Item 8: Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of CSW Industrials, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of March 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended March 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of March 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated May 20, 2021 expressed an unqualified opinion.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
As described in Note 2 of the consolidated financial statements, the Company completed its acquisition of T.A. Industries, Inc. (“TRUaire”) for a total purchase price of approximately $384.6 million on December 15, 2020. The Company’s accounting for the acquisition required the estimation of the fair value of assets acquired and liabilities assumed, which included a preliminary purchase price allocation of identifiable intangible assets of $202.5 million to customer lists and $43.5 million to a tradename. We have identified the valuation of customer lists and tradename to be a critical audit matter.
The principal consideration for our determination that the valuation of customer lists and tradename is a critical audit matter is the significant estimation uncertainty involved in determining fair value. The significant assumptions used to estimate the fair value of the identifiable intangible assets included the discount rates, royalty rate, and forecasted revenue growth rates and gross profit margins. These significant assumptions are forward-looking and could be affected by future changes in economic and market conditions and require significant auditor judgment in evaluating the reasonableness of the assumptions.
Our audit procedures related to the valuation of customer lists and tradename included the following, among others. We tested the design and operating effectiveness of the Company’s internal controls over accounting for the TRUaire acquisition, including controls over the recognition and measurement of the customer lists and trade name intangible assets and management’s judgments and evaluation of the underlying assumptions with regard to the valuation model applied.
We evaluated the significant assumptions used by comparing the forecasted revenue growth rates and gross profit margins to current industry and market trends and to the historical results of the acquired TRUaire business. In addition, we involved valuation specialists to assist in our evaluation of the valuation methodology and reasonableness of significant assumptions used by the Company. These procedures included developing a range of independent estimates for the discount rates and royalty rate and comparing those to the rates selected by management as well as performing sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the acquired customer lists and trade name intangible assets that would result from changes in the assumptions.
CSW Industrials, Inc.
Consolidated Balance Sheets
|(Amounts in thousands, except per share amounts)||($)||($)|
|Cash and cash equivalents||10,088||18,338|
|Accounts receivable, net||96,695||74,880|
|Prepaid expenses and other current assets||9,684||3,074|
|Total current assets||214,553||150,045|
|Property, plant and equipment, net||82,554||57,178|
|Intangible assets, net||283,060||46,185|
|LIABILITIES AND EQUITY|
|Accrued and other current liabilities||49,743||36,607|
|Current portion of long-term debt||561||561|
|Total current liabilities||82,748||59,146|
|Retirement benefits payable||1,695||1,879|
|Other long-term liabilities||136,725||21,142|
|Common shares, $0.01 par value |
Shares authorized – 50,000
Shares issued – 16,162 and 16,055, respectively
|Preferred shares, $0.01 par value |
Shares authorized (10,000) and issued (0)
|Additional paid-in capital||104,689||48,327|
|Treasury shares, at cost (511 and 1,311 shares, respectively)||(34,075||)||(75,377||)|
|Accumulated other comprehensive loss||(5,996||)||(11,446||)|
|TOTAL LIABILITIES AND EQUITY||874,957||369,245|
CSW Industrials, Inc.
Consolidated Statements of Operations
|Year Ended March 31,|
|(Amounts in thousands, except per share amounts)||($)||($)||($)|
|Cost of revenues||(234,405||)||(208,821||)||(188,785||)|
|Selling, general and administrative expenses||(125,330||)||(110,032||)||(100,930||)|
|Interest expense, net||(2,383||)||(1,331||)||(1,442||)|
|Other (expense) income, net||(5,969||)||(7,135||)||2,443|
|Income before income taxes||51,118||57,601||61,441|
|Provision for income taxes||(10,830||)||(12,784||)||(15,389||)|
|Income from continuing operations||40,288||44,817||46,052|
|Income (loss) from discontinued operations, net of tax||—||1,061||(478||)|
|Basic earnings (loss) per common share:|
|Diluted earnings (loss) per common share:|
Consolidated Statements of Comprehensive Income
|Year Ended March 31,|
|(Amounts in thousands)||($)||($)||($)|
|Other comprehensive (loss) income:|
|Foreign currency translation adjustments||4,791||(2,316||)||(2,032||)|
|Cash flow hedging activity, net of taxes of $(156), $265 and $72, respectively||587||(996||)||(286||)|
|Pension and other postretirement effects, net of taxes of $(34), $(682) and $177, respectively||72||2,595||(936||)|
|Other comprehensive (loss) income||5,450||(717||)||(3,254||)|
CSW Industrials, Inc.
Consolidated Statements of Equity
|Year Ended March 31,|
|(Amounts in thousands)||($)||($)||($)||($)||($)||($)|
|Balance at March 31, 2018||158||(3,252||)||42,684||233,650||(7,475||)||265,765|
|Adoption of ASU 2016-09||—||—||—||(1,232||)||—||(1,232||)|
|Adoption of ASC 606||—||—||—||(692||)||—||(692||)|
|Adoption of ASU 2018-02||—||—||—||288||—||288|
|Stock activity under stock plans||—||(1,086||)||—||—||—||(1,086||)|
|Repurchase of common shares||—||(45,626||)||—||—||—||(45,626||)|
|Other comprehensive loss, net of tax||—||—||—||—||(3,254||)||(3,254||)|
|Balance at March 31, 2019||158||(49,964||)||46,633||277,588||(10,729||)||263,686|
|Adoption of ASC 842||—||—||—||(206||)||—||(206||)|
|Stock activity under stock plans||1||1,451||(3,432||)||—||—||(1,980||)|
|Repurchase of common shares||—||(26,864||)||—||—||—||(26,864||)|
|Other comprehensive loss, net of tax||—||—||—||—||(717||)||(717||)|
|Balance at March 31, 2020||159||(75,377||)||48,327||315,078||(11,446||)||276,741|
|Stock activity under stock plans||2||(2,812||)||(2||)||—||—||(2,812||)|
|Repurchase of common shares||—||(7,291||)||—||—||—||(7,291||)|
|Reissuance of treasury shares||—||51,405||51,232||—||—||102,637|
|Other comprehensive income, net of tax||—||—||—||—||5,450||5,450|
|BALANCE AT MARCH 31, 2021||161||(34,075||)||104,689||347,234||(5,996||)||412,013|
CSW Industrials, Inc.
Consolidated Statements of Cash Flows
|Year Ended March 31,|
|(Amounts in thousands)||($)||($)||($)|
|Cash flows from operating activities:|
|Less: Income (loss) from discontinued operations, net of tax||—||1,061||(478||)|
|Income from continuing operations||40,288||44,817||46,052|
|Adjustments to reconcile net income to net cash provided by operating activities:|
|Amortization of intangible and other assets||13,843||6,927||6,425|
|Provision for inventory reserves||1,308||(28||)||231|
|Provision for doubtful accounts||696||909||818|
|Share-based and other executive compensation||5,086||5,074||3,949|
|Net gain on disposals of property, plant and equipment||(23||)||(833||)||(4,320||)|
|Pension plan termination expense||—||6,559||—|
|Net pension benefit||163||(121||)||(416||)|
|Impairment of intangible assets||—||951||—|
|Realized deferred taxes (Note 14)||—||—||10,419|
|Net deferred taxes||(1,737||)||537||206|
|Changes in operating assets and liabilities:|
|Prepaid expenses and other current assets||(4,246||)||3,969||725|
|Accounts payable and other current liabilities||13,856||5,884||5,704|
|Retirement benefits payable and other liabilities||(46||)||(1,545||)||(603||)|
|Net cash provided by operating activities, continuing operations||66,254||71,397||68,159|
|Net cash used in operating activities, discontinued operations||—||(1,500||)||(8,449||)|
|Net cash provided by operating activities||66,254||69,897||59,710|
|Cash flows from investing activities:|
|Proceeds from sale of assets held for investment||6,152||—||3,905|
|Proceeds from sale of assets||30||1,292||3,295|
|Cash paid for acquisitions||(287,238||)||(11,837||)||(10,100||)|
|Net cash used in investing activities, continuing operations||(289,889||)||(21,982||)||(10,415||)|
|Net cash provided by investing activities, discontinued operations||—||1,538||7,356|
|Net cash used in investing activities||(289,889||)||(20,444||)||(3,059||)|
CSW Industrials, Inc.
Consolidated Statements of Cash Flows
|Year Ended March 31,|
|(Amounts in thousands)||($)||($)||($)|
|Cash flows from financing activities:|
|Borrowings on lines of credit||255,000||7,500||28,000|
|Repayments of lines of credit||(23,561||)||(28,061||)||(20,561||)|
|Payments of deferred loan costs||(148||)||—||—|
|Purchase of treasury shares||(10,489||)||(28,460||)||(46,712||)|
|Proceeds from stock option activity||1,330||—||—|
|Dividends paid to shareholders||(8,083||)||(8,130||)||—|
|Net cash provided by (used in) financing activities||214,049||(57,151||)||(39,273||)|
|Effect of exchange rate changes on cash and equivalents||1,336||(615||)||(2,433||)|
|Net change in cash and cash equivalents||(8,250||)||(8,313||)||14,945|
|Cash and cash equivalents, beginning of period||18,338||26,651||11,706|
|CASH AND CASH EQUIVALENTS, END OF PERIOD||10,088||18,338||26,651|
|Supplemental non-cash disclosure:|
|Cash paid during the year for interest||1,875||1,165||1,302|
|Cash paid during the year for income taxes||14,021||8,873||2,888|
CSW Industrials, Inc.
Notes to Consolidated Financial Statements
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, ventilation, air conditioning and refrigeration (“HVAC/R”), sealants and high-performance specialty lubricants. Drawing on our innovative and proven technologies, we seek to deliver solutions to our professional customers that require superior performance and reliability. Our diverse product portfolio includes more than 100 highly respected industrial brands including RectorSeal No. 5®, KOPR-KOTE®, KATS Coatings®, Safe-T-Switch®, Air Sentry®, Deacon®, Leak Freeze®, Greco® and TRUaire®.
Our products are well-known in the specific industries we serve and have a reputation for high quality and reliability. Markets that we serve include HVAC/R, architecturally-specified building products, plumbing, energy, rail, mining and general industrial markets.
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.
The consolidated financial position, results of operations and cash flows included in this Annual Report on Form 10-K for the fiscal year ended March 31, 2021 (“Annual 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 process of preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses. We believe our estimates and assumptions are reasonable; however, actual results may differ materially from such estimates. The most significant estimates and assumptions are used in determining:
We consider all highly liquid instruments purchased with original maturities of three months or less and money market accounts to be cash equivalents. We maintain our cash and cash equivalents at financial institutions for which the combined account balances in individual institutions may exceed insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of insurance coverage. We had deposits in domestic banks of $6.1 million and $11.7 million at March 31, 2021 and 2020, respectively, and balances of $4.0 million and $6.6 million were held in foreign banks at March 31, 2021 and 2020, respectively.
Trade accounts receivables are recorded at the invoiced amounts and do not bear interest. We record an allowance for credit losses on trade receivables that, when deducted from the gross trade receivables balance, presents the net amount expected to be collected. We estimate the allowance based on an aging schedule and according to historical losses as determined from our billings and collections history. This may be adjusted after consideration of customer-specific factors such as financial difficulties, liquidity issues or insolvency, as well as both current and forecasted macroeconomic conditions as of the reporting date. We adjust the allowance and recognize credit losses in the income statement each period. Trade receivables are written off against the allowance in the period when the receivable is deemed to be uncollectible. Subsequent recoveries of amounts previously written off are reflected as a reduction to periodic credit losses in the income statement. Our allowance for expected credit losses for short-term receivables as of March 31, 2021 was $0.9 million, compared to $1.2 million as of March 31, 2020. The activity for the year ended March 31, 2021 included write off of trade receivables of $0.7 million for current period adjustments.
Credit risks are mitigated by the diversity of our customer base across many different industries and by performing creditworthiness analyses on our customers. Additionally, we mitigate credit risk through letters of credit and advance payments received from our customers. We do not believe that we have any significant concentrations of credit risk.
Inventories are stated at the lower of cost or net realizable value and include raw materials, supplies, direct labor and manufacturing overhead. Cost is determined using the last-in, first-out (“LIFO”) method for valuing inventories at most of our domestic operations. Our foreign subsidiaries and some domestic operations use either the first-in, first out method or the weighted average cost method to value inventory. Foreign inventories represent approximately 12% and 6% of total inventories as of March 31, 2021 and 2020, respectively.
Reserves are provided for slow-moving or excess and obsolete inventory based on the difference between the cost of the inventory and its net realizable value and by reviewing quantities on hand in comparison with historical and expected future usage. In estimating the reserve for excess or slow-moving inventory, management considers factors such as product aging, current and future customer demand and market conditions.
Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the individual assets. When property, plant and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and the resulting gain or loss is included in income from operations for the period. Generally, the estimated useful lives of assets are:
We review property, plant and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Repairs and maintenance costs are expensed as incurred, and significant improvements that either extend the useful life or increase the capacity or efficiency of property and equipment are capitalized and depreciated.
The value of goodwill is tested for impairment at least annually as of January 31 or whenever events or circumstances indicate such assets may be impaired. 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 it 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 base 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. No goodwill impairment loss was recognized as a result of the impairment tests for the years ended March 31, 2021, 2020 or 2019.
We have intangible assets consisting of patents, trademarks, customer lists and non-compete agreements. Definite-lived intangible assets are assessed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. In addition, we have other trademarks and license agreements that are considered to have indefinite lives. We test indefinite-lived 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 III inputs within the fair value hierarchy. An impairment loss would be recognized when estimated future cash flows are less than their carrying amount. We recorded an impairment of intangible assets of continuing operations of $0, $1.0 million and $0 for the years ended March 31, 2021, 2020 and 2019, respectively.
One of our non-operating subsidiaries holds and manages a non-operating property, which is valued at lower of cost or market and disposed of as opportunities arise to maximize value.
Deferred loan costs related to our credit facility, which are reported in other assets and consist of fees and other expenses associated with debt financing, are amortized over the term of the associated debt using the effective interest method.
Our financial instruments are presented at fair value in our consolidated balance sheets, with the exception of our long-term debt, as discussed in Note 7. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied.
Assets and liabilities recorded at fair value in our consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Hierarchical levels, as defined by Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities. An asset or a liability’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Hierarchical levels are as follows:
|Level I –||Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.|
|Level II –||Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.|
|Level III –||Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.|
Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Recurring fair value measurements are limited to investments in derivative instruments and assets held in defined benefit pension plans. The fair value measurements of our derivative instruments are determined using models that maximize the use of the observable market inputs including interest rate curves and both forward and spot prices for currencies, and are classified as Level II under the fair value hierarchy. The fair values of our derivative instruments are included in Note 9. The fair values of assets held in defined benefit pension plans are discussed in Note 13.
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. As most of our operating leases do not provide an implicit rate, we apply our incremental borrowing rate to determine the present value of remaining lease payments. Our incremental borrowing rate is determined based on information available at the commencement date of the lease. 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 consolidated income statements as the obligation is incurred. As of March 31, 2021, we did not have material leases that imposed significant restrictions or covenants, material related party leases or sale-leaseback arrangements.
We do not use derivative instruments for trading or speculative purposes. We enter into interest rate swap agreements for the purpose of hedging our cash flow exposure to floating interest rates on certain portions of our debt. All derivative instruments are recognized on the balance sheet at their fair values. Changes in the fair value of a designated interest rate swap are recorded in other comprehensive loss until earnings are affected by the underlying hedged item. Any ineffective portion of the gain or loss is immediately recognized in earnings. Upon settlement, realized gains and losses are recognized in interest expense in the consolidated statements of operations.
We discontinue hedge accounting when (1) we deem the hedge to be ineffective and determine that the designation of the derivative as a hedging instrument is no longer appropriate; (2) the derivative matures, terminates or is sold; or (3) occurrence of the contracted or committed transaction is no longer probable or will not occur in the originally expected period. When hedge accounting is discontinued and the derivative remains outstanding, we carry the derivative at its estimated fair value on the balance sheet, recognizing changes in the fair value in current period earnings. If a cash flow hedge becomes ineffective, any deferred gains or losses remain in accumulated other comprehensive loss until the underlying hedged item is recognized. If it becomes probable that a hedged forecasted transaction will not occur, deferred gains or losses on the hedging instrument are recognized in earnings immediately.
We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluations of our counterparties under forward exchange contracts and interest rate swap agreements and expect all counterparties to meet their obligations. If necessary, we adjust the values of our derivative contracts for our or our counterparties’ credit risk.
Determination of pension benefit obligations is based on estimates made by management in consultation with independent actuaries. Inherent in these valuations are assumptions including discount rates, expected rates of return on plan assets, retirement rates, mortality rates and rates of compensation increase and other factors, all of which are reviewed annually and updated if necessary. Current market conditions, including changes in rates of return, interest rates and medical inflation rates, are considered in selecting these assumptions.
|•||Discount rates are estimated using high quality corporate bond yields with a duration matching the expected benefit payments. The discount rate is obtained from a universe of AA-rated non-callable bonds across the full maturity spectrum to establish a weighted average discount rate. Our discount rate assumptions are impacted by changes in general economic and market conditions that affect interest rates on long-term high-quality debt securities, as well as the duration of our plans’ liabilities.|
|•||The expected rates of return on plan assets are derived from reviews of asset allocation strategies, expected future experience for trust asset returns, risks and other factors adjusted for our specific investment strategy. These rates are impacted by changes in general market conditions, but because they are long-term in nature, short-term market changes do not significantly impact the rates. Changes to our target asset allocation also impact these rates.|
Actuarial gains and losses and prior service costs are recognized in accumulated other comprehensive loss as they arise, and we amortize these costs into net pension expense over the remaining expected service period.
We 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 (“FASB”), 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.
R&D costs are expensed as incurred. Costs incurred for R&D primarily include salaries and benefits and consumable supplies, as well as rent, professional fees, utilities and the depreciation of property and equipment used in R&D activities. R&D costs included in selling, general and administrative expense were
$4.5 million, $4.3 million and $4.3 millions for the years ended March 31, 2021, 2020 and 2019, respectively.
Share-based compensation is measured at the grant-date fair value. The exercise price of stock option awards and the fair value of restricted share awards are set at the closing price of our common stock on the Nasdaq Global Select Market on the date of grant, which is the date such grants are authorized by our Board of Directors. The fair value of performance-based restricted share awards is determined using a Monte Carlo simulation model incorporating all possible outcomes against the Russell 2000 Index. The fair value of share-based payment arrangements is amortized on a straight-line basis to compensation expense over the period in which the restrictions lapse based on the expected number of shares that will vest. To cover the exercise of options and vesting of restricted shares, we generally issue new shares from our authorized but unissued share pool, although we may instead issue treasury shares in certain circumstances.
We apply the liability method in accounting and reporting for income taxes. Under the liability approach, deferred tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax rates expected to be in effect when these differences are expected to reverse. The effect on deferred tax assets and liabilities resulting from a change in tax rates is recognized in the period that includes the enactment date. The deferred income tax assets are adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent, based on available evidence, that it is more likely than not to be realized. This analysis is performed on a jurisdictional basis and reflects our ability to utilize these deferred tax assets through a review of past, current and estimated future taxable income in addition to the establishment of viable tax strategies that will result in the utilization of the deferred assets.
We recognize income tax related interest and penalties, if any, as a component of income tax expense.
During the fiscal quarter ended March 31, 2019, we lifted our assertion that the earnings of our United Kingdom (“U.K.”) and Australian subsidiaries were indefinitely invested outside of the U.S. During the fiscal quarter ended September 30, 2020, we lifted our assertion that the earnings of our Jet Lube Canada subsidiary were indefinitely invested outside of the U.S. We assert that the foreign earnings of the U.K., Australian, Vietnam and Jet Lube Canada subsidiaries will be remitted to the U.S. through distributions. We still consider the earnings of our other Canadian subsidiaries indefinitely invested outside the U.S. as we have needs for working capital in our other Canadian entities. A provision was made for taxes that may become payable upon distribution of earnings from our U.K., Australian, Vietnam and Jet Lube Canada subsidiaries.
We establish income tax liabilities to remove some or all of the income tax benefit of any of our income tax positions based upon one of the following: (1) the tax position is not “more likely than not” to be sustained, (2) the tax position is “more likely than not” to be sustained, but for a lesser amount or (3) the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. The amount of income taxes we pay is subject to ongoing audits by federal, state, and foreign taxing authorities, which often result in proposed assessments. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various taxing authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
We use the two-class method of calculating earnings per share, which determines earnings per share for each class of common stock and participating security as if all earnings of the period had been distributed. If the holders of restricted stock awards are entitled to vote and receive dividends during the restriction period, unvested shares of restricted stock qualify as participating securities and, accordingly, are included in the basic computation of earnings per share. Our unvested restricted shares participate on an equal basis with common shares; therefore, there is no difference in undistributed earnings allocated to each participating security. Accordingly, the presentation in Note 10 is prepared on a combined basis and is presented as earnings per common share. Diluted earnings per share is based on the weighted average number of shares as determined for basic earnings per share plus shares potentially issuable in conjunction with stock options.
Assets and liabilities of our foreign subsidiaries are translated to U.S. dollars at exchange rates prevailing at the balance sheet date, while income and expenses are translated at average rates for each month. Translation gains and losses are reported as a component of accumulated other comprehensive loss. Transactional currency gains and losses arising from transactions in currencies other than our sites’ functional currencies are included in our consolidated statements of operations.
Transaction and translation gains and losses arising from intercompany balances are reported as a component of accumulated other comprehensive loss when the underlying transaction stems from a long-term equity investment or from debt designated as not due in the foreseeable future. Otherwise, we recognize transaction gains and losses arising from intercompany transactions as a component of income.
We conduct our operations through two business segments based on type of product and how we manage the business. The products for our segments are distributed both domestically and internationally. For decision-making purposes, our Chief Executive Officer and other members of senior executive management use financial information generated and reported at the reportable segment level. We evaluate segment performance and allocate resources based on each reportable segment’s operating income. Our reportable segments are as follows:
|•||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.|
|•||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.|
Intersegment sales and transfers are recorded at cost plus a profit margin, with the revenues and related margin on such sales eliminated in consolidation. We do not allocate interest expense, interest income or other income, net to our segments. Our corporate headquarters does not constitute a separate segment. The Eliminations and Other segment information is included to reconcile segment data to the consolidated financial statements and includes assets and expenses primarily related to corporate functions and excess non-operating properties.
During the third quarter of the fiscal year ended March 31, 2019, we committed to a plan to divest our Strathmore products business (the “Coatings business”). This determination resulted in the reclassification of the assets and liabilities 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.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” The ASU requires, among other things, the use of a new current expected credit loss model in order to determine an allowance for credit losses with respect to financial assets and instruments held. The CECL model requires that we estimate the lifetime of an expected credit loss for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. On April 1, 2020, we adopted the ASU on a prospective basis to determine our allowance for credit losses in accordance with the requirements of Topic 326, and we modified our accounting policy and processes to facilitate this approach. Our primary exposure to financial assets that are within the scope of CECL are trade receivables. Our adoption of ASU No. 2016-13 effective April 1, 2020 did not have a material impact on our condensed consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments of the ASU modify the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosure requirements for assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to the financial statements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures were adopted on a retrospective basis and the new disclosures were adopted on a prospective basis. Our adoption of ASU No. 2018-13 effective April 1, 2020 did not impact our disclosures.
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. We have adopted the standard and the required disclosure are reflected on our annual disclosures of the Company’s defined benefit plans.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The ASU addresses how entities should account for costs associated with implementing a cloud computing arrangement that is considered a service contract. Per the amendments of the ASU, implementation costs incurred in a cloud computing arrangement that is a service contract should be accounted for in the same manner as implementation costs incurred to develop or obtain software for internal use as prescribed by guidance in ASC 350-40. The ASU requires that implementation costs incurred in a cloud computing arrangement be capitalized rather than expensed. Further, the ASU specifies the method for the amortization of costs incurred during implementation, and the manner in which the unamortized portion of these capitalized implementation costs should be evaluated for impairment. The ASU also provides guidance on how to present such implementation costs in the financial statements and also creates additional disclosure requirements. The amendments are effective for fiscal years beginning after December 15, 2019. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Our adoption of ASU No. 2018-15 effective April 1, 2020 did not have an impact on our condensed consolidated financial condition and results of operations.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes.” The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions and adding some requirements regarding franchise (or similar) tax, step-ups in a business combination, treatment of entities not subject to tax and when to apply enacted changes in tax laws. This ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. Early adoption is permitted. Our initial assessment of this ASU indicates it will not have a material impact on our consolidated financial condition and results of operations, but our assessment is not complete.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and LIBOR. In the U.S., the Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to LIBOR. This ASU includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This ASU is effective immediately; however, it is only available through December 31, 2022. The adoption is not expected to have a significant impact on our consolidated financial condition and results of operations.
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 contractual consideration paid for TRUaire included cash of $284 million ($286.9 million after working capital and closing cash adjustments) and 849,852 shares of the Company’s common stock (valued at approximately $76.0 million at transaction signing on November 4, 2020) valued at $97.7 million at transaction close based on the closing market price of the Company’s common shares on the acquisition date. The cash consideration was funded through a combination of cash on hand and borrowings under our revolving credit facility. The 849,852 shares of common stock delivered to the sellers as consideration were reissued from treasury shares.
|(a)||Amount includes working capital and closing cash adjustments, and excludes the $1.2 million received by the Company on April 1, 2021 as a result of the final working capital true-up adjustment pursuant to the purchase agreement.|
The TRUaire acquisition was accounted for as a business combination under FASB Accounting Standards Codification Topic 805, Business Combinations (“Topic 805”). Pursuant to Topic 805, the Company allocated the TRUaire purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, December 15, 2020. The excess of the purchase price over those fair values was recorded to goodwill. The Company’s evaluation of the facts and circumstances available as of the acquisition date, to assign fair values to assets acquired and liabilities assumed, including income tax related amounts, is ongoing. As we complete further analysis of tangible assets, intangible assets and liabilities assumed, additional information impacting the assets acquired and the related allocation thereof, may become available. A change in information related to the net assets acquired may change the amount of the purchase price assigned to goodwill, and, as a result, the preliminary fair values set forth below are subject to adjustments when additional information is obtained and valuations are completed. Provisional adjustments, if any, will be recognized during the reporting period in which the adjustments are determined. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date. The following table summarizes the Company’s best initial estimate of the aggregate fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands).
|Initial Estimated Fair|
|Accounts Receivable, net||13,467||—||13,467|
|Short-Term Tax Indemnity Assets||5,000||—||5,000|
|Other Current Assets||1,285||1,041||2,326|
|Property, Plant and Equipment||28,832||(3,065||)||25,767|
|Trade Name (indefinite life)||43,500||—||43,500|
|Customer Lists (useful life of 15 years)||194,000||8,500||202,500|
|Long-Term Tax Indemnity Assets||7,500||—||7,500|
|Other Long-term Assets||2,850||402||3,252|
|Accrued and Other Current Liabilities||(3,678||)||(1,395||)||(5,073||)|
|Lease Liabilities - Short-Term||(4,811||)||—||(4,811||)|
|Deferred Tax Liabilities||(56,249||)||(6,912||)||(63,161||)|
|Tax Contingency Reserve||(22,511||)||5,190||(17,321||)|
|Lease Liabilities - Long-Term||(45,369||)||—||(45,369||)|
|Estimated fair value of net assets acquired||256,566||2,461||259,027|
|TOTAL PURCHASE PRICE||385,735||(1,154||)||384,581|
Deferred tax liabilities were established to record the deferred tax impact of purchase price accounting adjustments, primarily related to intangibles assets. Tax contingency reserves relate to uncertain tax positions TRUaire took in the periods prior to the acquisition date.
In accordance with the tax indemnification included in the purchase agreement of TRUaire, the seller has provided contractual indemnification to the Company for up to $12.5 million related to uncertain tax positions taken in prior years. The outcome of this arrangement will either be settled or expire by 2023. During the three months ended March 31, 2021, TRUaire received an audit closing letter from Internal Revenue Service related to calendar 2017, a pre-acquisition tax year. As a result of this, the relevant tax indemnification asset of $5.0 million was released in accordance with the purchase agreement. The release of the relevant uncertain tax position accrual of $5.3 million was recorded as an income tax benefit for the three months ended March 31, 2021, and the offsetting indemnification expense of $5.0 million was recorded in other expense on the consolidated statement of operations. As of March 31, 2021, approximately $7.5 million of the indemnification assets remained outstanding.
Goodwill of $125.6 million represents the excess of the purchase price over the fair value of the underlying tangible and intangible assets acquired and liabilities assumed. The acquisition goodwill represents the value expected to be obtained from expanding the Company’s product offerings more broadly across the HVAC end market. The goodwill recorded as part of this acquisition is included in the Industrial Products segment. The goodwill associated with the acquisition will not be amortized for financial reporting purposes and will not be deductible for income tax purposes.
TRUaire generated net revenue of $33.8 million and a net loss before income taxes of $0.4 million for the period from the acquisition date to March 31, 2021. The loss before income taxes includes amortization expenses related to the acquired customer lists ($3.9 million), the fair value step-up of the inventory ($3.5 million), the indemnification expense of $5.0 million discussed above, and excludes the transaction expenses discussed below. TRUaire activity has been included in our Industrial Products segment since the acquisition date. During the year ended March 31, 2021, the Company incurred and paid $7.8 million of transaction expenses in connection with the TRUaire acquisition, which are included in selling, general and administrative expenses in the Consolidated Statement of Operations.
Pursuant to Topic 805, unaudited supplemental proforma results of operations for the year ended March 31, 2021 and 2020, as if the acquisition of TRUaire had occurred on April 1, 2019 are presented below (in thousands, except per share amounts):
These proforma results do not present financial results that would have been realized had the acquisition occurred on April 1, 2019, nor are they intended to be a projection of future results. The unaudited proforma results include certain proforma adjustments to net income that were directly attributable to the acquisition, as if the acquisition had occurred on April 1, 2019, including the following:
|•||Transactions expenses of $0 and $7.8 million for the years ended March 31, 2021 and 2020, respectively, that would have been recognized by the Company related to the TRUaire acquisition;|
|•||Additional depreciation expense of $0.4 million and $0.6 million for the years ended March 31, 2021 and 2020, respectively, that would have been recognized as a result of the fair value step-up of the property, plant and equipment;|
|•||Additional amortization expense of $0 and $7.9 million for the years ended March 31, 2021 and 2020, respectively, that would have been recognized as a result of the fair value step-up of the inventory;|
|•||Additional amortization expense of $9.6 million and $13.5 million for the years ended March 31, 2021 and 2020, respectively, that would have been recognized as a result of the allocation of purchase consideration to customer lists subject to amortization;|
|•||Estimated additional interest expense of $3.2 million and $4.5 million for the years ended March 31, 2021 and 2020, respectively, as a result of incurring additional borrowing;|
|•||Income tax effect of the proforma adjustments calculated using a blended statutory income tax rate of 24.5% of $3.2 million and $8.4 million for the years ended March 31, 2021 and 2020, respectively.|
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 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.
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 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.
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 former Coatings business manufactured specialized industrial coatings 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 consolidated balance sheets, and as discontinued operations, net of tax in the accompanying consolidated statements of operations 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 quarter ended December 31, 2017. No adjustments to previously recorded estimates have been made subsequently.
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 quarter ended September 30, 2018, we received an aggregate of $6.9 million for the sale of assets that 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.
On March 17, 2020, we completed the sale of the last remaining real property owned by the Coatings business to an unrelated third party, the terms of which were not disclosed due to immateriality. The sale resulted in proceeds and a gain on disposal of $1.5 million due to write-downs of long-lived assets in prior periods. The last remaining asset of the Coatings business is a long-term lease that expires in March 2027. We have not terminated the lease, but we have sub-let the property for the remainder of the lease term. As such, this lease has been moved back into continuing operations, effective March 31, 2020, and the related ROU assets and lease liabilities were reported as continuing operations as of March 31, 2020.
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. Discontinued operations reported no assets or liabilities as of March 31, 2021 and 2020, respectively, in the consolidated balance sheets.
Summarized selected financial information for the Coatings business for the years ended March 31, 2021, 2020 and 2019, is presented in the following table (in thousands):
The changes in the carrying amount of goodwill for the years ended March 31, 2021 and 2020 were as follows (in thousands):
|Balance at April 1, 2019||54,732||31,563||86,295|
|Balance at March 31, 2020||60,123||31,563||91,686|
|T.A. industries acquisition||125,554||—||125,554|
|BALANCE AT MARCH 31, 2021||187,232||31,563||218,795|
The following table provides information about our intangible assets for the years ended March 31, 2021 and 2020 (in thousands, except years):
|March 31, 2021||March 31, 2020|
|Finite-lived intangible assets:||Wtd Avg Life|
|Customer lists and amortized trademarks||14||267,096||(42,345||)||62,806||(33,098||)|
|TRADE NAMES AND TRADEMARKS NOT BEING AMORTIZED(a):||54,594||—||11,027||—|
|(a)||In the fiscal quarter ended March 31, 2020, we recorded an impairment of $1.0 million on one of our unamortized trademarks in our Specialty Chemicals segment.|
Amortization expense for the years ended March 31, 2021, 2020 and 2019 was $10.5 million, $6.7 million and $6.2 million, respectively. The following table presents the estimated future amortization of finite-lived intangible assets for the next five fiscal years ending March 31 (in thousands):
We maintain the shareholder-approved 2015 Equity and Incentive Compensation Plan (the “2015 Plan”), which provides for the issuance of up to 1,230,000 shares of CSWI common stock through the grant of stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units or other share-based awards, to employees, officers and non-employee directors. As of March 31, 2021, 675,113 shares were available for issuance under the 2015 Plan.
We recorded share-based compensation expense as follows for the years ended March 31, 2021, 2020 and 2019 (in thousands):
Stock option activity, which represents outstanding CSWI awards resulting from conversion awards held by current and former Capital Southwest employees, was as follows:
|Year Ended March 31, 2021|
|Average Exercise||Remaining||Intrinsic Value|
|Number of||Price||Contractual Life||(in Millions)|
|Outstanding at April 1, 2020||115,858||25.30|
|Outstanding at March 31, 2021(a)||63,413||25.23||3.4||7.0|
|EXERCISABLE AT MARCH 31, 2021(a)||63,413||25.23||3.4||7.0|
|(a)||All remaining awards outstanding and exercisable at March 31, 2021 are held by employees of CSWI.|
|Year Ended March 31, 2020|
|Average Exercise||Remaining||Intrinsic Value|
|Number of||Price||Contractual Life||(in Millions)|
|Outstanding at April 1, 2019||231,717||25.12|
|Outstanding at March 31, 2020||115,858||25.30||4.1||4.6|
|EXERCISABLE AT MARCH 31, 2020||115,858||25.30||4.1||4.6|
No options were granted during the years ended March 31, 2021, 2020 and 2019, and all stock options were vested and recognized as of March 31, 2021. The intrinsic value of options exercised during the years ended March 31, 2021, 2020 and 2019 was $2.5 million, $5.6 million and $0, respectively. Cash received for options exercised during the years ended March 31, 2021, 2020 and 2019 was $1.3 million, $2.9 million and $0, respectively, and the tax benefit received was $0.4 million, $1.2 million and $0, respectively. The total fair value of stock options vested during the years ended March 31, 2021, 2020 and 2019 was $0, $0 and $0.1 million, respectively.
|(a)||All remaining awards outstanding and exercisable at March 31, 2021 are held by employees of CSWI.|
During the restriction period, the holders of restricted shares are entitled to vote and receive dividends. Unvested restricted shares outstanding as of March 31, 2021 and 2020 included 82,728 and 93,249 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, and 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. We granted 34,245 and 31,758 awards with performance-based vesting provisions during the years ended March 31, 2021 and 2020, respectively, with a vesting range of 0-200%.
At March 31, 2021, we had unrecognized compensation cost related to unvested restricted shares of $6.9 million, which will be amortized into net income over the remaining weighted average vesting period of 1.9 years. The total fair value of restricted shares vested during the years ended March 31, 2021 and 2020 was $8.5 million and $6.3 million, respectively.
|Land and improvements||3,168||3,106|
|Buildings and improvements||53,020||44,612|
|Plant, office and laboratory equipment||95,848||72,652|
|Construction in progress||3,462||8,163|
|Less: Accumulated depreciation||(72,944||)||(71,355||)|
|PROPERTY, PLANT AND EQUIPMENT, NET||82,554||57,178|
Depreciation of property, plant and equipment was $9.2 million, $7.9 million and $7.5 million for the years ended March 31, 2021, 2020 and 2019, respectively. Of these amounts, cost of revenues includes $7.1 million, $6.6 million and $6.1 million, respectively.
|(a)||As of March 31, 2021 and 2020, $0.5 million and $5.9 million in assets were held for sale, respectively, in the “Elimination and Other” segment.|
|Compensation and related benefits||19,120||18,666|
|Rebates and marketing agreements||9,031||6,409|
|Operating lease liabilities||8,063||3,056|
|Billings in excess of costs||1,463||2,892|
|Income taxes payable||3,755||529|
|Other accrued expenses||6,718||4,305|
|ACCRUED AND OTHER CURRENT LIABILITIES||49,743||36,607|
On December 11, 2015, we entered into a five-year $250.0 million revolving credit facility agreement (“Revolving Credit Facility”), with an additional $50.0 million accordion feature, with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. The agreement was amended on September 15, 2017 to allow for multi-currency borrowing with a $125.0 million sublimit and to extend the maturity date to September 15, 2022. The interest rate, financial covenants and all other material provisions of the Revolving Credit Facility were not materially changed by this amendment. On December 1, 2020, the Company entered into an amendment of the Revolving Credit Facility to utilize the accordion feature, thus increasing the commitment from $250.0 million to $300.0 million, and hence eliminating the available incremental commitment by a corresponding amount. On March 10, 2021, the Revolving Credit Facility was amended to facilitate the formation and future operation of the joint venture discussed in Note 21.
Borrowings under the Revolving Credit Facility bore interest at a rate of prime plus 1.00% or London Interbank Offered Rate (“LIBOR”) plus 2.00%. We also paid a commitment fee of 0.30% 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 our assets. As of March 31, 2021 and 2020, we had $232.0 million and $0, respectively, in outstanding borrowings under the Facility, which resulted in a borrowing capacity of $68.0 million and $300.0 million, respectively, inclusive of the accordion feature. The Revolving Credit Facility contained certain customary restrictive covenants, including a requirement to maintain a minimum fixed charge coverage of ratio of 1.25 to 1.00 and a maximum leverage ratio of funded debt to EBITDA (as defined in the agreement) of 3.75 to 1.00. Covenant compliance is tested quarterly and we were in compliance with all covenants as of March 31, 2021.
On May 18, 2021, we entered into a Second Amended and Restated Credit Agreement (the “Second Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, the “Administrative Agent”) and collateral agent, and the lenders, issuing banks and swingline lender party thereto. CSW Industrials Holdings, LLC, a wholly-owned subsidiary of the Company (the “Borrower”), is the borrower under the Second Credit Agreement. The Second Credit Agreement provides for a $400.0 million revolving credit facility that contains a $25.0 million sublimit for the issuance of letters of credit and a $10.0 million sublimit for swingline loans. The Second Credit Agreement is scheduled to mature on May 18, 2026.
Borrowings under the Second Credit Agreement bear interest, at the Borrower’s option, at either base rate or LIBOR, plus, in either case, an applicable margin based on the Company’s leverage ratio calculated on a quarterly basis. The base rate is described in the Second Credit Agreement as the highest of (i) the Federal funds effective rate plus 0.50%, (ii) the prime rate quoted by The Wall Street Journal, and (iii) the one-month LIBOR rate plus 1.00%.
Borrowings under the Second Credit Agreement may be used for working capital and general corporate purposes, including, without limitation, for financing permitted acquisitions and fees and expenses incurred in connection therewith.
The obligations of the Borrower under the Second Credit Agreement are guaranteed by the Company and all of its direct and indirect domestic subsidiaries. The Second Credit Agreement is secured by a first priority lien on all tangible and intangible assets and stock issued by the Borrower and its domestic subsidiaries, subject to specified exceptions, and 65% of the voting equity interests in its first-tier foreign subsidiaries.
The financial covenants contained in the Second Credit Agreement require the maintenance of a maximum Leverage Ratio of 3.00 to 1.00, subject to a temporary increase to 3.75 to 1.00 for 18 months following the consummation of permitted acquisitions with consideration in excess of certain threshold amounts set forth in the Second Credit Agreement, and the maintenance of a minimum Fixed Charge Coverage Ratio of 1.25 to 1.00, the calculations and terms of which are defined in the Second Credit Agreement. The Second Credit Agreement also contains (i) affirmative and negative covenants which are customary for similar credit agreements, including, without limitation, limitations on the Company, the Borrower and its subsidiaries with respect to indebtedness, liens, investments, distributions, mergers and acquisitions, disposition of assets and transactions with affiliates, and (ii) customary events of default.
As of March 31, 2021, Whitmore Manufacturing, LLC (one of our wholly-owned operating subsidiaries) maintained a secured term loan related to the warehouse, corporate office building and remodel of the existing manufacturing and R&D facility. The term loan matures on July 31, 2029, with payments of $140,000 due each quarter. Borrowings under the term loan bear interest at a variable annual rate equal to one-month LIBOR plus 2.0%. As of March 31, 2021 and 2020, Whitmore had $10.3 million and $10.9 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.
We have operating leases for manufacturing facilities, offices, warehouses, vehicles and certain equipment. Our leases have remaining lease terms of 1 year to 27 years, some of which include escalation clauses and/or options to extend or terminate the leases.
In October 2019, we terminated two operating leases and paid an early lease termination fee of $0.5 million. The loss on early termination is recorded in other income (expense), net as the leased properties were not used in our operations.
|(a)||Included in our condensed consolidated statement of cash flows, operating activities in accounts payable and other current liabilities|
We enter into interest rate swap agreements to hedge exposure to floating interest rates on certain portions of our debt. As of March 31, 2021 and 2020, we had $10.3 million and $10.9 million, respectively, of notional amount in outstanding designated interest rate swaps with third parties. All interest rate swaps are highly effective. At March 31, 2021, the maximum remaining length of any interest rate swap contract in place was approximately 8.3 years.
The fair value of interest rate swaps designated as hedging instruments are summarized below (in thousands):
Current derivative assets are reported in our consolidated balance sheets in prepaid expenses and other current assets. Current and non-current derivative liabilities are reported in our consolidated balance sheets in accrued and other current liabilities and other long-term liabilities, respectively.
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings per share for the years ended March 31, 2021, 2020 and 2019:
|(amounts in thousands, except per share data)||($)||($)||($)|
|Income from continuing operations||40,288||44,817||46,052|
|Income (loss) from discontinued operations, net of tax||—||1,061||(478||)|
|WEIGHTED AVERAGE SHARES:|
|Denominator for basic earnings per common share||15,015||15,039||15,414|
|Potentially dilutive securities||111||167||118|
|DENOMINATOR FOR DILUTED EARNINGS PER COMMON SHARE||15,126||15,206||15,532|
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. 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. During the year ended March 31, 2019, we repurchased 629,659 shares of our common stock under this program for an aggregate amount of $33.8 million.
On November 7, 2018, we announced that our Board of Directors authorized a program to repurchase up to $75.0 million of our common stock over a two-year time period. On October 30, 2020, we announced that our Board of Directors authorized a new program to repurchase up to $100.0 million of our common stock, which replaced the previously announced $75.0 million program. Under the newly-authorized program, shares may be repurchased from time to time in the open market or in privately negotiated transactions. Repurchases will be made 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. Our Board of Directors has established an expiration of December 31, 2022 for completion of the new repurchase program; however, the program may be limited or terminated at any time at our discretion without notice. We repurchased 115,151 and 393,836 shares under the prior $75.0 million program during the years ended March 31, 2021 and 2020, respectively, for an aggregate amount of $7.3 million and $26.9 million, respectively. No shares were repurchased under the $100.0 million program during the year ended March 31, 2021.
On April 4, 2019, we announced we had commenced a dividend program and that our Board of Directors approved a regular quarterly dividend of $0.135 per share. Total dividends of $8.1 million and $8.1 million were paid during the years ended March 31, 2021 and 2020, respectively.
On April 15, 2021, we announced a quarterly dividend of $0.150 per share payable on May 14, 2021 to shareholders of record as of April 30, 2021. Any future dividends at the existing $0.150 per share quarterly rate or otherwise will be reviewed individually and declared by our Board of Directors in its discretion.
The fair value of interest rate swaps discussed in Note 9 are determined using Level II inputs. The carrying value of our debt, included in Note 7, approximates fair value as it bears interest at floating rates. The carrying amounts of other financial instruments (i.e., cash and cash equivalents, accounts receivable, net, accounts payable) approximated their fair values at March 31, 2021 and 2020 due to their short-term nature.
We had a frozen qualified defined benefit pension plan (the “Qualified Plan”) that covered certain of our U.S. employees. The Qualified Plan was previously closed to employees hired or re-hired on or after January 1, 2015, and it was amended to freeze benefit accruals and to modify certain ancillary benefits effective as of September 30, 2015. Benefits were based on years of service and an average of the highest five consecutive years of compensation during the last ten years of employment. The funding policy of the Qualified Plan was to contribute annual amounts that are currently deductible for federal income tax purposes. No contributions were made during the years ended March 31, 2021, 2020 or 2019. During the year ended March 31, 2018, we offered lump sum payments to terminated vested participants, representing approximately 16% of our liability. Approximately 67% of those participants accepted the lump sum offer for an aggregate payment of $7.3 million. During the six months ended September 30, 2019, we offered lump sum payments to eligible active and terminated vested participants, representing approximately 42% of our remaining 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 initially 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. After the participant data for the annuity purchase contract was finalized in the fiscal fourth quarter ended March 31, 2020, the Qualified Plan had excess funds of $0.5 million, which were distributed into the Defined Contribution Plan discussed below.
We maintain a frozen unfunded retirement restoration plan (the “Restoration Plan”) that is a non-qualified plan providing for the payment to participating employees, upon retirement, of the difference between the maximum annual payment permissible under the Qualified Plan pursuant to federal limitations and the amount that would otherwise have been payable under the Qualified Plan. As with the Qualified Plan, the Restoration Plan was closed to new participants on January 1, 2015 and amended to freeze benefit accruals and to modify certain ancillary benefits effective as of September 30, 2015.
We maintain a registered defined benefit pension plan (the “Canadian Plan”) that covers all of our employees based at our facility in Alberta, Canada. Employees are eligible for membership in the plan following the completion of one year of employment. Benefits accrue to eligible employees based on years of service and an average of the highest 60 consecutive months of compensation during the last 10 consecutive years of employment. Benefit eligibility typically occurs upon the first day of the month following an eligible employee’s reaching age 65, and plan benefits are typically paid monthly in advance for the lifetime of the participant.
The plans described above (collectively, the “Plans”) are presented in aggregate as the impact of the Restoration Plan and Canadian Plan to our consolidated financial position and results of operations is not material.
|Assumptions used to determine benefit obligations:|
|Rate of compensation increases(a)||3.0||%||3.0||%||3.0||%|
|Assumptions used to determine net pension expense:|
|Expected return on plan assets||4.8||%||4.8||%||4.6||%|
|Rate of compensation increases(a)||3.0||%||3.0||%||3.0||%|
|(a)||Rate of compensation increase is no longer relevant to the Restoration Plan due to freezing benefit accruals. The rate of compensation increase on the Canadian Plan is $3.0%.|
|Year Ended March 31,|
|Service cost – benefits earned during the year||40||71||76|
|Interest cost on projected benefit obligation||144||1,136||2,113|
|Expected return on assets||(96||)||(1,361||)||(2,656||)|
|Net amortization and deferral||74||56||47|
|Pension plan termination(a)||—||6,472||—|
|NET PENSION EXPENSE (BENEFIT)||162||6,374||(420||)|
The estimated prior service costs and the estimated net loss for the Plans that will be amortized from accumulated other comprehensive loss into pension expense in the year ended March 31, 2022 is $0.1 million.
|Benefit obligation at beginning of year||3,880||53,993|
|Pension plan termination(a)||—||(54,605||)|
|Currency translation impact||280||(121||)|
|BENEFIT OBLIGATION AT END OF YEAR||4,291||3,880|
|ACCUMULATED BENEFIT OBLIGATION||3,990||3,690|
|Fair value of plan assets at beginning of year||1,898||55,009|
|Actual return on plan assets||441||3,093|
|Pension plan termination(a)||—||(54,605||)|
|Currency translation impact||243||(101||)|
|FAIR VALUE OF PLAN ASSETS AT END OF YEAR||2,492||1,898|
We contributed $0.1 million to the Canadian Plan in the year ended March 31, 2021 and estimate that our contribution in the year ending March 31, 2022 will be $0.1 million.
The following table presents the change in accumulated other comprehensive loss attributable to the components of the net cost and the change in the benefit obligation:
|Accumulated other comprehensive loss at beginning of year||(871||)||(3,466||)|
|Amortization of net loss||62||47|
|Amortization of prior service benefit (cost)||(31||)||21|
|Pension plan termination(a)||—||2,516|
|Net gain (loss) arising during the year||96||(17||)|
|Currency translation impact||(55||)||28|
|ACCUMULATED OTHER COMPREHENSIVE LOSS AT END OF YEAR||(799||)||(871||)|
|(a)||Reflects impact of the termination of the Qualified Plan, including changes in assumptions resulting from the termination.|
The Canadian Plan assets, which account for 100% of total assets, are invested in other investments, as described below. The actual asset allocations for the Plans were as follows:
The Canadian Plan has investments of $2.5 million in a mutual fund that aims to provide a return derived from both income and capital appreciation by investing in a diversified portfolio of Canadian and foreign equity as well as fixed-income securities. This mutual fund is considered to have Level II inputs in the fair value hierarchy.
The following table summarizes the expected cash benefit payments for the Plans for fiscal years ending March 31 (in millions):
Effective October 1, 2015, we began to sponsor a defined contribution plan covering substantially all of our U.S. employees. Employees may contribute to this plan, and these contributions are matched 100% by us up to 6.0% of eligible earnings. We also contribute an additional percentage of eligible earnings to employees regardless of their level of participation in the plan, which is discretionary and subject to adjustment based on profitability. We made discretionary contributions of $3.9 million and $4.0 million during the years ended March 31, 2021 and 2020, respectively.
We sponsor a qualified, non-leveraged employee stock ownership plan (“ESOP”) in which domestic employees are eligible to participate following the completion of one year of service.
The ESOP provides annual discretionary contributions of up to the maximum amount that is deductible under the Internal Revenue Code. Contributions to the ESOP are invested in our common stock. A participant’s interest in contributions to the ESOP fully vests after three years of credited service or upon retirement, permanent disability (each, as defined in the plan document) or death.
We recorded total contributions to the ESOP of $3.6 million, $3.2 million and $1.6 million during the years ended March 31, 2021, 2020 and 2019, respectively, based on performance in the prior year. During the year ended March 31, 2021, $2.6 million was recorded to expense based on performance in the year ended March 31, 2021 and is expected to be contributed to the ESOP during the year ending March 31, 2022.
The ESOP held 628,289 and 718,646 shares of CSWI common stock as of March 31, 2021 and 2020, respectively.
Income from continuing operations before income taxes was comprised of the following (in thousands):
|For the year ended:||($)||($)||($)|
|March 31, 2021|
|State and local||3,561||(500||)||3,061|
|PROVISION FOR INCOME TAXES||11,975||(1,145||)||10,830|
|March 31, 2020|
|State and local||1,999||(100||)||1,899|
|PROVISION FOR INCOME TAXES||12,433||351||12,784|
|March 31, 2019|
|State and local||2,729||(280||)||2,449|
|PROVISION FOR INCOME TAXES||14,908||481||15,389|
Income tax expense differed from the amounts computed by applying the U.S. federal statutory income tax rate of 21.0% to income from continuing operations before income taxes as a result of the following (in thousands):
|Year Ended March 31,|
|Computed tax expense at statutory rate||10,735||12,096||12,903|
|Increase (reduction) in income taxes resulting from:|
|State and local income taxes, net of federal benefits||2,419||1,943||2,222|
|Amended return items (pension and foreign withholding)||—||975||—|
|IRS audit adjustments||—||502||—|
|GILTI and Section 250 Deduction||440||124||749|
|Foreign rate differential||85||84||302|
|Uncertain tax positions||(4,717||)||(1,615||)||244|
|Other permanent differences||1,438||(546||)||(276||)|
|Foreign tax credits||(554||)||(479||)||(1,123||)|
|Repatriation tax, net of tax credit||822||—||—|
|PROVISION FOR INCOME TAXES CONTINUING OPERATIONS||10,830||12,784||15,389|
The effective tax rates for the years ended March 31, 2021, 2020 and 2019 were 21.2%, 22.2% and 25.0%, respectively. 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, 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.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31 are presented below (in thousands):
|Deferred tax assets:|
|Operating lease liabilities||14,680||4,380|
|Pension and other employee benefits||313||362|
|Net operating loss carryforwards||145||145|
|Foreign tax credit carry-forward||130||40|
|State R&D credit carry-forward||120||—|
|Deferred tax assets||23,311||10,582|
|Deferred tax assets, net of valuation allowance||23,166||10,437|
|Deferred tax liabilities:|
|Goodwill and intangible assets||(65,070||)||(5,740||)|
|Property, plant and equipment||(7,816||)||(4,444||)|
|Operating lease – ROU assets||(13,631||)||(3,943||)|
|Deferred tax liabilities||(87,756||)||(14,285||)|
|NET DEFERRED TAX LIABILITIES||(64,590||)||(3,848||)|
As the assets and liabilities of our discontinued Coatings business discussed in Note 3 reside in a disregarded entity for tax purposes, the tax attributes associated with the operations of our Coatings business ultimately flow through to our corporate parent, which files a consolidated federal return. Therefore, corresponding deferred tax assets or liabilities expected to be substantially realized by our corporate parent have been reflected above as assets of our continuing operations and have not been allocated to the balances of assets or liabilities of our discontinued operations disclosed in Note 3. The statement of cash flows reflects the impact of the deferred taxes related to the disregarded entity in a line captioned “Realized (unrealized) deferred taxes.”
As of both March 31, 2021 and 2020, we had no tax effected net operating loss carryforwards, net of valuation allowances. Net operating loss carryforwards will expire in periods beyond the next 5 years.
Certain earnings of foreign subsidiaries continue to be permanently invested outside of the United States. The earnings related to these foreign subsidiaries for which taxes are not being provided are $17 million. The calculation of the taxes on these undistributed earnings are impracticable because it is unknown how these earnings would be distributed.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
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 accrued an immaterial interest and penalties during the year ended March 31, 2020. 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.
From time to time, we are involved in various claims and legal actions which arise in the ordinary course of business. There are not any matters pending that we currently believe are reasonably possible of having a material impact to our business, consolidated financial position, results of operations or cash flows.
The following table provides an analysis of the changes in accumulated other comprehensive income (loss) (in thousands).
|Currency translation adjustments:|
|Balance at beginning of period||(9,185||)||(6,869||)|
|Foreign currency translation adjustments||4,791||(2,316||)|
|BALANCE AT END OF PERIOD||(4,394||)||(9,185||)|
|Interest rate swaps:|
|Balance at beginning of period||(1,390||)||(394||)|
|Unrealized losses (gain), net of taxes of $(96) and $284, respectively(a)||362||(1,069||)|
|Reclassification of losses included in interest expense, net of taxes of $(60) and $(19), respectively||225||73|
|Other comprehensive loss||587||(996||)|
|BALANCE AT END OF PERIOD||(803||)||(1,390||)|
|Defined benefit plans:|
|Balance at beginning of period||(871||)||(3,466||)|
|Amortization of net prior service cost (benefit), net of taxes of $8 and $(6), respectively(b)||(31||)||21|
|Amortization of net loss, net of taxes of $(16) and $(12), respectively(b)||62||47|
|Net loss (gain) arising during the year, net of taxes of $(26) and $5, respectively||96||(17||)|
|Pension plan termination, net of taxes of $0 and $(669), respectively||—||2,516|
|Currency translation impact||(55||)||28|
|Other comprehensive loss||72||2,595|
|BALANCE AT END OF PERIOD||(799||)||(871||)|
|(a)||Unrealized gains are reclassified to earnings as underlying cash interest payments are made. We expect to recognize a loss of less than $0.2 million, net of deferred taxes, over the next twelve months related to a designated cash flow hedge based on its fair value as of March 31, 2021.|
|(b)||Amortization of prior service costs and actuarial losses out of accumulated other comprehensive loss are included in the computation of net periodic pension expense. See Note 13 for additional information.|
We conduct our operations in two reportable segments: Industrial Products and Specialty Chemicals. With the adoption of ASC Topic 606, we have concluded that the disaggregation of revenues that would be most useful in understanding the nature, timing and extent of revenue recognition is the breakout of build-to-order and book-and-ship, as defined below:
Build-to-order products are architecturally-specified building products generally sold into the construction industry. Revenue generated from sales of products under build-to-order transactions are currently reflected in the results of our Industrial Products segment. Occasionally, our built-to-order business lines enter into arrangements for the delivery of a customer-specified product and the provision of installation services. These orders are generally negotiated as a package and are commonly subject to retainage by the customer, which means the final 10% of the transaction price, when applicable, is not collectible until the overall construction project into which our products are incorporated is complete. The lead times for transfer to the customer can be up to 12 weeks. Revenue for goods is recognized at a point in time, but installation services are recognized over time as those services are performed. Installation services represented approximately 3% of total consolidated revenue for the year ended March 31, 2021.
Book-and-ship products are sold across all of our end markets. Revenue generated from sales of products under book-and-ship transactions have historically been presented in both Industrial Products and Specialty Chemicals. These sales are typically priced on a product-by-product basis using price lists provided to our customers. The lead times for transfer to the customer is usually one week or less as these items are generally built to stock. Revenue for products sold under these arrangements is recognized at a point in time.