growth in the first nine months of the fiscal year, but declines in the fourth fiscal quarter as compared with the same period in the prior year offset most of that growth.

 

Net revenues into the Americas, the Europe, Middle East and Africa (“EMEA”) and the Asia Pacific regions represented approximately 93%, 4%, and 3%, respectively, of net revenues for the year ended March 31, 2021. Net revenues into the Americas, EMEA and the Asia Pacific regions represented approximately 90%, 6%, and 4%, respectively, of net revenues for both of the years ended March 31, 2020 and 2019. The presentation of net revenues by geographic region is based on the location of the customer. For additional information regarding net revenues by geographic region, see Note 19 to our consolidated financial statements included in Item 8 of this Annual Report.

 

Gross Profit and Gross Profit Margin

 

   Year Ended March 31,
   2021   2020   2019 
(Amounts in thousands, except percentages)  ($)   ($)   ($) 
Gross profit   184,800    177,050    161,370 
Gross profit margin   44.1%   45.9%   46.1%

 

Gross profit for the year ended March 31, 2021 increased $7.8 million, or 4.4%, as compared with the year ended March 31, 2020. The increase was primarily due to the TRUaire acquisition, partially offset by decreased gross margin and an $0.8 million gain on sales of property, plant and equipment in the prior year that did not recur. Gross profit margin for the year ended March 31, 2021 of 44.1% decreased from 45.9% for the year ended March 31, 2020, primarily due to the TRUaire acquisition, including a $3.5 million amortization related to the inventory fair value step-up, and increased freight and transportation costs in the fourth fiscal quarter.

 

Gross profit for the year ended March 31, 2020 increased $15.7 million, or 9.7%, as compared with the year ended March 31, 2019. The increase was primarily due to increased revenues, recent acquisitions and an $0.8 million gain on sales of property, plant and equipment, partially offset by a $2.6 million gain on sales of property, plant and equipment in the prior year period that did not recur. Gross profit margin for the year ended March 31, 2020 of 45.9% decreased from 46.1% for the year ended March 31, 2019, primarily attributable to product mix.

 

Selling, General and Administrative Expense

 

   Year Ended March 31,
   2021   2020   2019 
(Amounts in thousands, except percentages)  ($)   ($)   ($) 
Operating expenses   125,330    110,983    100,930 
Operating expenses as a % of revenues   29.9%   28.8%   28.8%

 

Selling, general and administrative expense for the year ended March 31, 2021 increased $14.3 million, or 12.9%, as compared with the year ended March 31, 2020. The increase was primarily due to transaction expenses related to the TRUaire acquisition ($7.8 million) and the formation of a joint venture in our Specialty Chemicals segment ($2.6 million), the inclusion of TRUaire’s operations and employee severance costs ($0.7 million), partially offset by reduced spend on travel and entertainment expenses and a trademark impairment ($1.0 million) in the prior year that did not recur. The increase in operating expense as a percentage of sales was primarily attributable to transaction expenses discussed above.

 

Selling, general and administrative expense for the year ended March 31, 2020 increased $10.1 million, or 10.0%, as compared with the year ended March 31, 2019. The increase was primarily attributable to acquisitions ($3.2 million), and increased employee-related costs, as well as a net increase in trademark impairments and write-offs ($0.6 million). Operating expenses as a percentage of revenues for the year ended March 31, 2020 was comparable to the year ended March 31, 2019, as leverage on increased revenues was partially offset by increased employee-related costs.

 

Operating Income

 

   Year Ended March 31,
   2021   2020   2019 
(Amounts in thousands, except percentages)  ($)   ($)   ($) 
Operating income   59,470    66,067    60,440 
Operating margin   14.2%   17.1%   17.3%

 

 

Operating income for the year ended March 31, 2021 decreased by $6.6 million, or 10.0%, as compared with the year ended March 31, 2020. The decrease was a result of the $14.3 million increase in selling, general and administrative expense, partially offset by the $7.8 million increase in gross profit.

 

Operating income for the year ended March 31, 2020 increased by $5.6 million, or 9.3%, as compared with the year ended March 31, 2019. The increase was a result of the $15.7 million increase in gross profit, partially offset by the $10.1 million increase in selling, general and administrative expense as discussed above.

 

Other Income and Expense

 

Interest expense, net for the year ended March 31, 2021 increased $1.1 million to $2.4 million as compared with the year ended March 31, 2020, due to increased borrowing under our Revolving Credit Facility (described in Note 7 to our consolidated financial statements included in Item 8 of this Annual Report) to fund a portion of the purchase price for the TRUaire acquisition.

 

Interest expense, net for the year ended March 31, 2020 decreased $0.1 million to $1.3 million as compared with the year ended March 31, 2019, primarily due to an overall reduction in average outstanding debt under our Revolving Credit Facility, as well as lower interest rates.

 

Other expense, net decreased by $1.2 million for the year ended March 31, 2021 to expense of $6.0 million as compared with the year ended March 31, 2020. The decrease was primarily due to an indemnification expense of $5.0 million due to the partial release of a tax indemnification asset related to the TRUaire acquisition and loss arising from transactions in currencies other than our sites’ functional currencies, entirely offset by a charge of $6.5 million resulting from the termination of our U.S. defined benefit pension plan and a lease termination cost of $0.5 million in the prior year that did not recur.

 

Other income (expense), net decreased by $9.6 million for the year ended March 31, 2020 to expense of $7.1 million as compared with the year ended March 31, 2019. The decrease was primarily due to a charge of $6.5 million resulting from the termination of our U.S. defined benefit pension plan, $1.8 million of gains on sales of non-operating assets in the prior year that did not recur, and a lease termination cost of $0.5 million.

 

Provision for Income Taxes and Effective Tax Rate

 

The provision for income taxes for the year ended March 31, 2021 was $10.8 million, representing an effective tax rate of 21.2%, as compared with the provision of $12.8 million, representing an effective tax rate of 22.2%, for the year ended March 31, 2020 and the provision of $15.4 million, representing an effective tax rate of 25.0%, for the year ended March 31, 2019. As compared with the statutory rate for the year ended March 31, 2021, the provision for income taxes was primarily impacted by the release of uncertain tax positions, which decreased the provision by $4.7 million and the effective rate by 9.2% offset by the state tax expense (net of federal benefits), which increased the provision by $2.4 million and the effective rate by 4.7% and additional non-deductible expenses, which increased the provision by $1.4 million and the effective rate by 2.8%.

 

As compared with the statutory rate for the year ended March 31, 2020, the provision for income taxes was primarily impacted by the state tax expense (net of federal benefits), which increased the provision by $1.9 million and the effective rate by 3.4%, and the release of uncertain tax positions, which decreased the provision by $1.6 million and the effective rate by 2.8%. Other items impacting the effective tax rate for the prior years include adjustments for the closing of the IRS audit for tax year ended March 31, 2017, foreign withholding tax paid during the tax year ended March 31, 2020 for prior year periods, and the reversal of a pension adjustment related to a former wholly-owned subsidiary for the tax period ended September 30, 2015, in which the statute of limitations expired.

 

We recorded total tax contingency reserves of $17.3 million, including unrecognized tax benefit of $13.6 million, accrued interest and penalty of $1.4 million and $2.3 million, respectively, through purchase accounting as a result of the TRUaire acquisition discussed in Note 2. During the three months ended March 31, 2021, a tax benefit of $5.3 million, including release of accrued interest ($0.6 million) and penalty ($0.6 million), was recognized as a result of receiving the audit closing letter from Internal Revenue Service related to calendar 2017, a pre-acquisition tax year. For the year ended March 31, 2021, the interest and penalties related to the uncertain tax position resulted in a net decrease of $0.9 million in income tax expense. We accrued interest and penalties on uncertain tax positions of $1.0 million and $1.8 million, respectively, as of the year ended March 31, 2021. We recognize accrued interest and penalties related to unrecognized tax benefits within our income tax provision.

 

We are currently under examination by the IRS for a short period return ending September 30, 2015 for a CSWI subsidiary company. Our federal income tax returns for the years ended March 31, 2020, 2019 and 2018 remain subject to examination. Our income tax returns for TRUaire’s pre-acquisiton periods including calendar years 2017, 2018 and 2019 remain subject to examinations. Our income tax returns in certain state income tax jurisdictions remain subject to examination for various periods for the period ended September 30, 2015 and subsequent years.

 

As of both March 31, 2021 and 2020, we had no tax effected operating loss carryforwards net of valuation allowances. Net operating loss carryforwards will expire in periods beyond the next five years.

 

Business Segments

 

We conduct our operations through two business segments based on type of product and how we manage the business. We evaluate segment performance and allocate resources based on each segment’s operating income. The key operating results for our two business segments are discussed below.

 

 

Industrial Products Segment Results

 

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.

 

   Year Ended March 31,
   2021   2020   2019 
(Amounts in thousands, except percentages)  ($)   ($)   ($) 
Revenues, net   289,416    234,895    205,931 
Operating income   55,641    55,725    48,817 
Operating margin   19.2%   23.7%   23.7%

 

Net revenues for the year ended March 31, 2021 increased $54.5 million, or 23.2%, as compared with the year ended March 31, 2020. The increase was primarily due to the TRUaire acquisition ($33.8 million or 14.4%) and organic sales increases ($20.7 million in total or 8.8%) driven by increased sales volumes into the HVAC/R ($20.3 million), architecturally-specified building products ($4.8 million) and plumbing ($1.4 million) end markets, partially offset by decreases in rail ($2.7 million) and general industrial ($3.1 million) end markets.

 

Net revenues for the year ended March 31, 2020 increased $29.0 million, or 14.1%, as compared with the year ended March 31, 2019. The increase was primarily due to recent acquisitions ($15.1 million or 7.3%) and organic sales increases ($13.9 million in total or 6.8%) driven by increased sales volumes into the HVAC/R ($12.0 million) and plumbing ($2.6 million) end markets, partially offset by a decline in the rail ($0.5 million) end market.

 

Operating income for the year ended March 31, 2021 decreased $0.1 million, or 0.2%, as compared with the year ended March 31, 2020. The decrease was primarily attributable to transaction expenses related to the TRUaire acquisition ($7.8 million), partially offset by increased revenues.

 

Operating income for the year ended March 31, 2020 increased $6.9 million, or 14.2%, as compared with the year ended March 31, 2019. The increase was primarily attributable to recent acquisitions ($4.0 million) and increased revenues, partially offset by a $0.5 million gain on the sale of property, plant and equipment in the prior year that did not recur.

 

Specialty Chemicals Segment Results

 

Specialty Chemicals includes pipe thread sealants, firestopping sealants and caulks, adhesives/solvent cements, lubricants and greases, drilling compounds, anti-seize compounds, chemical formulations and degreasers and cleaners.

 

   Year Ended March 31,
   2021   2020   2019 
(Amounts in thousands, except percentages)  ($)   ($)   ($) 
Revenues, net   129,789    150,976    144,224 
Operating income   18,263    24,691    23,930 
Operating margin   14.1%   16.4%   16.6%

 

Net revenues for the year ended March 31, 2021 decreased $21.2  million, or 14.0%, as compared with the year ended March  31, 2020. The decrease was primarily attributable to decreased sales volumes into the energy ($7.5 million), general industrial ($6.0 million), architecturally-specified building products ($2.8 million), rail ($2.7 million) and mining ($1.1 million) end markets.

 

Net revenues for the year ended March 31, 2020 increased $6.8 million, or 4.7%, as compared with the year ended March 31, 2019. The increase was primarily attributable to increased sales volumes into the architecturally-specified building products ($2.1 million), rail ($1.7 million), general industrial ($1.3 million), mining ($1.2 million) and plumbing ($0.6 million) end markets.

 

Operating income for the year ended March 31, 2021 decreased $6.4 million, or 26.0%, as compared with the year ended March 31, 2020. The decrease was primarily attributable to decreased sales and $2.6 million of transaction expenses related to the formation of a joint venture, partially offset by decreases in travel and personnel-related expenses and sales commissions.

 

Operating income for the year ended March 31, 2020 increased $0.8 million, or 3.2%, as compared with the year ended March 31, 2019. The increase was primarily attributable to increased revenues, partially offset by a net decrease in year-over-year gains on sales of property, plant and equipment ($1.4 million) and an increase in net trademark impairments and write-offs ($0.6 million).

 

For additional information on segments, see Note 19 to our consolidated financial statements included in Item 8 of this Annual Report.

 

 

Liquidity and Capital Resources

 

Cash Flow Analysis

 

   Year Ended March 31,
   2021   2020   2019 
(Amounts in thousands)  ($)   ($)   ($) 
Net cash provided by operating activities, continuing operations   66,254    71,397    68,159 
Net cash used in investing activities, continuing operations   (289,889)   (21,982)   (10,415)
Net cash provided by (used in) financing activities   214,049    (57,151)   (39,273)

 

Existing cash, cash generated by operations and borrowings available under our Revolving Credit Facility are our primary sources of short-term liquidity. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. Our sources of operating cash generally include the sale of our products and services and the conversion of our working capital, particularly accounts receivable and inventories. Our cash balance at March 31, 2021 was $10.1 million, as compared with $18.3 million at March 31, 2020.

 

For the year ended March 31, 2021, our cash provided by operating activities from continuing operations was $66.3 million, as compared with $71.4 million and $68.2 million for the years ended March 31, 2020 and 2019, respectively.

 

Working capital used cash for the year ended March 31, 2021 due to higher accounts receivable ($7.2 million), higher prepaid expenses and other current assets ($4.2 million) and higher inventories ($3.4 million), partially offset by higher accounts payable and other current liabilities ($13.9 million).
Working capital provided cash for the year ended March 31, 2020 due to higher accounts payable and other current liabilities ($5.9 million) and lower prepaid expenses and other current assets ($4.0 million), mostly offset by higher accounts receivable ($8.0 million) and higher inventories ($1.7 million).
Working capital used cash for the year ended March 31, 2019 due to higher inventory ($5.5 million) and higher accounts receivable ($3.8 million), partially offset by higher accounts payable and other current liabilities ($5.7 million).

 

Cash flows used in investing activities from continuing operations during the year ended March 31, 2021 were $289.9 million as compared with $22.0 million and $10.4 million for the years ended March 31, 2020 and 2019, respectively.

 

Capital expenditures during the years ended March 31, 2021, 2020 and 2019 were $8.8 million, $11.4 million and $7.5 million, respectively. Our capital expenditures have been focused on enterprise resource planning systems, new product introductions, capacity expansion, continuous improvement, automation and consolidation of manufacturing facilities.
During the year ended March 31, 2021 we acquired TRUaire for $286.9 million (after working capital adjustment) in cash consideration and stock consideration valued at $97.7 million, during the year ended March 31, 2020 we acquired Petersen for $11.8 million, and during the year ended March 31, 2019, we acquired MSD for $10.1 million, net of cash acquired, as discussed in Note 2 to our consolidated financial statements included in Item 8 of this Annual Report.

 

Cash flows used in financing activities during the years ended March 31, 2021, 2020 and 2019 were $214.0 million, $57.2 million and $39.3 million, respectively. Cash outflows resulted from:

 

Repayments on our lines of credit (as discussed in Note 7 to our consolidated financial statements included in Item 8 of this Annual Report) of $23.6 million, $28.1 million and $20.6 million during the years ended March 31, 2021, 2020 and 2019, respectively.
Repurchases of shares under our share repurchase programs (as discussed in Note 11 to our consolidated financial statements included in Item 8 of this Annual Report) of $7.7 million, $26.5 million and $45.6 million during the years ended March 31, 2021, 2020 and 2019, respectively.
Dividend payments of $8.1 million and $8.1 million during the years ended March 31, 2021 and 2020, respectively. No dividends were paid during the years ended March 31, 2019.

 

Cash inflows resulted from borrowings on our Revolving Credit Facility of $255.0 million, $7.5 million and $28.0 million during the years ended March 31, 2021, 2020 and 2019, respectively.

 

We believe that available cash and cash equivalents, cash flows generated through operations and cash available under our Revolving Credit Facility will be sufficient to meet our liquidity needs, including capital expenditures, for at least the next 12 months.

 

Acquisitions and Dispositions

 

We regularly evaluate acquisition opportunities of various sizes. The cost and terms of any financing to be raised in conjunction with any acquisition, including our ability to raise capital, is a critical consideration in any such evaluation. Note 2 to our consolidated financial statements included in Item 8 of this Annual Report contains a discussion of our acquisitions.

 

 

Financing

 

Credit Facilities

 

See Note 7 to our consolidated financial statements included in Item 8 of this Annual Report for a discussion of our indebtedness. We were in compliance with all covenants contained in our Revolving Credit Facility as of March 31, 2021.

 

We have entered into an interest rate swap agreement to hedge our exposure to variable interest payments related to our indebtedness. This agreement is more fully described in Note 9 to our consolidated financial statements included in Item 8 and in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of this Annual Report.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2021, we did not have any off-balance sheet arrangements that we believe have or are reasonably likely to have a material adverse effect on our financial condition or results of operations.

 

Contractual Obligations

 

The following table presents a summary of our contractual obligations for continuing operations at March 31, 2021 (in thousands):

 

   Payments due by Period(a)
   < 1 Year   1-3 Years   3-5 Years   > 5 Years   Total 
    ($)    ($)    ($)    ($)    ($) 
Long-term debt obligations, principal   561    233,122    1,122    7,532    242,337 
Long-term debt obligations, interest   5,113    2,848    354    482    8,797 
Operating lease obligations(b)(c)   9,551    17,919    17,571    26,518    71,559 
Purchase obligations(d)   49,703    1,570            51,273 
TOTAL   64,928    255,459    19,047    34,532    373,966 
(a) The less than one-year category represents the year ended March 31, 2022, the 1-3 years category represents years ending March 31, 2023 and 2024, the 3-5 years category represents years ending March 31, 2025 and 2026 and the greater than five years category represents years ending March 31, 2027 and thereafter.
(b) Sales taxes, value added taxes and goods and services taxes included as part of recurring lease payments, as well as variable maintenance and executory costs, are excluded from the amounts shown above.
(c) Operating lease and purchase obligations denominated in foreign currencies are projected based on the exchange rate in effect on March 31, 2021.
(d) Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancellable without penalty.

 

Critical Accounting Estimates

 

The process of preparing financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions to determine reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of related contingent assets and liabilities. These estimates and assumptions are based upon information available at the time of the estimates or assumptions, including our historical experience, where relevant. The most significant estimates made by management include: timing and amount of revenue recognition; deferred taxes and tax reserves; pension benefits; and valuation of goodwill and indefinite-lived intangible assets, both at the time of initial acquisition, as well as part of recurring impairment analyses, as applicable. The significant estimates are reviewed at least annually, if not quarterly, by management. Because of the uncertainty of factors surrounding the estimates, assumptions and judgments used in the preparation of our financial statements, actual results may differ from the estimates, and the difference may be material.

 

Our critical accounting policies are those policies that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following represent our critical accounting policies. For a summary of all of our significant accounting policies, see Note 1 to our consolidated financial statements included in Item 8 of this Annual Report. Management and our external auditors have discussed our critical accounting estimates and policies with the Audit Committee of our Board of Directors.

 

 

Revenue Recognition

 

We recognize revenues to depict the transfer of control of promised goods or services to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Refer to Note 18 for further discussion. We recognize revenue when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied, which are more fully described below.

 

(i) We identify a contract with a customer when a sales agreement indicates approval and commitment of the parties; identifies the rights of the parties; identifies the payment terms; has commercial substance; and it is probable that we will collect the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer. In most instances, our contract with a customer is the customer’s purchase order. For certain customers, we may also enter into a sales agreement that outlines a framework of terms and conditions that apply to all future purchase orders for that customer. In these situations, our contract with the customer is both the sales agreement and the specific customer purchase order. Because our contract with a customer is typically for a single transaction or customer purchase order, the duration of the contract is one year or less. As a result, we have elected to apply certain practical expedients and, as permitted by the Financial Accounting Standards Board, omit certain disclosures of remaining performance obligations for contracts that have an initial term of one year or less.
   
(ii) We identify performance obligations in a contract for each promised good or service that is separately identifiable from other promises in the contract and for which the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer. Goods and services provided to our customers that are deemed immaterial are included with other performance obligations.
   
(iii) We determine the transaction price as the amount of consideration we expect to be entitled to in exchange for fulfilling the performance obligations, including the effects of any variable consideration.
   
(iv) For any contracts that have more than one performance obligation, we allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which we expect to be entitled in exchange for satisfying each performance obligation. We have excluded disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less as the majority of our contracts are short-term in nature with a term of one year or less.
   
(v) We recognize revenue when, or as, we satisfy the performance obligation in a contract by transferring control of a promised good or service to the customer.

 

We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer. As such, we present revenue net of sales and other similar taxes. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues. Costs to obtain a contract, which include sales commissions recorded in selling, general and administrative expense, are expensed when incurred as the amortization period is one year or less. We do not have customer contracts that include significant financing components.

 

Deferred Taxes and Tax Reserves

 

Deferred tax assets and liabilities are determined based on temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Based on the evaluation of available evidence, both positive and negative, we recognize future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that these benefits are more likely than not to be realized. We base our judgment of the recoverability of our deferred tax assets primarily on historical earnings, our estimate of current and expected future earnings using historical and projected future operating results, and prudent and feasible tax planning strategies.

 

The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Significant judgment is required in determining income tax provisions and evaluating tax positions. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various taxing authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate. Tax benefits recognized in the financial statements from uncertain tax positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. For the year ended March 31, 2021, we had a net increase in our uncertain tax position of $9.7 million. This included an increase of $13.9 million primarily related to uncertain tax positions taken by TRUaire during pre-acquisiton periods, partially offset by a decrease of $4.2 million in uncertain tax positions. For the year ended March 31, 2021, the interest and penalties related to the uncertain tax position resulted in a net decrease of $0.9 million in income tax expense. For the year ended March 31, 2020, we had a net decrease in our uncertain tax position of $1.4 million. This included settlements of $0.2 million, increases of $0.1 million and a release of $1.3 million in federal uncertain tax positions. The interest and penalties related to the uncertain tax position resulted in a reduction of $0.4 million in income tax expense. For the year ended March 31, 2019, we had an immaterial change in our uncertain tax position due to negligible changes from settlements in the current and prior years. Our liability for uncertain tax positions contains uncertainties as management is required to make assumptions and apply judgments to estimate exposures associated with our tax positions.

 

As of March 31, 2021, we are currently under examination by the IRS for a short period return ending September 30, 2015 for a CSWI subsidiary company. Our federal income tax returns for the years ended March 31, 2020, 2019 and 2018 remain subject to examination. Our income tax returns for TRUaire’s pre-acquisiton periods including calendar years 2017, 2018 and 2019 remain subject to examinations. Our income tax returns in certain state income tax jurisdictions remain subject to examination for various periods for the period ended September 30, 2015 and subsequent years.

 

While we believe we have adequately provided for any reasonably foreseeable outcome related to these matters, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities. To the extent that the expected tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made.

 

Goodwill and Indefinite-Lived Intangible Assets

 

The initial recording of goodwill and intangible assets requires subjective judgements concerning estimates of the fair value of the acquired assets. We test the value of goodwill for impairment as of January 31 each year or whenever events or circumstances indicate such asset may be impaired.

 

The test for goodwill impairment involves significant judgement in estimating projections of fair value generated through future performance of each of the reporting units. The identification of our reporting units began at the operating segment level and considered whether components one level below the operating segment levels should be identified as reporting units for purpose of testing goodwill for impairment based on certain conditions. These conditions included, among other factors, (i) the extent to which a component represents a business and (ii) the aggregation of economically similar components within the operating segments. Other factors that were considered in determining whether the aggregation of components was appropriate included the similarity of the nature of the products and services, the nature of the production processes, the methods of distribution and the types of industries served.

 

Accounting Standards Codification (“ASC”) 350 allows an optional qualitative assessment, prior to a quantitative assessment test, to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. We bypassed the qualitative assessment and proceeded directly to the quantitative test. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired and an impairment loss is recorded equal to the excess of the carrying value over its fair value. We estimate the fair value of our reporting units based on an income approach, whereby we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. A discounted cash flow analysis requires us to make various judgmental assumptions about future sales, operating margins, growth rates and discount rates, which are based on our budgets, business plans, economic projections, anticipated future cash flows and market participants. Our quantitative test performed as of January 31, 2021 indicated that no goodwill impairment loss should be recognized for the year ended March 31, 2021. There were no impairment loss recognized for the years ended March 31, 2020 and 2019, respectively.

 

We have indefinite-lived intangible assets in the form of trademarks and license agreements. We test these intangible assets for impairment at least annually as of January 31 or whenever events or circumstances indicate that the carrying amount may not be recoverable. Significant assumptions used in the impairment test include the discount rate, royalty rate, future sales projections and terminal value growth rate. These inputs are considered non-recurring level three inputs within the fair value hierarchy. An impairment loss would be recognized when estimated future cash flows are less than their carrying amount. We recorded impairment losses on intangible assets (excluding those related to discontinued operations) of $0, $1.0 million and $0 for the years ended March 31, 2021, 2020 and 2019, respectively.

 

Accounting Developments

 

We have presented the information about accounting pronouncements not yet implemented in Note 1 to our consolidated financial statements included in Item 8 of this Annual Report.

 

 

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