EX-99.1 8 d942100dex991.htm EX-99.1 EX-99.1
Table of Contents

Exhibit 99.1

LOGO

September         , 2015

Dear CSW Industrials Stockholder:

I am pleased to inform you that on September 8, 2015, the Board of Directors of Capital Southwest Corporation (“Capital Southwest”) approved the spin-off of its industrial products, coatings, sealants and adhesives and specialty chemicals businesses into CSW Industrials, Inc. (“CSWI”), a standalone, publicly traded company. We refer to this spin-off, which will be effected by a special dividend of CSWI’s common stock to Capital Southwest shareholders, as the “Share Distribution.”

As a result of the Share Distribution, Capital Southwest shareholders will receive one share of CSWI common stock for every share of Capital Southwest common stock held as of 5:00 p.m. Eastern time on September 18, 2015, the record date. The distribution of CSWI shares is expected to occur on September 30, 2015. Shareholder approval of the Share Distribution is not required, and you do not need to take any action to receive your shares of CSWI common stock in the Share Distribution. Further, you do not need to pay any consideration or surrender or exchange your shares of Capital Southwest common stock. The shares you will receive in the Share Distribution, which is subject to several conditions, will be issued in book-entry form only, which means that no physical stock certificates representing interests in CSWI will be issued. A book-entry account statement reflecting your ownership of shares of CSWI common stock will be mailed to you, or your brokerage account will be credited for the shares on or about September 30, 2015.

It is our pleasure to welcome you as a stockholder of CSWI, a diversified industrial growth company with well-established, scalable platforms and deep domain expertise across three segments: Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals.

As an independent, publicly traded company, we will have greater focus on our core businesses and greater flexibility to pursue growth opportunities within our industry, bringing more value to you as a stockholder than possible as separate companies controlled by Capital Southwest.

In connection with the Share Distribution, CSWI common stock will be listed on the NASDAQ Stock Market, LLC under the symbol “CSWI.”

We invite you to learn more about CSWI by reviewing the enclosed Information Statement. We look forward to our future as an independent, publicly traded company and to your support as a stockholder.

 

Very truly yours,
LOGO
Joseph B. Armes
Chairman of the Board and
Chief Executive Officer


Table of Contents

Information included herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

 

PRELIMINARY INFORMATION STATEMENT

SUBJECT TO COMPLETION, DATED SEPTEMBER 9, 2015

CSW Industrials, Inc.

Common Stock

 

 

This Information Statement is being sent to you in connection with the planned distribution by Capital Southwest Corporation (“Capital Southwest”) to its shareholders of the outstanding shares of common stock of its wholly owned subsidiary, CSW Industrials, Inc. (“we,” “us,” “our” or “CSWI”).

Capital Southwest will distribute the outstanding shares of common stock of CSWI on a pro rata basis to holders of Capital Southwest common stock. This distribution is referred to in this Information Statement as the “Share Distribution.” Holders of Capital Southwest common stock as of 5:00 p.m. Eastern time on September 18, 2015 (the “Record Date”) will be entitled to receive one share of CSWI common stock for every share of Capital Southwest common stock they hold. The distribution of shares will be made through direct registration in book-entry form on September 30, 2015 (the “Distribution Date”), which means that no physical share certificates will be issued. Immediately after the Share Distribution, we will be an independent, publicly traded company.

We are currently a wholly owned subsidiary of Capital Southwest. We were formed solely to effect the Share Distribution. To date, we have not conducted any material activities or operations. Prior to the Share Distribution, Capital Southwest will contribute to us the outstanding capital stock of the following operating companies:

 

  The RectorSeal Corporation, which manufactures specialty chemical products and control devices for plumbing, heating, ventilation and air conditioning, refrigeration, electrical and industrial applications;

 

  The Whitmore Manufacturing Company, which manufactures high performance, specialty lubricants for heavy equipment used in surface mining, railroad and other industries, lubrication equipment specifically for rail applications and lubrication-centric reliability solutions for a wide variety of industries. Whitmore also produces water-based coatings for the automotive and primary metals industries;

 

  Jet-Lube, Inc., which manufactures specialty lubricants and other products used in oil and gas and industrial applications;

 

  Balco, Inc., which designs and manufactures innovative products specified by architects for use in the construction and remodeling of educational facilities, commercial and industrial buildings, airports, hotels, hospitals, parking garages and high-end residential condominiums;

 

  Strathmore Holdings, LLC, which manufactures customized industrial coatings used in various industries including rail car and locomotive, mining and other manufacturing; and

 

  Smoke Guard, Inc., which manufactures safety products for the commercial construction market and other markets requiring smoke and fire protection.

Following the Share Distribution, we will be a diversified industrial growth company with well-established, scalable platforms and deep domain expertise across three segments: Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals. We expect to focus on generating free cash flow by growing organically and through complementary and synergistic acquisitions. We believe the key drivers of our growth include: (1) the benefits that will result from the Share Distribution; (2) leveraging our existing customer relationships, technologies, products and solutions; (3) focused acquisitions that leverage our distribution channels; and (4) operational excellence.

You will not be required to pay any cash or other consideration for the shares of CSWI common stock that will be distributed to you, nor will you be required to surrender or exchange your shares of Capital Southwest common stock in order to receive shares of CSWI common stock in the Share Distribution. The Share Distribution will not affect the number of shares of Capital Southwest common stock that you own. No approval by Capital Southwest shareholders of the Share Distribution is required or being sought. You are not being asked for a proxy and you are requested not to send a proxy.

There is currently no trading market for our common stock. In connection with the Share Distribution, CSWI common stock will be listed on the NASDAQ Stock Market, LLC under the symbol “CSWI.” However, we expect that a limited market for our common stock, commonly known as a “when-issued” trading market, will develop on or shortly prior to the Record Date, and we expect “regular-way” trading of our common stock will begin one trading day after the Distribution Date.

 

 

In reviewing this Information Statement, you should carefully consider the matters described under “Risk Factors” for a discussion of certain factors that should be considered by recipients of our common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

This Information Statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

CSWI first mailed this information statement to its stockholders on or about September         , 2015.

 

 

The date of this Information Statement is September         , 2015.


Table of Contents

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT CSWI AND THE SHARE DISTRIBUTION

     2   

SUMMARY

     8   

RISK FACTORS

     18   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     34   

THE SHARE DISTRIBUTION

     35   

DIVIDEND POLICY

     44   

CAPITALIZATION

     45   

SELECTED HISTORICAL FINANCIAL DATA

     46   

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

     47   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     51   

BUSINESS

     79   

MANAGEMENT

     91   

COMPENSATION OF DIRECTORS

     97   

COMPENSATION OF EXECUTIVE OFFICERS

     98   

SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     111   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     114   

DESCRIPTION OF OUR CAPITAL STOCK

     120   

INDEMNIFICATION AND LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS

     124   

WHERE YOU CAN FIND MORE INFORMATION

     126   

INDEX TO COMBINED FINANCIAL STATEMENTS

     F-1   


Table of Contents

Unless the context otherwise requires, references to “CSWI,” “we,” “us” or “our” in this Information Statement are to CSW Industrials, Inc. and its direct and indirect subsidiaries following the Share Distribution. References to “Capital Southwest” refer to Capital Southwest Corporation and its consolidated subsidiaries before the Share Distribution and to Capital Southwest Corporation and its consolidated subsidiaries excluding CSWI and its subsidiaries after the Share Distribution, unless the context otherwise requires.

This Information Statement is being furnished solely to provide information to Capital Southwest shareholders who will receive shares of CSWI common stock in the Share Distribution. It is not and is not to be construed as an inducement or encouragement to buy or sell any of our securities or any securities of Capital Southwest. This Information Statement describes our business, our relationship with Capital Southwest and how the Share Distribution affects Capital Southwest and its shareholders, and provides other information to assist you in evaluating the benefits and risks of holding or disposing of our common stock that you will receive in the Share Distribution. For additional information regarding the risks relating to the Share Distribution, our business and ownership of our common stock, see “Risk Factors.”

Prior to the Share Distribution, Capital Southwest will contribute to CSWI all of the outstanding capital stock of The RectorSeal Corporation (“RectorSeal”), The Whitmore Manufacturing Company (“Whitmore”), Jet-Lube, Inc. (“Jet-Lube”), Balco, Inc. (“Balco”), Strathmore Holdings, LLC, the entity formed to acquire substantially all of the assets of Strathmore Products, Inc. in April 2015 (“Strathmore”), Smoke Guard, Inc. (“Smoke Guard”) and CapStar Holdings Corporation (“CapStar”). CapStar is a real estate holdings company whose operations are not material to CSWI. RectorSeal, Whitmore, Jet-Lube, Balco, Strathmore, Smoke Guard and CapStar are collectively referred to in this Information Statement as the “CSWI Businesses.” Except as otherwise indicated, the information included in this Information Statement reflects the contribution by Capital Southwest, immediately prior to the Share Distribution, of all of the capital stock of the CSWI Businesses. To date, CSWI has not conducted any material activities or operations.

You should not assume that the information contained in this Information Statement is accurate as of any date other than the date set forth on the cover. Changes to the information contained in this Information Statement may occur after that date, and we undertake no obligation to update the information, except in the normal course of our public disclosure obligations and practices and as otherwise required by law.

 

1


Table of Contents

QUESTIONS AND ANSWERS ABOUT CSWI AND THE SHARE DISTRIBUTION

Set forth below are commonly asked questions and answers about the spin-off of CSWI by Capital Southwest into a standalone, publicly traded company. The spin-off will be effected by a pro rata distribution of the outstanding shares of CSWI common stock to Capital Southwest’s shareholders. This distribution is referred to in this Information Statement as the “Share Distribution.” You should read the section titled “The Share Distribution” for a more detailed description of the matters described below.

 

Q. What is the Share Distribution?

 

A. The Share Distribution is the spin-off of Capital Southwest’s industrial products, coatings, sealants and adhesives and specialty chemicals businesses by means of a distribution of the outstanding shares of common stock of CSWI on a pro rata basis to holders of Capital Southwest common stock. If all conditions to the Share Distribution are met, all outstanding shares of our common stock will be distributed to holders of shares of Capital Southwest common stock as of September 18, 2015 (the “Record Date”). The Share Distribution is expected to occur on September 30, 2015 (the “Distribution Date”). Each holder of shares of Capital Southwest common stock as of the Record Date will be entitled to receive one share of our common stock for every share of Capital Southwest common stock held as of the Record Date. Following the Share Distribution, Capital Southwest will no longer hold any of our outstanding capital stock and we will be a standalone, publicly traded company. In connection with the Share Distribution, CSWI common stock will be listed on the NASDAQ Stock Market, LLC (“NASDAQ”) under the symbol “CSWI.”

 

Q. What are the reasons for the Share Distribution?

 

A. The Board of Directors of Capital Southwest (the “Capital Southwest Board”) reviewed Capital Southwest’s structure and strategy to consider the strategic, operational and financial requirements of an investment company seeking to achieve capital appreciation through long-term investments in privately held businesses. As part of its review, the Capital Southwest Board evaluated potential strategic alternatives in connection with an overall review of its strategy as a business development company, including a termination of Capital Southwest’s regulated investment company status. Although the business development company structure has several benefits, the growth and expansion of the CSWI Businesses has created significant concerns about the continued qualification of Capital Southwest as a regulated investment company and has significantly limited the flexibility of Capital Southwest and the CSWI Businesses to obtain and deploy capital in a manner that would maximize the growth and profitability of their respective businesses. Further, because of the regulatory framework imposed on Capital Southwest as a business development company, the CSWI Businesses have been operated as separate businesses, and consequently the CSWI Businesses have been unable to benefit from the greater scale, cost synergies and other benefits that could result from common ownership and operation in a less regulated operating environment.

The Capital Southwest Board determined that the Share Distribution is in the best interests of Capital Southwest and its shareholders, and that separating the CSWI Businesses from Capital Southwest would provide benefits to both Capital Southwest and CSWI that could not be achieved as a combined company, such as our ability to:

 

    Organize the CSWI Businesses Around Key Market Segments. Due to Capital Southwest’s business development company structure, each of the CSWI Businesses has historically operated as a separate independent company. The Share Distribution will allow CSWI to pursue a strategy expected to focus on organizing around key market segments, which the Capital Southwest Board believes will result in greater opportunities to achieve cost and operational synergies and implement best practices in the collective operations of the businesses.

 

   

Grow the CSWI Businesses by Allocating Capital More Efficiently. As a business development company, Capital Southwest is subject to regulatory limitations that, because of the growth of the

 

2


Table of Contents
 

CSWI Businesses and the value of Capital Southwest’s investments in them, create significant regulatory hurdles to Capital Southwest’s ability to invest directly in the continued expansion of the CSWI Businesses. In addition, due to their being separate portfolio companies in Capital Southwest’s business development company structure, it is not efficient to move capital from one of the CSWI Businesses to another to fund attractive growth projects. Following the Share Distribution, CSWI will be able to more efficiently fund growth projects across the CSWI Businesses, as no regulatory hurdles will exist that would limit CSWI’s ability to fund future growth.

 

    Offer Greater Investor Choice Through Separate Entities. The Share Distribution will separate the two business models that the Capital Southwest Board believes currently reside within Capital Southwest—an industrial growth company and an investment company. The Capital Southwest Board believes this will increase investor visibility into and understanding of the CSWI Businesses and Capital Southwest’s investment activities and thereby facilitate the creation of a more natural and interested investor base for each company.

 

    Unlock Shareholder Value. The Capital Southwest Board believes that following the Share Distribution the combined value of Capital Southwest common stock and CSWI common stock should, over time and assuming similar market conditions, be greater than the value of Capital Southwest common stock had the Share Distribution not occurred, resulting in greater long-term value to Capital Southwest shareholders and greater flexibility for each of Capital Southwest and CSWI to make new investments to advance their business plans. This belief is based in part on the fact that the Share Distribution will result in greater public disclosure of the operations and performance of the CSWI Businesses once CSWI is a publicly traded company, permitting investors to more accurately assess the performance and strategies of the CSWI Businesses.

 

    Increase Management Focus. The Share Distribution will enable us to assemble a management team capable of devoting its entire time and attention to growing the CSWI Businesses and improving operational performance and profitability and, as a result, maximizing shareholder value.

 

    Better Align the Interests of Management and Our Stockholders. The Capital Southwest Board believes that the Share Distribution will enable us to use share-based incentive awards that will be tied directly to CSWI’s performance, providing employees with incentives more closely linked to the achievement of the specific performance objectives of the CSWI Businesses and aligning employee interests more closely with the interests of stockholders.

In addition, the Capital Southwest Board considered the fact that the CSWI Businesses are not integrated with Capital Southwest and, as a result, the Share Distribution is not expected to involve extensive disentanglements.

The Capital Southwest Board also considered a number of potentially negative factors in evaluating the Share Distribution. These factors included, among other things, the fact that the Share Distribution: (1) will result in two standalone, publicly traded companies, which will result in increased operating and overhead costs in the aggregate; and (2) has caused Capital Southwest to incur implementation costs it would not otherwise have incurred, and, if implemented, will likely cause transitional disruptions in the operations of both Capital Southwest and CSWI. Notwithstanding these potentially negative factors, the Capital Southwest Board determined that the Share Distribution was the best alternative to enhance shareholder value, taking into account the factors discussed above. For a more detailed discussion relating to the factors considered by the Capital Southwest Board, see “The Share Distribution—Reasons for the Share Distribution.

 

Q. What will CSWI’s operations consist of following the Share Distribution?

 

A. We are currently a wholly owned subsidiary of Capital Southwest. We were formed solely to effect the Share Distribution and to date, we have not conducted any material activities or operations. Prior to the Share Distribution, Capital Southwest will contribute to us the outstanding capital stock of the CSWI Businesses. Further, Capital Southwest expects to contribute to us $13.0 million in cash.

 

3


Table of Contents

Following the Share Distribution, we will be a diversified industrial growth company with well-established, scalable platforms and deep domain expertise across three segments: Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals. We expect to focus on generating free cash flow by growing organically and through complementary and synergistic acquisitions. We believe the key drivers of our growth include: (1) the benefits that will result from the Share Distribution; (2) leveraging our existing customer relationships, technologies, products and solutions; (3) focused acquisitions that leverage our distribution channels; and (4) operational excellence.

 

Q. What are the conditions to consummation of the Share Distribution?

 

A. The Share Distribution is subject to a number of conditions, including, among others: (1) effectiveness of CSWI’s Registration Statement on Form 10 (the “Form 10”) filed with the U.S. Securities and Exchange Commission (the “SEC”); (2) receipt of a favorable opinion with respect to the tax-free nature of the Share Distribution for federal income tax purposes; (3) the absence of any legal restraint or prohibition preventing consummation of the Share Distribution; and (4) the absence of any event occurring that, in the Capital Southwest Board’s judgment, would result in the Share Distribution having a material adverse effect on Capital Southwest or its shareholders. However, even if all of the conditions have been satisfied, Capital Southwest may amend, modify or abandon any and all terms of the distribution and the related transactions at any time prior to the Distribution Date. In the event that the Capital Southwest Board waives a material condition or amends, modifies or abandons the Share Distribution, Capital Southwest will notify its shareholders in a manner reasonably calculated to inform them of such modifications with a press release, Current Report on Form 8-K or other means. For a more detailed description, see “The Share Distribution—Conditions to the Share Distribution.

 

Q. Who will be the executive management team of CSWI and Capital Southwest following the Share Distribution?

 

A. Our executive officers following the Share Distribution will be: (1) Joseph B. Armes, our Chairman and Chief Executive Officer and Capital Southwest’s current Chairman and Chief Executive Officer; (2) Christopher J. Mudd, our President and Chief Operating Officer and Capital Southwest’s current Senior Vice President, Operations; and (3) Kelly Tacke, our Chief Financial Officer and Capital Southwest’s current Chief Financial Officer. See “Management—Executive Officers” for biographical information for Mr. Armes, Mr. Mudd and Ms. Tacke.

We expect that Bowen S. Diehl, Capital Southwest’s current Chief Investment Officer, will become Capital Southwest’s Chief Executive Officer following the Share Distribution.

 

Q. Who will be a member of the Board of Directors of CSWI following the Share Distribution?

 

A. Upon effectiveness of the Form 10, we will have a Board of Directors initially consisting of five directors. See “Management—The CSWI Board Following the Share Distribution” for a list of the individuals who are expected to be appointed as directors, along with of a summary of each individual’s qualifications and experience.

 

Q. What are the material U.S. federal income tax consequences to me of the Share Distribution?

 

A. The Share Distribution is conditioned on the receipt of an opinion from a nationally recognized accounting firm that the requirements necessary for the Share Distribution (and the Pre-Share Distribution reorganization) to receive tax-free treatment under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”), should be satisfied, except with respect to any cash paid in lieu of fractional shares of CSWI common stock. Capital Southwest expects to receive this opinion on the day of the Share Distribution. Although Capital Southwest has no present intention to do so, this condition is solely for the benefit of Capital Southwest and may be waived by Capital Southwest in its sole discretion. The U.S. federal income tax consequences of the distribution are described in more detail under “The Share Distribution—Material U.S. Federal Income Tax Consequences.

 

4


Table of Contents
Q. What will I receive in the Share Distribution?

 

A. You will receive one share of our common stock for every share of Capital Southwest common stock held as of 5:00 p.m. Eastern time on September 18, 2015, the record date for the Share Distribution. Your proportionate ownership interest in Capital Southwest will not change as a result of the Share Distribution. For a more detailed description, see “The Share Distribution.”

 

Q. What is the record date for the Share Distribution?

 

A. Record ownership of Capital Southwest common stock for purposes of entitlement to participate in the Share Distribution will be determined as of 5:00 p.m. Eastern time on September 18, 2015, the Record Date.

 

Q. What is being distributed in the Share Distribution?

 

A. Approximately 15.6 million shares of our common stock will be distributed in the Share Distribution, based on the number of shares of Capital Southwest common stock we expect to be outstanding as of the Record Date. The shares of our common stock to be distributed by Capital Southwest will constitute all of the shares of our common stock that are issued and outstanding immediately prior to the Share Distribution. For more information on the shares being distributed in the Share Distribution, see “Description of Our Capital Stock—Common Stock.

 

Q. When will the Share Distribution be consummated?

 

A. The Share Distribution will occur on the Distribution Date, which is September 30, 2015. It is possible that factors outside of Capital Southwest’s control, or a decision by Capital Southwest to delay the Share Distribution or terminate the Distribution Agreement pursuant to its terms, could require Capital Southwest to consummate the Share Distribution at a later time or not to complete it at all. For a more detailed description, see “The Share Distribution.

 

Q. What do I have to do to participate in the Share Distribution?

 

A. No action is required of Capital Southwest shareholders to receive shares of CSWI common stock, which means that (1) you will not be required to pay for the shares of our common stock that you receive in the Share Distribution, (2) you do not need to surrender or exchange any shares of Capital Southwest common stock in order to receive shares of our common stock, and (3) you do not need to take any other action in connection with the Share Distribution.

 

Q. How will fractional shares be treated in the Share Distribution?

 

A. You will not receive fractional shares of CSWI common stock in the Share Distribution. Fractional shares issuable to you will be sold on your behalf, and you will receive a cash payment with respect to that fractional share. For an explanation of how the cash payments for fractional shares will be determined, see “The Share Distribution—Treatment of Fractional Shares.”

 

Q. How will I determine my tax basis in CSWI common stock?

 

A.

Generally, your aggregate tax basis in your Capital Southwest common stock and the shares of our common stock received in the Share Distribution (including fractional shares of our stock sold on your behalf) will equal the aggregate tax basis of the Capital Southwest common stock held by you immediately before the Share Distribution. This aggregate tax basis should be allocated between your Capital Southwest common stock and the CSWI common stock you receive in the Share Distribution (including fractional shares of CSWI common stock sold on your behalf) in proportion to the relative fair market value of each immediately after the Share Distribution. You should consult your tax advisor about how this allocation will apply in your particular situation (including a situation where you have purchased Capital Southwest shares

 

5


Table of Contents
  at different times or for different amounts) and regarding any particular tax consequences of the Share Distribution to you, including the application of state, local, and foreign tax laws. The material U.S. federal income tax consequences of the Share Distribution are described in more detail under “The Share Distribution—Material U.S. Federal Income Tax Consequences.”

 

Q. Will CSWI common stock be listed on a stock exchange?

 

A. Yes. In connection with the Share Distribution, CSWI common stock will be listed on NASDAQ under the symbol “CSWI.” It is anticipated that trading of our common stock will commence on a “when-issued” basis on or shortly prior to the Record Date. When-issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. On the first trading day following the Distribution Date, when-issued trading with respect to our common stock will end and “regular-way” trading will begin. “Regular-way” trading refers to trading after a security has been issued and typically involves a transaction that settles on the third full trading day following the date of the transaction.

 

Q. Will my Capital Southwest common stock continue to trade?

 

A. Yes. Shares of Capital Southwest common stock will continue to be listed and trade on NASDAQ under the symbol “CSWC.”

 

Q. If I sell shares of Capital Southwest common stock that I held on the Record Date on or before the Distribution Date, am I still entitled to receive shares of CSWI common stock distributable with respect to the Capital Southwest common stock I sold?

 

A. Beginning on or shortly before the Record Date and continuing up to and including the Distribution Date, shares of Capital Southwest common stock will begin to trade in two markets on NASDAQ: (1) a “regular-way” market; and (2) an “ex-distribution” market. If you hold shares of Capital Southwest common stock as of the Record Date and choose to sell those shares in the regular-way market after the Record Date and on or before the Distribution Date, you also will be selling the right to receive the shares of our common stock in connection with the Share Distribution. If you hold shares of Capital Southwest common stock as of the Record Date and choose to sell those shares in the ex-distribution market after the Record Date and on or before the Distribution Date, you will still receive the shares of our common stock in the Share Distribution.

 

Q. Will the Share Distribution affect the trading price of my shares of Capital Southwest common stock?

 

A. Yes, the trading price of Capital Southwest common stock immediately following the Share Distribution is expected to initially decline because its trading price will no longer reflect the value of the assets that will be transferred to CSWI prior to consummation of the Share Distribution. Specifically, the Share Distribution will result in a reduction to Capital Southwest’s net asset value (as of June 30, 2015, the CSWI Businesses represented 60.5% of Capital Southwest’s net asset value). There can also be no assurance that the combined trading price of Capital Southwest common stock and our common stock after the Share Distribution will be equal to or exceed the trading price of Capital Southwest common stock prior to the Share Distribution.

 

Q. Do I have appraisal rights in connection with the Share Distribution?

 

A. No. Holders of Capital Southwest common stock will not have appraisal rights under Texas law in connection with or as a result of the Share Distribution.

 

Q. Are there any risks in connection with the Share Distribution that I should consider?

 

A. Yes, there are risks associated with the Share Distribution. These risk factors are discussed in the section titled “Risk Factors.

 

6


Table of Contents
Q. Who is the transfer agent for CSWI common stock?

 

A. American Stock Transfer and Trust Company is the transfer agent for CSWI common stock.

 

Q. Where can I get more information?

 

A. If you have any questions relating to the Share Distribution, you should contact the distribution agent at:

American Stock Transfer and Trust Company

59 Maiden Lane, Plaza Level

New York, NY 10038

1-800-937-5449

Before the Share Distribution, if you have any questions relating to the Share Distribution, you should contact Capital Southwest at:

Chief Financial Officer

Capital Southwest Corporation

informationrequest@capitalsouthwest.com

972-233-8242

After the Share Distribution, if you have any questions relating to CSWI, you should contact us at:

Chief Financial Officer

CSW Industrials, Inc.

investor.relations@cswindustrials.com

972-233-8242

 

7


Table of Contents

SUMMARY

This summary highlights information contained elsewhere in this Information Statement and may not contain all of the information that may be important to you. For a more complete understanding of our business and the Share Distribution, you should read this summary together with the more detailed information and our combined financial statements appearing elsewhere in this Information Statement. You should read this entire Information Statement carefully, including “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements.”

Our Company

Prior to the Share Distribution, Capital Southwest expects to contribute to us $13.0 million in cash and 100% of the outstanding capital stock of the following operating companies:

 

•       RectorSeal

 

•       Jet-Lube

 

•       Strathmore

•       Whitmore

 

•       Balco

 

•       Smoke Guard

We are a diversified industrial growth company with well-established, scalable platforms and deep domain expertise across three segments: Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals. Our broad portfolio of leading products provides performance optimizing solutions to our customers. Our products include mechanical products for heating, ventilation and air conditioning (“HVAC”) and refrigeration applications, coatings and sealants and high performance specialty lubricants. Markets that we serve include plumbing, HVAC, refrigeration, electrical, commercial construction, rail car and locomotive, oil and gas, mining, steel, transportation and general industrial markets.

Drawing on our innovative and proven technologies, we seek to deliver solutions to our professional customers that require superior performance and reliability. Our industrial brands, such as RectorSeal No. 5® and KOPR-KOTE®, are well known in the specific industries we serve and have a reputation for high quality and reliability. Through organic growth and acquisitions, we believe we are well positioned to offer our customers an increasingly broad portfolio of performance optimizing solutions. We have a successful record of making accretive acquisitions—in the last five years, we completed 10 acquisitions for an aggregate purchase price of $148.1 million. We believe there are further attractive acquisition opportunities available within the markets in which we operate.

Our pro forma net revenues grew by 29.2% and our pro forma operating income grew by 8.6% for the three months ended June 30, 2015 compared to June 30, 2014. Our pro forma net revenues and pro forma operating income for the three months ended June 30, 2015 were $88.9 million and $15.4 million, respectively. Our actual net revenues and operating income for the three months ended June 30, 2014 were $68.8 million and $14.1 million, respectively. Additionally, our pro forma net revenues grew by 40.3% and our pro forma operating income grew by 22.0%, for the fiscal year ended March 31, 2015. Our pro forma net revenues and pro forma operating income for the fiscal year ended March 31, 2015 were $325.0 million and $46.2 million, respectively. Our actual net revenues and operating income for the fiscal year ended March 31, 2014 were $231.7 million and $37.9 million, respectively.

We expect to focus on generating free cash flow by growing organically and through complementary and synergistic acquisitions. We believe the key drivers of our growth include: (1) the benefits that will result from the Share Distribution; (2) leveraging our existing customer relationships, technologies, products and solutions; (3) focused acquisitions that leverage our distribution channels; and (4) operational excellence.

In addition to the companies listed above, Capital Southwest will contribute to us 100% of the outstanding capital stock of CapStar, a real estate holding company, the operations of which are not material to CSWI.

Recent Developments

Effective April 1, 2015, we acquired substantially all of the assets of Strathmore for a net cash purchase price of $68.8 million, plus additional payments if certain financial metrics are achieved in future periods. Strathmore is a leading manufacturer of specialized industrial coating products including urethanes, epoxies, acrylics and alkyds.

 



 

8


Table of Contents

Strathmore’s net revenues and operating income for the fiscal year ended December 31, 2014 were $63.2 million and $8.2 million, respectively. Strathmore’s financial results will be included in our Coatings, Sealants and Adhesives segment. The Strathmore acquisition was funded from borrowings of $70.0 million.

Business Segments

We operate in three business segments: Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals. The table below provides an overview of these business segments.

 

                                             

Business

Segment

          Principal Product       Key End Use                   Pro Forma
Net Revenue*
    Categories     Markets             Representative Industrial Brands             $       %    
                                             
Industrial Products    

¡      Specialty mechanical products

¡      Fire and smoke protection products

¡     Architecturally- specified building products

¡     Storage. filtration and application equipment for use with our specialty chemicals and other products

 

   

¡     Plumbing

¡     HVAC

¡     Refrigeration

¡     Electrical

¡     Commercial construction

¡     Rail car and locomotive

¡     General industrial

   

. LOGO              LOGO

 

 

LOGO          LOGO

LOGO                LOGO

 

LOGO          LOGO

 

LOGO    LOGO

 

LOGO      LOGO

 

LOGO      LOGO

 

LOGO          LOGO

 

   

LOGO  

                                             
                     
Coatings, Sealants and Adhesives    

¡     Coatings and penetrants

¡     Pipe thread sealants

¡     Firestopping sealants and caulks

¡     Adhesives/solvent cements

   

¡     Rail car and locomotive

¡     Oil and gas

¡     Commercial construction

¡     Plumbing

¡     HVAC

¡     Refrigeration

¡     Electrical

¡     General industrial

 

   

LOGO

 

 

LOGO     

LOGO

                       LOGO

LOGO

 

 

 

             LOGO

             LOGO

   

LOGO  

                                             
                     
Specialty Chemicals    

¡     Lubricants and greases

¡     Drilling compounds

¡     Anti-seize compounds

¡     Chemical formulations

¡     Degreasers and cleaners

   

¡     Oil and gas

¡     Drilling and boring

¡     Water well drilling

¡     Mining

¡     Rail car and locomotive

¡     Steel

¡     Power generation

¡     Cement

¡     Aviation

¡     Plumbing

¡     HVAC

¡     Electrical

¡     General industrial

 

   

LOGO    LOGO    LOGO

 

LOGO        LOGO

 

 

LOGO

LOGO      LOGO

 

LOGO

   

LOGO  

 

* Reflects acquisition of substantially all of the assets of Strathmore.

 



 

9


Table of Contents

Our Competitive Strengths

We believe we have the following competitive strengths:

Broad Portfolio of Industry Leading Products and Solutions

We have a broad portfolio of products with leading industry positions in the specific end markets in which we compete. We believe our products and solutions are differentiated from those of our competitors by superior quality and total value delivered to customers. For example, our RectorSeal No. 5® product is widely regarded as an industry standard for thread sealants for HVAC, plumbing and electrical configurations. As another example, our KOPR-KOTE® product is recognized as the anti-seize compound of choice for use in oil and gas drilling operations, where it is asked for by name.

Sustainable Organic Revenue Growth and Operating Performance

Our pro forma net revenues grew by 29.0% for the three months ended June 30, 2015. This growth was driven by a 12.1% increase in revenues due to organic growth, with the remainder coming from acquisitions. Additionally, our pro forma net revenues grew by 23.9%, compounded annually, for the three fiscal years ended March 31, 2015. This growth was driven by a 14.8% increase in revenues due to organic growth, with the remainder coming from acquisitions. Our organic revenue growth is benefited by a number of factors. We focus on end markets with above-average growth trends, such as rail car and locomotive, HVAC, refrigeration and construction. We also have a loyal customer base that recognizes the performance and quality of our products and solutions, including continuously evaluating the potential uses of existing products to broaden our market penetration. Further, our customer base is diverse – for the three months ended June 30, 2015, no single customer represented more than 3.0% of our net revenues on a pro forma basis. For the year ended March 31, 2015, no single customer represented more than 5.0% of our net revenues on a pro forma basis.

These factors have also enabled our products to enjoy strong margins. Our pro forma operating income grew by 8.6% for the three months ended June 30, 2015. Additionally, our pro forma operating income grew by 28.4%, compounded annually, for the three fiscal years ended March 31, 2015. We continue to improve our profitability through targeted investments to further improve our manufacturing processes. For example, in the Specialty Chemicals segment, we are in the process of consolidating the manufacturing of some of our lubricant and grease products into our Rockwall, Texas facility in order to optimize capacity, improve efficiency and leverage technologies while enhancing product quality and environmental compliance. Further, we continue to refine our manufacturing processes in all of our manufacturing facilities to lower manufacturing costs, increase production capacity and improve product quality.

Stable Platform for Acquisitions with Proven Track Record

We have a demonstrated track record of identifying, completing and integrating acquisitions, as evidenced by the 31 acquisitions we have successfully completed since 1991. Since January 1, 2010, we have invested $148.1 million in acquisitions that either (1) added new products designed to service our existing end markets or (2) provided an entry into new, complementary end markets where we can drive revenue growth and improved profitability. Historically, our acquisitions have been relatively small, lower-risk acquisitions of a product that we have identified as having the potential to benefit from our extensive distribution network and manufacturing efficiencies. We also consummated larger acquisitions that complement our business model. Most recently, we acquired substantially all of the assets of Strathmore, a leading participant in the coatings market.

Culture of Product Enhancement and Customer Centric Solutions

We have a long history of serving our customers with high quality products and solutions. We work closely with our customers, industry experts and research partners to continuously improve our existing products to meet

 



 

10


Table of Contents

evolving customer and market requirements. Our highly trained and specialized personnel work directly with our current and prospective customers to enhance our product offerings by expanding the use and markets for our existing products. We focus on product enhancements and product line extensions that are designed to meet the specific application needs of our customers.

Diverse Sales and Distribution Channels

Many of our products are sold through service-intensive distribution networks committed to technical support and total customer satisfaction. We primarily go to market through an international network of independent manufacturer representatives and agents calling on our wholesale distributors, contractors and direct customers. For example, our distributors sell products from our Industrial Products and Specialty Chemicals segments to plumbers, electricians and HVAC contractors.

The strong, long-term relationships we have developed with our wholesale distribution partners allow us to introduce new products, including newly developed, as well as acquired products. In addition, our extensive distribution network allows us to exploit niche end markets that provide organic growth opportunities and form a key component of our acquisition strategy.

With certain of our products we also go to market through a direct sales force focused on specific customer needs. For example, we sell products in our Coatings, Sealants and Adhesive segment directly to rail car and locomotive manufacturers.

Experienced Management Team

Our executive officers following the Share Distribution will be: (1) Joseph B. Armes, our Chairman and Chief Executive Officer and Capital Southwest’s current Chairman and Chief Executive Officer; (2) Christopher J. Mudd, our President and Chief Operating Officer and Capital Southwest’s current Senior Vice President, Operations; and (3) Kelly Tacke, our Chief Financial Officer and Capital Southwest’s current Chief Financial Officer. See “Management” for biographical information for Mr. Armes, Mr. Mudd and Ms. Tacke.

Our management team is highly regarded in each of our business segments. Collectively, our management team, including the executive officers, has an average of 25 years of experience in the industrial manufacturing and specialty chemicals industries. They have a successful track record of enabling us to recognize and capitalize upon attractive opportunities in the key markets we serve, and our executive management team has a strong record of effectively managing capital and delivering operating efficiencies over time. In addition, our management team has demonstrated strong capabilities in sourcing and executing strategic and accretive acquisitions.

Our Growth Strategy

We are focused on creating significant stockholder value over the long term by increasing our revenue, profitability and free cash flow by (1) expanding the market and uses of our existing products and (2) growing the portfolio of products we manufacture, market and sell through targeted acquisitions. We believe the key drivers of our growth include:

Benefits Resulting from the Share Distribution

Historically, the CSWI Businesses operated as separate independent companies with discrete strategies and capital structures. The Share Distribution will allow us to pursue a strategy focused on rationalizing our organizational structure and management around our business segments. We expect this strategy to enable us to realize cost and operational synergies, implement best practices across our operations, cross-sell product offerings and thereby increase our profitability.

 



 

11


Table of Contents

Following the Share Distribution, we will no longer operate as separate portfolio companies in Capital Southwest’s existing structure, which will allow us to more efficiently finance growth and more effectively allocate capital across our businesses.

Leveraging Existing Customer Relationships and Products and Solutions

We expect to continue to increase revenue by leveraging our reputation for providing high quality products to our long-standing customer base. Our team of sales representatives, engineers and other technical personnel continues to proactively collaborate with our distributors and end users to enhance and adapt existing products and solutions to meet evolving customer needs. In addition, we expect to leverage our existing customer base to cross-sell our products and solutions across our three business segments.

Focused Acquisitions that Leverage our Distribution Channels

While we are focused on improving our existing products and penetrating new markets with these products, we continue to identify and execute acquisitions that will broaden our portfolio of products and offer attractive risk-adjusted returns. We primarily focus on commercially proven products and solutions that currently have limited distribution but would benefit from a broader distribution network and be attractive to customers in our target end markets. Once acquired, we utilize our extensive distribution networks to increase revenue by selling those products to our diversified customer base.

Operational Excellence

We focus on operational excellence in all aspects of our business, leading to improved efficiencies and increased profitability. We will continue to expand improvement initiatives and information sharing across our entire platform, promoting best practices.

Reasons for the Share Distribution

The Capital Southwest Board determined that the Share Distribution is in the best interests of Capital Southwest and its shareholders, and that separating the CSWI Businesses from Capital Southwest would provide benefits to both Capital Southwest and CSWI that could not be achieved as a combined company, such as our ability to:

 

  organize the CSWI Businesses around key market segments;

 

  grow the CSWI Businesses by allocating capital more efficiently;

 

  offer greater investor choice through separate entities;

 

  unlock shareholder value;

 

  increase management focus; and

 

  better align the interests of management and our stockholders.

For a more detailed discussion of the factors considered by the Capital Southwest Board, see “The Share Distribution—Reasons for the Share Distribution.

Corporate Information

We are currently a wholly owned subsidiary of Capital Southwest. After the Share Distribution, we will be a standalone, publicly traded company. We were incorporated in the State of Delaware on November 6, 2014 solely for the purpose of effecting the Share Distribution. Our principal executive office is located at 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas 75240, and our telephone number at that location is 972-233-8242. To date, we have not conducted any material activities or operations.

 



 

12


Table of Contents

Our website address is www.cswindustrials.com. Information contained on, or linked to, our website or Capital Southwest’s website does not and will not constitute part of this Information Statement or the Registration Statement on Form 10 of which this Information Statement is a part.

Summary of the Share Distribution

The following is a summary of certain terms of the Share Distribution. See “The Share Distribution” for a more detailed description of the matters described below.

 

Distributing company

   Capital Southwest Corporation. After the Share Distribution, Capital Southwest will not own any capital stock of CSWI.

Distributed company

   CSW Industrials, Inc. CSWI is currently a wholly owned subsidiary of Capital Southwest. After the Share Distribution, CSWI will be a standalone, publicly traded company.

Pre-Share Distribution

reorganization

   Prior to the Share Distribution, Capital Southwest will contribute to CSWI the outstanding capital stock of the CSWI Businesses. Further, Capital Southwest expects to contribute to us $13.0 million in cash.

Distribution ratio

   Holders of shares of Capital Southwest common stock as of 5:00 p.m. Eastern time on September 18, 2015, the Record Date, will be entitled to receive one share of our common stock for every share of Capital Southwest common stock they own as of the Record Date. Cash will be distributed in lieu of fractional shares as described below.

Securities to be distributed

   Based on the approximately 15.6 million shares of Capital Southwest common stock outstanding on August 25, 2015, and applying the distribution ratio of one share of our common stock for every share of Capital Southwest common stock, approximately 15.6 million shares of our common stock will be distributed to Capital Southwest shareholders who hold shares of Capital Southwest common stock as of the Record Date.

Record Date

   5:00 p.m. Eastern time on September 18, 2015.

Distribution Date

   September 30, 2015.

Fractional shares

   Fractional shares of CSWI common stock will not be distributed in the Share Distribution. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate net cash proceeds of the sales pro rata to each holder who otherwise would have been entitled to receive a fractional share of CSWI common stock in the Share Distribution. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

Conditions to the Share Distribution

   The Share Distribution is subject to a number of conditions, including, among others: (1) effectiveness of CSWI’s Registration Statement on Form 10 filed with the SEC; (2) receipt of a favorable opinion with respect to the tax-free nature of the Share Distribution for federal income tax purposes; (3) the absence of any legal restraint or prohibition preventing consummation of the Share Distribution; and (4) the absence of any event occurring that, in the Capital Southwest Board’s judgment, would result in the Share Distribution having a material adverse effect on Capital Southwest or its shareholders. Even

 



 

13


Table of Contents
   if all of the conditions have been satisfied, Capital Southwest may amend, modify or abandon any and all terms of the distribution and the related transactions at any time prior to the Distribution Date. In the event that the Capital Southwest Board waives a material condition or amends, modifies or abandons the Share Distribution, Capital Southwest will notify its shareholders in a manner reasonably calculated to inform them of such modifications with a Current Report on Form 8-K, a press release or other means. See “The Share Distribution—Conditions to the Share Distribution.
Costs of the Share Distribution    Capital Southwest will pay all costs and expenses incurred by CSWI or Capital Southwest on or prior to the Distribution Date related to the Share Distribution, including the printing and mailing of this Information Statement. However, certain costs relating to the incorporation of CSWI and the post-Share Distribution operations of CSWI as a holding company of the CSWI Businesses will be paid by CSWI. Following the Distribution Date, each party will be responsible for its own costs and expenses. See “Certain Relationships and Related Party Transactions—Agreements between Capital Southwest and CSWI Relating to the Share Distribution—Distribution Agreement—Costs of the Share Distribution.

Treatment of equity-based awards

  

In connection with the Share Distribution, all outstanding stock option and restricted stock awards held by Capital Southwest directors and employees will be adjusted to represent both Capital Southwest and CSWI stock options and restricted stock awards.

 

The treatment of Capital Southwest’s equity-based awards in connection with the Share Distribution is described in more detail under “The Share Distribution—Treatment of Stock-Based Awards.”

Share Distribution-related compensation    If the Share Distribution is consummated, certain executive officers of Capital Southwest will be entitled to stock option and restricted stock awards and cash award payments pursuant to Capital Southwest’s executive compensation plan (the Share Distribution Executive Compensation Plan) that correlate to the aggregate appreciation in Capital Southwest’s equity value from the August 28, 2014 grant date (based on a trading value of $36.16 per share) through the date of determination following the Share Distribution, including in such determination the post-Share Distribution CSWI equity value. For a more detailed description, see “Compensation of Executive Officers—Share Distribution-Related Compensation.” Stock options and restricted stock awarded under the Share Distribution Executive Compensation Plan will be treated as described above under “—Treatment of equity-based awards.” The cash awards payable under the Share Distribution Executive Compensation Plan will be paid by Capital Southwest.

Trading market and symbol

   In connection with the Share Distribution, CSWI common stock will be listed on NASDAQ under the symbol “CSWI.” We anticipate that, on or shortly prior to the Record Date, trading of our common stock will begin on a “when-issued” basis and “when-issued” trading will continue up to and including the Distribution Date. Regular-way trading will commence one trading day after the Distribution Date. See “The Share Distribution—Trading and Listing of Our Common Stock.

 



 

14


Table of Contents

Dividend policy

   Any payment of dividends will be at the discretion of our Board of Directors (the “CSWI Board”) and will depend upon various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, any contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that the CSWI Board may deem relevant. We do not currently expect to pay dividends on our common stock for the foreseeable future following the Share Distribution.

Tax consequences to Capital

Southwest shareholders

   As a condition to the Share Distribution, Capital Southwest will have received a tax opinion from a nationally recognized accounting firm stating that Capital Southwest and Capital Southwest’s shareholders should not recognize any income, gain or loss for U.S. Federal income tax purposes as a result of the Share Distribution, except, in the case of Capital Southwest’s shareholders, with respect to any cash received in lieu of fractional shares of CSWI’s common stock. See “The Share Distribution—Material U.S. Federal Income Tax Consequences.

Relationship with Capital Southwest

following the Share Distribution

   We will enter into a Distribution Agreement and other agreements with Capital Southwest related to the Share Distribution. These agreements will govern the relationship between us and Capital Southwest up to and after the Share Distribution and provide for the allocation between us and Capital Southwest of various assets, liabilities and obligations (including employee benefits and tax-related assets and liabilities). The Distribution Agreement, in particular, will set forth our agreement with Capital Southwest regarding the principal transactions necessary to separate us from Capital Southwest, as well as other arrangements that govern our relationship with Capital Southwest after the Share Distribution. We will enter into a Tax Matters Agreement and an Employee Matters Agreement with Capital Southwest. As part of these agreements, we and Capital Southwest will indemnify each other against certain liabilities arising from our respective businesses. We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions—Agreements between Capital Southwest and CSWI Relating to the Share Distribution” and describe some of the risks of these arrangements under “Risk Factors—Risks Relating to the Share Distribution and Operation as a Standalone, Publicly Traded Company.
Distribution Agent and Transfer Agent   

American Stock Transfer and Trust Company will be the distribution agent for the Share Distribution and will be the transfer agent for our shares after the Share Distribution. If you have any questions relating to the Share Distribution, you should contact American Stock Transfer and Trust Company at:

 

American Stock Transfer and Trust Company

59 Maiden Lane, Plaza Level

New York, NY 10038

1-800-937-5449

Risk factors

   You should carefully consider the matters discussed under the section titled “Risk Factors.

 



 

15


Table of Contents

Summary Historical and Unaudited Pro Forma Condensed Combined Financial Data

CSWI was formed on November 6, 2014 solely for the purpose of effecting the Share Distribution and to date, CSWI has not conducted any material activities or operations. The summary historical combined financial data as of March 31, 2015 and 2014, and for the fiscal years ended March 31, 2015, 2014 and 2013 has been derived from the audited combined financial statements of the CSWI Businesses. The summary historical combined financial data as of June 30, 2015 and for the three months ended June 30, 2015 and 2014 has been derived from the unaudited combined financial statements of the CSWI Businesses. The data below was prepared by combining the results of the CSWI Businesses. The summary historical combined financial data as of March 31, 2015 and 2014 and for the years ended March 31, 2015, 2014 and 2013 and for the three months ended June 30, 2014 does not include Strathmore, substantially all of the assets of which were acquired subsequent to the periods indicated. The summary historical combined financial data as of June 30, 2015 and for the three months ended June 30, 2015 includes the financial data of Strathmore since the date of its acquisition (effective April 1, 2015). The data set forth below is not necessarily indicative of CSWI’s future results of operations and should be read in conjunction with the historical combined financial statements of the CSWI Businesses, the “Unaudited Pro Forma Condensed Combined Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The unaudited pro forma condensed combined financial information presented below consists of unaudited pro forma condensed combined balance sheet information as of June 30, 2015 and unaudited pro forma condensed combined statements of operations for the fiscal year ended March 31, 2015 and for the three months ended June 30, 2015. The unaudited pro forma condensed combined financial information for the fiscal year ended March 31, 2015 gives effect to (1) the acquisition of substantially all of the assets of Strathmore and (2) the Share Distribution and the related transactions. The unaudited pro forma condensed combined financial information as of June 30, 2015 and for the three months ended June 30, 2015 gives effect to the Share Distribution and related transactions. The unaudited pro forma condensed combined financial information is based on certain assumptions and adjustments, and should be read in conjunction with “Unaudited Pro Forma Condensed Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical combined financial statements of the CSWI Businesses included elsewhere in this Information Statement.

 

     Pro Forma
Three Months
Ended

June 30,
    Three Months
Ended
June 30,
    Pro Forma
Year Ended
March 31,
    Fiscal Year Ended March 31,  
     2015     2015     2014     2015     2015     2014     2013  
     (in thousands)  

Combined Statements of Operations Data:

              

Net revenues

   $ 88,909      $ 88,909      $ 68,798      $ 325,025      $ 261,834      $ 231,713      $ 199,094   

Cost of revenues

     (48,465     (48,465     (35,000     (181,922     (135,409     (119,627     (104,512

Selling, distribution, general and administrative, and other operating expenses

     (25,078     (26,156     (19,655     (95,873     (82,391     (74,173     (62,335
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 15,366      $ 14,288      $ 14,143      $ 47,230      $ 44,034      $ 37,913      $ 32,247   

Operating margin

     17.3     16.1     20.6     14.5     16.8     16.4     16.2

Other income (expense)

     (732     (732     312        (1,694     894        (387     973   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 14,634      $ 13,556      $ 14,455      $ 45,536      $ 44,928      $ 37,526      $ 33,220   

Provision for income taxes

     (5,283     (4,906     (4,707     15,612        (15,223     (12,794     (10,707
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

   $ 9,351      $ 8,650      $ 9,748      $ 29,924      $ 29,705      $ 24,732      $ 22,513   

Loss on disposal of operation, net of income tax benefit

     —          —          —          —          —          —          (1,326

Income from discontinued operation, net of income taxes

     —          —          —          —          —          —          511   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss on discontinued operation, net of income taxes

     —          —          —          —          —          —          (815
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 9,351      $ 8,650      $ 9,748      $ 29,924      $ 29,705      $ 24,732      $ 21,698   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

              

Depreciation and amortization

   $ 3,330      $ 3,327      $ 2,601      $ 13,873      $ 10,515      $ 9,113      $ 6,701   

Interest (expense) income, net

     (667     (667     (168     (3,199     (611     (131     74   

 



 

16


Table of Contents
     Pro Forma
As of
June 30,
     As of
June 30,
     As of March 31,  
     2015      2015      2015      2014  
     (in thousands)  

Balance Sheet Data (end of period):

           

Working capital

   $ 138,535       $ 124,834       $ 96,391       $ 90,884   

Goodwill, intangible and other assets, net

   $ 152,229       $ 152,229       $ 94,675       $ 89,400   

Total assets

   $ 389,801       $ 376,100       $ 286,521       $ 277,820   

Short-term borrowings and current portion of long-term obligation

   $ 4,499       $ 4,499       $ 13,561       $ 13,764   

Long-term debt

   $ 90,690       $ 90,690       $ 13,143       $ 31,333   

Other non-current liabilities

   $ 22,270       $ 32,564       $ 30,159       $ 12,233   

Equity

   $ 238,629       $ 214,634       $ 204,601       $ 196,186   

 



 

17


Table of Contents

RISK FACTORS

You should carefully consider the risks described below, which we believe are the principal risks that we face and of which we are currently aware, together with all of the other information included in this Information Statement. If any of the risks described below actually occurs, our business, financial results, financial condition and stock price could be materially adversely affected.

Risks Relating to Our Business

Difficult and volatile conditions in the overall economy, particularly in the U.S. but also globally, and in the capital, credit and commodities markets could materially adversely affect our financial position, results of operations and cash flows.

Our financial position, results of operations and cash flows could be materially adversely affected by difficult global economic conditions and significant volatility in the capital, credit and commodities markets and in the overall economy. Difficult and volatile conditions in the U.S. and globally could affect our business in a number of ways. For example:

 

  weak economic conditions, especially in our key markets, could reduce demand for our products, impacting our revenues and margins;

 

  as a result of the recent volatility in commodity prices, we may encounter difficulty in achieving sustained market acceptance of past or future price increases, which could have a material adverse effect on our financial position, results of operations and cash flows;

 

  under difficult market conditions, there can be no assurance that access to credit or the capital markets would be available or sufficient, and in such a case, we may not be able to successfully obtain additional financing on reasonable terms, or at all; and

 

  market conditions could result in our key customers experiencing financial difficulties and/or electing to limit spending, which in turn could result in decreased sales and earnings for us.

The industries in which we operate are highly competitive, and many of our products are in highly competitive markets, particularly certain specialty chemicals products. We may lose market share to producers of other products that can be substituted for our products.

The industries in which we operate are highly competitive, and we face significant competition from both large international producers and from smaller regional competitors. Our competitors may improve their competitive position in our core markets by successfully introducing new products, improving their manufacturing processes, or expanding their capacity or manufacturing facilities. Further, some of our competitors benefit from advantageous cost positions that could make it increasingly difficult for us to compete in markets for less-differentiated applications. If we are unable to keep pace with our competitors’ product and manufacturing process innovations or cost position, our financial condition and results of operations could be materially adversely affected.

In addition, competition among producers of certain specialty chemicals products used in oil and gas drilling operations is intense. Increased competition from existing or newly developed chemical products may reduce demand for our products in the future, and our customers may decide on alternate sources to meet their requirements. If we are unable to successfully compete with other producers or if other products can be successfully substituted for our products, our sales may decline.

Our attempts to address evolving customer needs requires that we continually enhance our products. Our efforts to enhance our products may not be commercially viable and failure to develop commercially successful products or keep pace with our competitors could harm our business and results of operations.

The enhancement and extension of our existing products to broaden the market and uses of our existing products is a key driver of our growth, particularly in our Coatings, Sealants and Adhesives segment. However,

 

18


Table of Contents

developing those product enhancements and extensions can be a costly, lengthy and uncertain process, and it is difficult to estimate the commercial success of those products.

A failure to develop commercially successful products or to identify additional uses for existing products could materially and adversely affect our financial results. If our attempts to develop or enhance products is unsuccessful, we may be unable to recover our development costs, which could have an adverse effect on our business and results of operations. In addition, our inability to enhance or develop products that are able to meet the evolving needs of our customers, including a failure to do so that results in our products lagging those of new or existing competitors, could reduce demand for our products and may have a material adverse effect on our business and results of operations.

Any inability to consummate acquisitions at our historical rate and at appropriate prices could negatively impact our growth rate and stock price.

Our ability to grow revenues, earnings and cash flow at or above our historic rates depends in part upon our ability to identify and successfully acquire and integrate businesses at appropriate prices and realize anticipated synergies. We may not be able to consummate acquisitions at rates similar to the past, which could adversely impact our growth rate and our stock price. Promising acquisitions are difficult to identify and complete for a number of reasons, including high valuations, competition among prospective buyers, the availability of affordable funding in the capital markets and the need to satisfy applicable closing conditions and obtain antitrust and other regulatory approvals on acceptable terms. In addition, competition for acquisitions may result in higher purchase prices. Changes in accounting or regulatory requirements or instability in the credit markets could also adversely impact our ability to consummate acquisitions.

Our acquisition of businesses could negatively impact our financial statements.

As part of our business strategy, we acquire businesses in the ordinary course, some of which may be material; please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information. These acquisitions involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely affect our financial statements:

 

  any acquired business, technology, service or product could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable;

 

  we may incur or assume significant debt in connection with our acquisitions;

 

  acquisitions could cause our financial results to differ from our own or the investment community’s expectations in any given period, or over the long-term;

 

  pre-closing and post-closing earnings charges could adversely impact operating results in any given period, and the impact may be substantially different from period to period;

 

  acquisitions could create demands on our management, operational resources and financial and internal control systems that we are unable to effectively address;

 

  we could experience difficulty in integrating personnel, operations and financial and other controls and systems and retaining key employees and customers;

 

  we may be unable to achieve cost savings or other synergies anticipated in connection with an acquisition;

 

  we may assume by acquisition unknown liabilities, known contingent liabilities that become realized, known liabilities that prove greater than anticipated, internal control deficiencies or exposure to regulatory sanctions resulting from the acquired company’s activities. The realization of any of these liabilities or deficiencies may increase our expenses, adversely affect our financial position or cause us to fail to meet our public financial reporting obligations; and

 

19


Table of Contents
  in connection with acquisitions, we often enter into post-closing financial arrangements such as purchase price adjustments, earn-out obligations and indemnification obligations, which may have unpredictable financial results.

Our ability to obtain additional capital on commercially reasonable terms may be limited, which could adversely affect our ability to pursue our acquisition strategy.

Although we believe that our cash, cash equivalents and short-term investments and existing credit facilities will provide adequate resources to fund ongoing operating requirements, we may need to seek additional financing to compete effectively and pursue our acquisitions strategy. If we are unable to obtain capital on commercially reasonable terms, it could:

 

  reduce funds available to us for purposes such as working capital, capital expenditures, strategic acquisitions, research and development and other general corporate purposes;

 

  restrict our ability to introduce new products, effect future acquisitions or capitalize on other business opportunities;

 

  increase our vulnerability to economic downturns and competitive pressures in the markets in which we operate; and

 

  place us at a competitive disadvantage.

During periods of volatile credit markets, there is a risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their credit commitments and obligations, including but not limited to extending credit up to the maximum permitted by a credit facility and otherwise accessing capital and/or honoring loan commitments. If our lenders are unable to fund borrowings under their revolving credit commitments or if we are unable to borrow, it could be difficult to replace our revolving credit facilities on similar terms.

The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities.

Certain of the acquisition agreements by which we have acquired companies require the former owners to indemnify us against certain liabilities related to the operation of the company before we acquired it. In most of these agreements, however, the liability of the former owners is limited and certain former owners may be unable to meet their indemnification responsibilities. We cannot assure you that these indemnification provisions will protect us fully or at all, and, as a result, we may face unexpected liabilities that adversely affect our financial statements.

The cyclical nature of certain industries in which our business operates can cause significant fluctuations in our results of operations and cash flows.

The cyclical nature of the supply and demand balance of the oil and gas and mining industries, which are served by our Specialty Chemicals and Coatings, Sealants and Adhesives segments, poses risks to us that are beyond our control and can affect our operating results. These markets are highly competitive; are driven to a large extent by end-use markets; and may experience overcapacity, all of which may affect demand for and pricing of our products and result in volatile operating results and cash flows over our business cycle. Future growth in product demand may not be sufficient to utilize current or future capacity. Excess industry capacity may continue to depress our volumes and margins on some products. Our operating results, accordingly, may be volatile as a result of excess industry capacity, as well as from rising energy and raw materials costs.

 

20


Table of Contents

Weakness in the oil and gas industry may adversely affect certain segments of our end market customers and reduce our sales and results of operations.

Some of our customers are impacted by current weakness in the oil and gas industry. This means our operations and earnings, particularly in the Specialty Chemicals and Coatings, Sealants and Adhesives segments, may be significantly affected by changes in oil, gas and petrochemical prices and drilling activities. Oil, gas, petrochemical and product prices and margins in turn depend on local, regional and global events or conditions that affect supply and demand for the relevant commodity.

Our relationships with our employees could deteriorate, which could adversely affect our operations.

As a manufacturing company, we rely on our employees and good relations with our employees to produce our products and maintain our production processes and productivity. After giving effect to the Share Distribution, we had 732 full-time employees as of June 30, 2015. Approximately 33 of our employees are subject to collective bargaining agreements. If our workers were to engage in a strike, work stoppage or other slowdown, our operations could be disrupted, or we could experience higher labor costs. In addition, if significant portions of our employees were to become unionized, we could experience significant operating disruptions and higher ongoing labor costs, which could adversely affect our business, financial condition and results of operations.

Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.

Our success in the highly competitive end markets in which we operate will continue to depend to a significant extent on our key employees. We are dependent on the expertise of our executive officers and other key employees that will be serving CSWI after the Share Distribution. Loss of the services of any of these individuals could have an adverse effect on our prospects. We may not be able to retain or recruit qualified individuals to join CSWI. The loss of executive officers or other key employees could result in high transition costs and could disrupt our operations.

We rely on independent distributors and independent sales representatives. Termination of one or more of our relationships with any of those parties or an increase in their sales of our competitors’ products could have a material adverse effect on our business, financial condition, results of operations or cash flows.

We depend on the services of independent distributors and independent sales representatives to sell our products and, in many cases, provide service and aftermarket support to end users of our products. Rather than serving as passive conduits for delivery of products, our distributors and sales representatives play a significant role in determining which of our products are available for purchase by contractors to service our customers. Almost all of the distributors and sales representatives with whom we transact business also offer competitors’ products and services to our customers. The loss of one of our key distributors or of a substantial number of our other distributors or sales representatives, or an increase in the distributors’ or sales representatives’ sales of our competitors’ products to our customers could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Growth of our business will depend in part on market awareness of our industrial brands, and any failure to develop, maintain, protect or enhance our industrial brands would hurt our ability to retain or attract customers.

We believe that building and maintaining market awareness, brand recognition and goodwill is critical to our success. This will depend largely on our ability to continue to provide high-quality products, and we may not be able to do so effectively. Our efforts in developing our industrial brands may be affected by the marketing efforts of our competitors and our reliance on our independent dealers, distributors and strategic partners to promote our industrial brands effectively. If we are unable to cost-effectively maintain and increase positive awareness of our industrial brands, our businesses, results of operations and financial condition could be harmed.

 

21


Table of Contents

We may not be able to consolidate our manufacturing facilities without incurring unanticipated costs and disruptions to our business.

As part of our efforts to streamline and rationalize our manufacturing processes, we are consolidating manufacturing facilities. For example, we are in the process of consolidating the manufacture of all lubricant and grease products currently manufactured in one of our Houston, Texas facilities to our Rockwall, Texas facility in order to optimize capacity and efficiency. Because of unanticipated events, including the actions of governments, suppliers, employees or customers, we may not realize the synergies, cost reductions and other benefits of any consolidation to the extent we currently expect.

We are dependent on contract manufacturers for manufacturing of certain products that we sell.

We use third parties to manufacture certain of our products. To the extent that we rely on third parties to perform these functions, we will not be able to directly control product delivery schedules and quality assurance. This lack of control may result in product shortages or quality assurance problems that could delay shipments of products or increase manufacturing, assembly, testing or other costs. If a contractor experiences capacity constraints or financial difficulties, suffers damage to its facilities, experiences power outages, natural disasters, labor shortages or labor strikes, or any other disruption of assembly or testing capacity, we may not be able to obtain alternative manufacturing in a timely manner or on commercially acceptable terms.

We are subject to risks from litigation that may materially impact our operations.

We face an inherent business risk of exposure to various types of claims and lawsuits. We are involved in various legal proceedings that arise in the ordinary course of our business. Although it is not possible to predict with certainty the outcome of every pending claim or lawsuit or the range of probable loss, we believe these pending lawsuits and claims will not individually or in the aggregate have a material adverse impact on our results of operations. However, we could in the future be subject to various lawsuits, including intellectual property, product liability, personal injury, product warranty, environmental or antitrust claims, among others, and incur judgments or enter into settlements of lawsuits and claims that could have a material adverse effect on our results of operations in any particular period.

Chemical processing is inherently hazardous, which could result in accidents that disrupt our operations or expose us to significant losses or liabilities.

Hazards associated with chemical processing and the related storage and transportation of raw materials, products and wastes exist in our operations and the operations of other occupants with whom we share manufacturing sites. These hazards could lead to an interruption or suspension of operations and have an adverse effect on the productivity and profitability of a particular manufacturing facility or on us as a whole. These potential risks include, but are not necessarily limited to chemical spills and other discharges or releases of toxic or hazardous substances or gases, pipeline and storage tank leaks and ruptures, explosions and fires and mechanical failure. These hazards may result in personal injury and loss of life, damage to property and contamination of the environment, which may result in a suspension of operations and the imposition of civil or criminal penalties, including governmental fines, expenses for remediation and claims brought by governmental entities or third parties. The loss or shutdown of operations over an extended period at any of our major operating facilities could have a material adverse effect on our financial condition and results of operations. Our property, business interruption and casualty insurance may not fully insure us against all potential hazards incidental to our business.

Regulation of our employees’ exposure to certain chemicals or other hazardous products could require material expenditures or changes in our operations.

Certain chemicals that we use in the manufacture of our products may have adverse health effects. The Occupational Safety and Health Administration limits the permissible employee exposure to some of those chemicals. Future studies on the health effects of certain chemicals may result in additional regulations or new

 

22


Table of Contents

regulations in foreign countries that further restrict or prohibit the use of, and exposure to, certain chemicals. Additional regulation of certain chemicals could require us to change our operations, and these changes could affect the quality of our products and materially increase our costs.

Regulatory and statutory changes applicable to us or our customers could adversely affect our financial condition and results of operations.

We and many of our customers are subject to various national and local laws, rules and regulations. Changes in any of these areas could result in additional compliance costs, seizures, confiscations, recall or monetary fines, any of which could prevent or inhibit the development, distribution and sale of our products.

In addition, we benefit from certain regulations, including building code regulations that require the use of products that we and other manufacturers sell. For example, certain environmental regulations may encourage the use of more environmentally friendly products, such as some of the lubricants and greases that we manufacture. If these regulations were to change, our results of operations could be adversely affected.

Compliance with extensive environmental, health and safety laws could require material expenditures, changes in our operations or site remediation.

Certain materials we use in the manufacture of our products can represent potentially significant health and safety concerns. We use large quantities of hazardous substances and generate hazardous wastes in our manufacturing operations. Consequently, our operations are subject to extensive environmental, health and safety laws and regulations at the international, national, state and local level in multiple jurisdictions. These laws and regulations govern, among other things, air emissions, wastewater discharges, solid and hazardous waste management, site remediation programs and chemical use and management. Many of these laws and regulations have become more stringent over time, and the costs of compliance with these requirements may increase, including costs associated with any necessary capital investments. In addition, our production facilities require operating permits that are subject to renewal and, in some circumstances, revocation. The necessary permits may not be issued or continue in effect, and renewals of any issued permits may contain significant new requirements or restrictions. The nature of the chemical industry exposes us to risks of liability due to the use, production, management, storage, transportation and sale of materials that may be hazardous and can cause contamination or personal injury or damage if released into the environment.

Compliance with environmental laws and regulations generally increases the costs of transportation and storage of raw materials and finished products, as well as the costs of storage and disposal of wastes. We may incur substantial costs, including fines, damages, criminal or civil sanctions and remediation costs, or experience interruptions in our operations for violations arising under environmental laws, regulations or permit requirements.

Our permits, licenses, registrations or authorizations and those of our customers or distributors may be modified, suspended, terminated or revoked before their expiration or we and/or they may be unable to renew them upon their expiration. We may bear liability for failure to obtain, maintain or comply with required authorizations.

We are required to obtain and maintain, and may be required to obtain and maintain in the future, various permits, licenses, registrations and authorizations for the ownership or operation of our business, including the manufacturing, distribution, sale and marketing of our products and importing of raw materials. These permits, licenses, registrations and authorizations could be modified, suspended, terminated or revoked or we may be unable to renew them upon their expiration for various reasons, including for non-compliance. These permits, licenses, registrations and authorizations can be difficult, costly and time consuming to obtain and could contain conditions that limit our operations. Our failure to obtain, maintain and comply with necessary permits, licenses, registrations or authorizations for the conduct of our business could result in fines or penalties, which may be significant. Additionally, any such failure could restrict or otherwise prohibit certain aspects of our operations, which could have a material adverse effect on our business, financial condition and results of operations.

 

23


Table of Contents

Many of our customers and distributors require similar permits, licenses, registrations and authorizations to operate. If a significant customer, distributor or group thereof were to have an important permit, license, registration or authorization revoked or such permit, license, registration or authorization was not renewed, forcing them to cease or reduce their business, our sales could decrease, which would have a material adverse effect on our business, financial condition and results of operations.

We may have additional tax liabilities.

We are subject to federal and state income and other taxes in the U.S., as well as a number of foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from that which is reflected in our consolidated financial statements. Should any tax authority challenge our tax positions, our results of operations, financial position and cash flows could be adversely affected.

Failure to design, implement and maintain effective internal controls could have a material adverse effect on our business and stock price.

As a public company, we will have significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. If we are unable to maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our financial statements and harm our operating results. In addition, we will be required to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting.

This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our auditors have issued an attestation report on effectiveness of our internal controls. Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting or our independent registered public accounting firm may not issue a favorable assessment. If either we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report, investors could lose confidence in our reported financial information, which could have a material adverse effect on the trading price of our stock.

Natural disasters or other events may disrupt our operations, decrease the demand for our products or otherwise have an adverse impact on our business.

Extraordinary events such as natural disasters may negatively affect local economies, including those of our customers or suppliers. Moreover, the occurrence of such events cannot be predicted, although they can be expected to continue to adversely impact the economy in general and our specific markets. The resulting damage from such an event could include loss of life, property damage or site closure. Any, or a combination, of these factors could adversely impact our results of operations, financial position and cash flows.

Our insurance policies may not cover, or fully cover, us against natural disasters, global conflicts or environmental risk.

We currently have insurance policies for certain operating risks, which include certain property damage, including certain aspects of business interruption for certain sites, operational and product liability, transit, directors’ and officers’ liability, industrial accident insurance and other risks customary in the industries in which

 

24


Table of Contents

we operate. However, we may become subject to liability (including in relation to pollution, occupational illnesses, injury resulting from tampering, product contamination or degeneration or other hazards) against which we have not insured or cannot fully insure.

For example, hurricanes may affect our facilities. In particular, the failure of our information systems as a result of breakdown, malicious attacks, unauthorized access, viruses or other factors could severely impair several aspects of operations, including, but not limited to, logistics, sales, customer service and administration. In addition, in the event that a product liability or third-party liability claim is brought against us, we may be required to recall our products in certain jurisdictions if they fail to meet relevant quality or safety standards, and we cannot guarantee that we will be successful in making an insurance claim under our policies or that the claimed proceeds will be sufficient to compensate the actual damages suffered.

Should we suffer a major uninsured loss, a product liability judgment against us or a product recall, future earnings could be materially adversely affected. We could be required to increase our debt or divert resources from other investments in our business to discharge product related claims. In addition, adverse publicity in relation to our products could have a significant effect on future sales, and insurance may not continue to be available at economically acceptable premiums. As a result, our insurance coverage may not cover the full scope and extent of claims against us or losses that we incur, including, but not limited to, claims for environmental or industrial accidents, occupational illnesses, pollution and product liability and business interruption.

Our business relies on trademarks, trade secrets, other intellectual property and proprietary information, and our failure to protect our rights could harm our competitive advantages with respect to the manufacturing of some of our products.

Our ability to protect and preserve our trademarks, trade secrets and other intellectual property and proprietary information relating to our business is an important factor to our success. However, we may be unable to prevent third parties from using our intellectual property and other proprietary information without our authorization or from independently developing intellectual property and other proprietary information that is similar to ours, particularly in those countries where the laws do not protect our proprietary rights to the same degree as in the U.S. In addition, because certain of our products are manufactured by third parties, we have shared some of our intellectual property with those third parties. There can be no guarantee that those third parties, some of whom are located in jurisdictions where intellectual property risks may be more pronounced, will preserve our intellectual property.

The use of our intellectual property and other proprietary information by others could reduce or eliminate any competitive advantage we have developed, potentially causing us to lose sales or otherwise harm our business. If it becomes necessary for us to litigate to protect these rights, any proceedings could be burdensome and costly, and we may not prevail.

Our intellectual property may not provide us with any competitive advantage and may be challenged by third parties. Moreover, our competitors may already hold or in the future may hold intellectual property rights in the U.S. or abroad that, if enforced or issued, could possibly prevail over our rights or otherwise limit our ability to manufacture or sell one or more of our products in the U.S. or internationally.

Adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets and manufacturing expertise. The loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition. In addition, others may obtain knowledge of our trade secrets through independent development or other access by legal means.

The failure to protect our intellectual property and other proprietary information, including our processes, apparatuses, technology, trade secrets, trade names and proprietary manufacturing expertise, methods and compounds, could have a material adverse effect on our businesses and results of operations.

 

25


Table of Contents

Our products may infringe on the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.

Many of our competitors have significant intellectual property rights. We cannot guarantee that our processes and products do not and will not infringe issued patents (whether present or future) or other intellectual property rights belonging to others, including situations in which our products, processes or technologies may be covered by patent applications filed by other parties in the U.S. or internationally.

We may also be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties. Intellectual property litigation is expensive and time-consuming, regardless of the merits of any claim, and could divert our management’s attention from operating our business.

If we were to discover that our processes, technologies or products infringe the valid intellectual property rights of others, we might need to obtain licenses from these parties or substantially re-engineer our products in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer our products successfully. Moreover, if we are sued for infringement and lose, we could be required to pay substantial damages and/or be enjoined from using or selling the infringing products or technology. If we incur significant costs to litigate our intellectual property rights or to obtain licenses, or if our inability to obtain required licenses for our processes, technologies or products prevents us from selling our products, our business and results of operations could be materially adversely affected.

A major failure of our information systems could harm our business.

We may experience operating problems with our information systems as a result of system failures, viruses or other causes. If our systems for protecting against these risks prove not to be sufficient, we could be adversely affected by, among other things, loss or damage of intellectual property or proprietary information, having our business operations interrupted, and increased costs to prevent, respond to, or mitigate attacks on our systems. Any significant disruption or slowdown of our systems could cause customers to cancel orders or cause standard business processes to become inefficient or ineffective, which could adversely affect our financial position, results of operations or cash flows.

Security breaches and other disruptions to our information technology systems could compromise our information, disrupt our operations, and expose us to liability, which may adversely impact our operations.

In the ordinary course of our business, we store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees in our information technology systems, including in our data centers and on our networks. The secure processing, maintenance and transmission of this data is critical to our operations. Despite our security measures, our information technology systems may be vulnerable to attacks by hackers or breached or disrupted due to employee error, malfeasance or other disruptions. Any such attack, breach or disruption could compromise our information technology systems and the information stored in them could be accessed, publicly disclosed, lost or stolen and our business operations could be disrupted. Any such access, disclosure or other loss of information or business disruption could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and damage to our reputation, which could adversely impact our operations.

We are subject to the U.S. Foreign Corrupt Practices Act and other anti-corruption laws, as well as other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, financial condition and results of operations.

Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”), and other anti-corruption laws that apply in countries where we do business. The FCPA and these

 

26


Table of Contents

other laws generally prohibit us and our employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We operate in a number of jurisdictions that pose a high risk of potential FCPA violations, and we participate in joint ventures and relationships with third parties whose actions could potentially subject us to liability under the FCPA or other anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.

We are also subject to other laws and regulations governing our international operations, including regulations administered by the U.S. Department of Commerce’s Bureau of Industry and Security, the U.S. Department of Treasury’s Office of Foreign Asset Control and various non-U.S. government entities, including applicable export control regulations, economic sanctions on countries and persons, customs requirements, currency exchange regulations and transfer pricing regulations (collectively, the “Trade Control Laws”).

However, there is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the FCPA or other legal requirements, or Trade Control Laws. If we are not in compliance with the FCPA and other anti-corruption laws or Trade Control Laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the FCPA, other anti-corruption laws or Trade Control Laws by the U.S. or foreign authorities could also have an adverse impact on our reputation, business, financial condition and results of operations.

We may acquire various structured financial instruments for purposes of hedging or reducing our risks, which may be costly and ineffective.

We may seek to hedge against commodity price fluctuations and credit risk by using structured financial instruments such as futures, options, swaps and forward contracts. Use of structured financial instruments for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging transaction can result in losses in the hedging transaction. Hedging activities also involve the risk of an imperfect correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the instrument being hedged. Use of hedging activities may not prevent significant losses and could increase our losses.

Fluctuations in currency exchange rates may significantly impact our results of operations and may significantly affect the comparability of our results between financial periods.

Our operations are conducted in many countries. The results of the operations and the financial position of these subsidiaries are reported in the relevant foreign currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements. The main currencies to which we are exposed, besides the U.S. dollar, are primarily the Canadian dollar, the British pound and the Australian dollar. The exchange rates between these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies against the U.S. dollar will decrease the U.S. dollar equivalent of the amounts derived from these operations reported in our consolidated financial statements and an appreciation of these currencies will result in a corresponding increase in such amounts. Because many of our raw material costs are determined with respect to the U.S. dollar rather than these currencies, depreciation of these currencies may have an adverse effect on our profit margins or our reported results of operations. Conversely, to the extent that we are required to pay for goods or services in foreign currencies, the appreciation of such currencies against the U.S. dollar will tend to negatively impact our results of operations. In addition, currency fluctuations may affect the comparability of our results of operations between financial periods.

 

27


Table of Contents

We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. Given the volatility of exchange rates, there can be no assurance that we will be able to effectively manage our currency transaction risks, that our hedging activities will be effective or that any volatility in currency exchange rates will not have a material adverse effect on our financial condition or results of operations.

Risks Relating to the Share Distribution and Operation as a Standalone, Publicly Traded Company

The historical combined financial information included in this Information Statement is not necessarily representative of the results we would have achieved as a standalone, publicly traded company and may not be a reliable indicator of our future results.

The historical combined financial information included in this Information Statement reflects the historical financial information of the CSWI Businesses and does not necessarily reflect the financial condition, results of operations or cash flows we would have achieved as a standalone, publicly traded company during the periods presented or that we may achieve in the future. This is primarily a result of the following factors:

 

  the historical combined financial information reflects allocations of expenses for services historically provided by Capital Southwest, and those allocations may be different than the comparable expenses we would have incurred as a standalone company;

 

  the historical combined financial information as of and for the periods prior to April 1, 2015 does not include Strathmore, which was a significant acquisition that was completed in April 2015;

 

  our cost of debt and other capitalization may be different from that reflected in our historical combined financial information;

 

  the historical combined financial information does not reflect the changes that will occur in our cost structure, management, financing arrangements and business operations as a result of our separation from Capital Southwest, including the costs related to being an independent company; and

 

  the historical combined financial information does not reflect the effects of some of the assets that will be transferred to, and liabilities that will be assumed by, CSWI.

The historical combined financial information presented in this Information Statement should not be assumed to be indicative of what our financial condition or results of operations would have been as a standalone publicly traded company or to be a reliable indicator of what our financial condition or results of operations actually may be in the future.

We may not be able to successfully integrate the CSWI Businesses and their respective operations in a timely manner or at all.

The CSWI Businesses currently operate as independent companies and will continue to do so until consummation of the Share Distribution. Following the Share Distribution, CSWI’s management will need to integrate the separate businesses, technologies, organizations, procedures, policies and operations of each of the CSWI Businesses in order to fully realize the expected results of the Share Distribution. The integration process may prove to be more complex and time-consuming and require substantially more resources and effort than currently anticipated, which could have a material adverse effect on CSWI and its businesses, relationships with market participants, employees, regulators and others.

 

28


Table of Contents

The requirements of being a public company, including compliance with the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) and the requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a public company with listed equity securities, we will be required to comply with additional laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act related regulations of the SEC, including compliance with the reporting requirements of the Exchange Act and the requirements of the NASDAQ Marketplace Rules with which we were not required to comply as a private company. Complying with these statutes, regulations and requirements is expected to occupy a significant amount of time of the CSWI Board and management and is expected to significantly increase our administrative costs and expenses. As a result of becoming a public company, we will be required to:

 

  institute a more comprehensive compliance function;

 

  design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;

 

  comply with rules promulgated by NASDAQ;

 

  prepare and distribute periodic public reports in compliance with our obligations under federal securities laws;

 

  establish new internal policies and procedures, such as those relating to corporate governance, disclosure controls and procedures and insider trading;

 

  involve and retain to a greater degree outside counsel and accountants in the above activities; and

 

  establish an investor relations function.

Our profitability will be adversely affected because of these additional costs.

We may be unable to achieve some or all of the benefits that we expect to achieve from the Share Distribution.

As a standalone, publicly traded company, we believe that our business will benefit from, among other things, more focused management and an enhanced ability to pursue our business strategy, which we expect as a result of the Share Distribution. However, by separating from Capital Southwest, we may be more susceptible to market fluctuations and other adverse events than we would have been were we still a part of Capital Southwest. In addition, we may not be able to achieve some or all of the benefits that we expect to achieve as a standalone company in the time we expect, if at all.

The Capital Southwest Board has reserved the right, in its sole discretion, to amend, modify or abandon the Share Distribution at any time prior to the Distribution Date. In addition, the Share Distribution is subject to the satisfaction or waiver (by the Capital Southwest Board in its sole discretion) of a number of conditions. CSWI and Capital Southwest cannot assure that any or all of these conditions will be met.

The Capital Southwest Board has reserved the right, in its sole discretion, to amend, modify or abandon the Share Distribution at any time prior to the Distribution Date. This means Capital Southwest may cancel or delay the planned distribution of common stock of CSWI if at any time the Capital Southwest Board determines that the distribution of such common stock is not in the best interests of Capital Southwest. If the Capital Southwest Board determines to cancel the Share Distribution, shareholders of Capital Southwest will not receive any distribution of CSWI common stock, and Capital Southwest will be under no obligation whatsoever to its shareholders to distribute such shares. In addition, the Share Distribution is subject to the satisfaction or waiver (by the Capital Southwest Board in its sole discretion) of a number of conditions. See “The Share Distribution—Conditions to the Share Distribution.” CSWI and Capital Southwest cannot assure that any or all of these conditions will be met. The fulfillment of the conditions to the Share Distribution will not create any obligation on Capital Southwest’s part to effect the Share Distribution.

 

29


Table of Contents

Potential indemnification obligations of CSWI pursuant to the Distribution Agreement and related agreements could materially adversely affect us.

The Distribution Agreement and related agreements between Capital Southwest and us provide for, among other things, the principal corporate transactions required to effect the separation, the conditions to the Share Distribution and provisions governing the relationship between Capital Southwest and us with respect to and resulting from the Share Distribution. For a description of the Distribution Agreement and related agreements, see “Certain Relationships and Related Party Transactions—Agreements between Capital Southwest and CSWI Relating to the Share Distribution.”

Among other things, the Distribution Agreement provides for indemnification obligations designed to make CSWI financially responsible for liabilities that may exist relating to or arising out of its business activities, whether incurred prior to or after the Share Distribution.

In addition, after the Share Distribution, there will be several significant areas where the liabilities of Capital Southwest may become our obligations under the Employee Matters Agreement, including Capital Southwest defined benefit obligations. For a description of the Employee Matters Agreement, see “Certain Relationships and Related Party Transactions—Agreements between Capital Southwest and CSWI Relating to the Share Distribution—Agreements between Capital Southwest and CSWI Relating to the Share Distribution—The Employee Matters Agreement.”

If CSWI is required to indemnify Capital Southwest under the circumstances set forth in the Distribution Agreement or the Employee Matters Agreement, CSWI may be subject to substantial liabilities that could adversely affect our financial condition.

If the Share Distribution is determined to be taxable for U.S. federal income tax purposes, our stockholders could incur significant U.S. federal income tax liabilities.

A condition to the Share Distribution is Capital Southwest’s receipt of an opinion from a nationally recognized accounting firm substantially to the effect that the Share Distribution (and the Pre-Share Distribution reorganization) should qualify as tax free under Sections 355 and 368(a)(1)(D) of the Code, except with respect to any cash received in lieu of fractional shares of CSWI common stock. An opinion of an accounting firm is not binding on the Internal Revenue Service (“IRS”). Accordingly, the IRS may reach conclusions with respect to the Share Distribution (and the Pre-Share Distribution reorganization) that are different from the conclusions reached in the opinion. The opinion will rely on certain facts, assumptions, representations and undertakings from Capital Southwest and us regarding the past and future conduct of the companies’ respective businesses and other matters, which, if incomplete, incorrect or not satisfied, could alter that accounting firm’s conclusions.

If the Share Distribution ultimately is determined to be taxable, it could be treated as a taxable dividend to you for U.S. federal income tax purposes and you could incur significant U.S. federal income tax liabilities. In addition, Capital Southwest would recognize a taxable gain to the extent that the fair market value of our common stock exceeds Capital Southwest’s tax basis in such stock on the date of the Share Distribution. For a description of the sharing of such liabilities between Capital Southwest and us, see “Certain Relationships and Related Person Transactions—Tax Matters Agreement.”

We may not be able to engage in certain corporate transactions after the Share Distribution.

Our ability to engage in significant equity transactions will be limited or restricted after the Share Distribution in order to preserve the tax-free status of the Share Distribution to Capital Southwest for U.S. federal income purposes. Even if the Share Distribution (and the Pre-Share Distribution reorganization) otherwise qualifies for tax-free treatment to Capital Southwest’s shareholders under Sections 355 and 368(a)(1)(D) of the Code, it may be taxable to Capital Southwest under section 355(e) of the Code if 50% or more, by vote or value, of the shares of our common stock or Capital Southwest’s common stock are acquired or issued as part of a plan

 

30


Table of Contents

or series of related transactions that includes the Share Distribution. For this purpose, any acquisitions or issuances of Capital Southwest’s common stock within two years before the Share Distribution, and any acquisitions or issuances of our common stock or Capital Southwest’s common stock within two years after the Share Distribution, generally are presumed to be part of such a plan, although we or Capital Southwest may be able to rebut that presumption. If an acquisition or issuance of shares of our common stock or Capital Southwest’s common stock triggers the application of Section 355(e) of the Code, Capital Southwest would recognize a taxable gain as a result of the Share Distribution to the extent the fair market value of our common stock exceeds Capital Southwest’s tax basis in our common stock at the time of the Share Distribution.

Under the Tax Matters Agreement that was entered into in connection with the Distribution Agreement, there will be restrictions on our ability to take actions that could cause the Share Distribution to fail to qualify for favorable treatment under the Code, and we will be required to indemnify Capital Southwest against any tax liabilities arising as a result of the Share Distribution that are attributable to any actions taken by us or with respect to us or any of our affiliates. As a result, we may be limited or restricted from entering into strategic, capital raising or other transactions which might be advantageous to us or our stockholders. For a description of the provisions of the Tax Matters Agreement, see “Certain Relationships and Related Person Transactions—Tax Matters Agreement.”

In connection with our separation from Capital Southwest, Capital Southwest will indemnify us for certain liabilities. However, there can be no assurance that these indemnities will be sufficient to insure us against the full amount of such liabilities or that Capital Southwest’s ability to satisfy its indemnification obligation will not be impaired in the future.

Following the Share Distribution, Capital Southwest has agreed to indemnify us for certain liabilities, including certain tax liabilities. However, third parties could seek to hold us responsible for any of the liabilities that Capital Southwest will agree to retain, and there can be no assurance that Capital Southwest will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Capital Southwest any amounts for which we are held liable, we may be temporarily required to bear these losses while seeking recovery from Capital Southwest.

Potential liabilities may arise due to fraudulent transfer considerations, which would adversely affect our financial condition and our results of operations.

In connection with the Share Distribution, Capital Southwest will undertake several corporate restructuring transactions which, along with the Share Distribution, may be subject to federal and state fraudulent conveyance and transfer laws. If, under these laws, a court were to determine that, at the time of the Share Distribution, any entity involved in these restructuring transactions or the Share Distribution: (1) was insolvent; (2) was rendered insolvent by reason of the Share Distribution; (3) had remaining assets constituting unreasonably small capital; or (4) intended to incur, or believed it would incur, debts beyond its ability to pay these debts as they matured, then the court could void the Share Distribution, in whole or in part, as a fraudulent conveyance or transfer. The court could then require CSWI’s stockholders to return to Capital Southwest some or all of the shares of CSWI’s common stock issued in the Share Distribution, or require Capital Southwest or CSWI, as the case may be, to fund liabilities of the other company for the benefit of creditors.

Risks Relating to Our Common Stock

There is no existing market for our common stock, and we cannot be certain that an active trading market will develop or be sustained after the Share Distribution. Following the Share Distribution, our stock price may fluctuate significantly.

There is currently no trading market for our common stock. In connection with the Share Distribution, CSWI common stock will be listed on NASDAQ under the symbol “CSWI,” to be effective upon consummation of the Share Distribution. It is anticipated that on or shortly prior to the record date, trading of shares of our

 

31


Table of Contents

common stock will begin on a “when-issued” basis and this trading will continue up to and including the Distribution Date. However, there can be no assurance that an active trading market for our common stock will develop as a result of the Share Distribution or be sustained in the future. The lack of an active market may make it more difficult for you to sell our common stock and could lead to the share price for our common stock being depressed or more volatile.

We have not set an initial price for our common stock. The price will be established by the market. We cannot predict the prices at which our common stock may trade after the Share Distribution. Indeed, the combined market prices of our common stock and Capital Southwest common stock after the distribution may not equal or exceed the market value of Capital Southwest common stock immediately prior to the Share Distribution. The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including:

 

  changes in expectations concerning our future financial performance and the future performance of the industrial products, coatings, sealants and adhesives and specialty chemicals industries in general, including financial estimates and recommendations by securities analysts;

 

  differences between our actual financial and operating results and those expected by investors and analysts;

 

  strategic actions by us or our competitors, including acquisitions or corporate restructurings;

 

  changes in the regulatory framework affecting our operations; and

 

  changes in general economic or market conditions.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.

In the past, class-action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have an adverse effect on our financial condition, results of operations, cash flow and trading price of our common stock.

Substantial sales of shares of our common stock may occur in connection with the Share Distribution, which could cause our stock price to decline.

The shares of our common stock that Capital Southwest will distribute to its shareholders in the Share Distribution generally may be sold immediately in the public market. Although we have no actual knowledge of any plan or intention on the part of any significant stockholder to sell shares of our common stock following the Share Distribution, it is likely that some of Capital Southwest’s shareholders will sell shares of our common stock received in the Share Distribution if, for reasons such as our business profile or market capitalization as a standalone company, we do not fit their investment objectives. The sales of significant amounts of our common stock or the perception in the market that this will occur may result in the lowering of the market price of our common stock.

Future issuances of debt securities, which would rank senior to our common stock upon our liquidation, and future issuances of equity securities, which would dilute the holdings of our common stockholders, may negatively affect the market price of our common stock.

In the future, we may issue debt or equity securities or incur other borrowings. Upon liquidation, holders of our debt securities and other loans and preferred stock will receive a distribution of our available assets before common stockholders. We are not required to offer any additional debt or equity securities to common stockholders on a preemptive basis. Therefore, additional common stock issuances, directly or through convertible or exchangeable securities, warrants or options, will dilute our common stockholders’ ownership in

 

32


Table of Contents

us and such issuances, or the perception that such issuances may occur, may reduce the market price of shares of our common stock. Because our decision to issue debt or equity securities or otherwise incur debt in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. Thus, common stockholders bear the risk that our future issuances of debt or equity securities or our other borrowing will negatively affect the market price of our common stock and dilute their ownership in us.

Upon effectiveness of the Form 10, our charter will authorize us to issue 60 million shares of capital stock, of which 50 million shares will be designated as common stock and 10 million shares will be designated as preferred stock. After the Share Distribution, the CSWI Board may elect to, among other things, (1) sell additional shares in one or more public offerings, (2) issue equity interests in private offerings, or (3) issue shares of our common stock under a long term incentive plan to our non-employee directors or employees. To the extent we issue additional equity interests after the Share Distribution, your percentage ownership interest in us will be diluted. Further, depending upon the terms of such transactions, most notably the offering price per share, stockholders may also experience a dilution in the value of their investment in us.

We do not expect to pay dividends for the foreseeable future.

Any payment of dividends will be at the discretion of the CSWI Board and will depend upon various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, any contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that our board of directors may deem relevant. We do not currently expect to pay dividends on our common stock for the foreseeable future following the Share Distribution. As a result, you may not receive any return on an investment in our capital stock in the form of dividends.

We are a holding company, and we depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial obligations.

We are a holding company and our subsidiaries conduct all of our operations and own all of our operating assets. We have no significant assets other than the equity interests in our subsidiaries. As a result, our ability to satisfy our financial obligations in the future depends on our subsidiaries and their ability to distribute funds to us.

Anti-takeover provisions in our organizational documents and Delaware law could delay or prevent a change in control.

Provisions of our charter and bylaws may delay or prevent a merger or acquisition that a stockholder may consider favorable. For example, our charter and bylaws will authorize the CSWI Board to issue one or more series of preferred stock. This provision may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price. In addition, Delaware law also imposes some restrictions on mergers and other business combinations between any holder of 15 percent or more of our outstanding common stock and us. See “Description of Our Capital Stock” for additional information. As a result, our obligations may discourage, delay or prevent a change of control of our company.

 

33


Table of Contents

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements appearing in this Information Statement constitute “forward-looking statements.” Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “expects,” “plans,” “anticipates,” “estimates,” “believes,” “potential,” “projects,” “forecasts,” “intends,” or the negative thereof or other comparable terminology.

Forward-looking statements include, but are not limited to, statements that relate to, or statements that are subject to risks, contingencies or uncertainties that relate to:

 

  the expected benefits of the Share Distribution;

 

  our business strategy;

 

  future levels of revenues, operating margins, income from operations, net income or earnings per share;

 

  anticipated levels of demand for our products and services;

 

  future levels of research and development, capital, environmental or maintenance expenditures;

 

  our beliefs regarding the timing and effects on our business of health and safety, tax, environmental or other legislation, rules and regulations;

 

  the success or timing of completion of ongoing or anticipated capital, restructuring or maintenance projects;

 

  expectations regarding the acquisition or divestiture of assets and businesses;

 

  our ability to obtain appropriate insurance and indemnities;

 

  the potential effects of judicial or other proceedings, including tax audits, on our business, financial condition, results of operations and cash flows;

 

  the anticipated effects of actions of third parties such as competitors, or federal, foreign, state or local regulatory authorities, or plaintiffs in litigation; and

 

  the effective date and expected impact of accounting pronouncements.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forwarding-looking statements in this Information Statement.

The matters discussed in “Risk Factors” could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. These risks could cause our results to differ materially from those expressed in forward-looking statements.

 

34


Table of Contents

THE SHARE DISTRIBUTION

General

The Capital Southwest Board has determined that it is in the best interests of Capital Southwest and its shareholders to pursue the Share Distribution. Capital Southwest will accomplish this through a pro rata distribution to Capital Southwest’s shareholders of our outstanding common stock. Following the Share Distribution, we will be a standalone, publicly traded company. In connection with the Share Distribution, CSWI common stock will be listed on NASDAQ under the symbol “CSWI.”

Before the Share Distribution, we entered into a Distribution Agreement and other agreements with Capital Southwest to effect the Share Distribution and provide a framework for our relationship with Capital Southwest after the Share Distribution. These agreements govern the relationship between us and Capital Southwest before and after the Share Distribution and will provide for the allocation between us and Capital Southwest of various assets, liabilities and obligations attributable to periods before the Share Distribution.

The Share Distribution is subject to the satisfaction of certain conditions. For a more detailed description of these conditions, see “—Conditions to the Share Distribution.”

Reasons for the Share Distribution

The Capital Southwest Board reviewed Capital Southwest’s structure and strategy to consider the strategic, operational and financial requirements of an investment company seeking to achieve capital appreciation through long-term investments in privately held businesses. As part of its review, the Capital Southwest Board evaluated potential strategic alternatives in connection with an overall review of its strategy as a business development company, including a termination of Capital Southwest’s regulated investment company status. Although the business development company structure has several benefits, the growth and expansion of the CSWI Businesses has created significant concerns on the continued qualification of Capital Southwest as a regulated investment company and has significantly limited the flexibility of Capital Southwest and the CSWI Businesses to obtain and deploy capital in a manner that would maximize the growth and profitability of their respective businesses. Further, because of the regulatory framework imposed on Capital Southwest as a business development company, the CSWI Businesses have been operated as separate businesses, and consequently the CSWI Businesses have been unable to benefit from the greater scale, cost synergies and other benefits that could result from common ownership and operation in a less regulated operating environment.

The Capital Southwest Board determined that the Share Distribution is in the best interests of Capital Southwest and its shareholders, and that separating the CSWI Businesses from Capital Southwest would provide benefits to both Capital Southwest and CSWI that could not be achieved as a combined company, such as our ability to:

 

  Organize the CSWI Businesses Around Key Market Segments. Due to Capital Southwest’s business development company structure, each of the CSWI Businesses has historically operated as a separate independent company. The Share Distribution will allow CSWI to pursue a strategy expected to focus on organizing around key market segments, which the Capital Southwest Board believes will result in greater opportunities to achieve cost and operational synergies and implement best practices in the collective operations of the businesses.

 

 

Grow the CSWI Businesses by Allocating Capital More Efficiently. As a business development company, Capital Southwest is subject to regulatory limitations that, because of the growth of the CSWI Businesses and the value of Capital Southwest’s investments in them, create significant regulatory hurdles to Capital Southwest’s ability to invest directly in the continued expansion of the CSWI Businesses. In addition, due to their being separate portfolio companies in Capital Southwest’s business development company structure, it is not efficient to move capital from one of the CSWI Businesses to another to fund attractive growth projects. Following the Share Distribution, CSWI will be able to more efficiently fund growth projects across the CSWI Businesses, as no regulatory hurdles will exist that would limit CSWI’s ability to fund

 

35


Table of Contents
 

future growth. In particular, (1) CSWI is expected to be able to more effectively access the capital markets to fund growth and more efficiently move capital internally as a company separate from Capital Southwest and without the limitations imposed on it as a business development company and (2) Capital Southwest is expected to operate as a more traditional debt-focused business development company. Further, the Capital Southwest Board expects that the cash to be contributed to CSWI prior to the Share Distribution will provide it with the ability to immediately pursue growth opportunities.

 

  Offer Greater Investor Choice Through Separate Entities. The Share Distribution will separate the two business models that the Capital Southwest Board believes currently exist within Capital Southwest—an industrial growth company and an investment company. The Capital Southwest Board believes this will increase investor visibility into and understanding of the CSWI Businesses and Capital Southwest’s investment activities and thereby facilitate the creation of a more natural and interested investor base for each company. The Share Distribution will provide investors with two individual investment options that may be more attractive to them than an investment in Capital Southwest. Separating the CSWI Businesses will result in each of Capital Southwest and CSWI representing more of a pure-play investment that the Capital Southwest Board believes will appeal to the respective investor bases due to each company’s more defined business and assets. The Share Distribution will allow investors to make independent decisions with respect to each of CSWI and Capital Southwest based on, among other factors, its different business models, strategies and industry focus.

 

  Unlock Shareholder Value. The Capital Southwest Board believes that following the Share Distribution the combined value of Capital Southwest common stock and CSWI common stock should, over time and assuming similar market conditions, be greater than the value of Capital Southwest common stock had the Share Distribution not occurred, resulting in greater long-term value to Capital Southwest shareholders and greater flexibility for each of Capital Southwest and CSWI to make new investments to advance their business plans. This belief is based in part on the fact that the Share Distribution will result in greater public disclosure of the operations and performance of the CSWI Businesses once CSWI is a publicly traded company, permitting investors to more accurately assess the performance and strategies of the CSWI Businesses. To date, public dissemination of CSWI information is limited, because, as a business development company, Capital Southwest does not consolidate the results of the CSWI Businesses or its other investments into its own financial reports. The additional public information should lead to enhanced investor understanding of each company’s businesses, and as a result, to shareholder valuations with respect to CSWI that are more closely aligned with the underlying performance of the CSWI Businesses. The increased market value of the shares of each company should provide additional flexibility for each company to pursue its business strategy. However, no assurance can be given that such higher aggregate value will be achieved.

 

  Increase Management Focus. The Share Distribution will enable us to create a management team capable of devoting its entire time and attention to growing the CSWI Businesses and improving operational performance and profitability and, as a result, maximizing shareholder value.

 

  Better Align the Interests of Management and Our Stockholders. The Capital Southwest Board believes that the Share Distribution will enable us to use share-based incentive awards that will be tied directly to CSWI’s performance, providing employees with incentives more closely linked to the achievement of the specific performance objectives of the CSWI Businesses and aligning employee interests more closely with the interests of stockholders.

In addition, the Capital Southwest Board considered the fact that the CSWI Businesses are not integrated with Capital Southwest and, as a result, the Share Distribution is not expected to involve extensive disentanglements.

The Capital Southwest Board also considered a number of potentially negative factors in evaluating the Share Distribution. These factors included, among other things, the fact that the Share Distribution: (1) will result in two standalone, publicly traded companies, which will result in increased operating and overhead costs in the

 

36


Table of Contents

aggregate; and (2) has caused Capital Southwest to incur implementation costs it would not otherwise have incurred, and, if implemented, will likely cause transitional disruptions in the operations of both Capital Southwest and CSWI.

The Capital Southwest Board also considered a number of potential risks in evaluating the Share Distribution, including (1) the risk that the Share Distribution might not be consummated, (2) the risk of being unable to achieve expected benefits from the Share Distribution, and (3) risks relating to possible declines or fluctuations in the Capital Southwest stock price.

Notwithstanding these potentially negative factors and risks, the Capital Southwest Board determined that the Share Distribution was the best alternative to enhance shareholder value taking into account the factors discussed above. In view of the wide variety of factors considered in connection with the evaluation of the Share Distribution and the complexity of these matters, the Capital Southwest Board did not find it useful to, and did not attempt to, quantify, rank or otherwise assign relative weights to the factors considered.

Manner of Effecting the Share Distribution

On the Distribution Date, Capital Southwest will distribute its CSWI common stock to its shareholders. Capital Southwest shareholders will receive one share of our common stock for every share of Capital Southwest common stock held as of the Record Date. See “—Material U.S. Federal Income Tax Consequences” for an explanation of the material U.S. federal income tax consequences of the Share Distribution.

If you own shares of Capital Southwest common stock as of the close of business on the Record Date, the shares of our common stock that you are entitled to receive in the Share Distribution will be issued electronically, as of the Distribution Date, to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. Direct registration refers to a method of recording share ownership when no physical share certificates are issued to shareholders, as is the case in this distribution.

Commencing on or shortly after the Distribution Date, if you hold physical share certificates that represent your Capital Southwest common stock and you are the registered holder of the Capital Southwest common stock represented by those certificates, the distribution agent will mail to you an account statement that indicates the number of shares of our common stock that have been electronically registered in your name.

Most Capital Southwest shareholders hold their shares of Capital Southwest common stock through a bank or brokerage firm. In these cases, the bank or brokerage firm would be said to hold the shares in “street name,” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your shares of Capital Southwest common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of our common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares held in “street name,” we encourage you to contact your bank or brokerage firm at any time.

The distribution will be pro rata to shareholders holding shares of Capital Southwest common stock as of the Record Date. The Capital Southwest Board has established a distribution ratio of one share of our common stock for every share of Capital Southwest common stock held as of the Record Date. Accordingly, assuming approximately 15.6 million shares of Capital Southwest common stock outstanding as of the Record Date, the number of shares of our common stock to be distributed in the Share Distribution, and the number of shares of our common stock which will be outstanding immediately following the Share Distribution, will be approximately 15.6 million. The Share Distribution will not affect the number of outstanding shares of Capital Southwest common stock or any rights of Capital Southwest’s shareholders.

Treatment of Fractional Shares

The distribution agent will not deliver any fractional shares of CSWI common stock in connection with the Share Distribution. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the

 

37


Table of Contents

whole shares in the open market at prevailing market prices and distribute the aggregate net cash proceeds of the sales pro rata to each holder who otherwise would have been entitled to receive a fractional share of CSWI common stock in the Share Distribution. These sales will occur as soon as practicable after the Distribution Date. Those stockholders will then receive a cash payment, in the form of a check, in an amount equal to their pro rata share of the total proceeds of those sales. Any applicable expenses, including brokerage fees, will be paid by CSWI.

CSWI expects that all fractional shares held in street name will be aggregated and sold by brokers or other nominees according to their standard procedures, and that brokers or other nominees may request the distribution agent to sell the fractional shares on their behalf. You should contact your broker or other nominee for additional details. None of Capital Southwest, CSWI, or the distribution agent will guarantee any minimum sale price for fractional shares or pay any interest on the proceeds from the sale of fractional shares. The receipt of cash in lieu of fractional shares will generally be taxable to the recipient stockholders. See “—Material U.S. Federal Income Tax Consequences.”

Trading of Capital Southwest Common Stock Prior to the Share Distribution

It is anticipated that, on or shortly before the Record Date and continuing up to and including the Distribution Date, there will be two markets in Capital Southwest common stock: a “regular-way” market and an “ex-distribution” market. Shares of Capital Southwest common stock that trade on the regular-way market will trade with an entitlement to shares of our common stock to be distributed in the Share Distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock to be distributed in the Share Distribution. Therefore, if you sell Capital Southwest common stock in the regular-way market up to and including the Distribution Date, you will be selling your right to receive shares of our common stock in the Share Distribution. If you own shares of Capital Southwest common stock at the close of business on the Record Date and sell those shares on the ex-distribution market up to and including the Distribution Date, you will still receive the shares of our common stock that you would otherwise be entitled to receive pursuant to the Share Distribution.

Trading and Listing of Our Common Stock

In connection with the Share Distribution, CSWI common stock will be listed on NASDAQ under the symbol “CSWI.” We also expect that a “when-issued” market in our common stock may develop on or shortly prior to the Record Date. When-issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The when-issued trading market will be a market for the shares of our common stock that will be distributed to Capital Southwest shareholders on the Distribution Date. If you own shares of Capital Southwest common stock at the close of business on the Record Date, you will be entitled to shares of our common stock distributed pursuant to the Share Distribution, unless traded in the “regular-way” market as described above. You may trade this entitlement to shares of our common stock, without the Capital Southwest common stock you own, on the when-issued market. On the first trading day following the Distribution Date, we expect that when-issued trading with respect to our common stock will end and regular-way trading will begin.

Relationship with Capital Southwest Following the Share Distribution

Prior to the Share Distribution, Capital Southwest entered into a Distribution Agreement and other agreements with us to effect the Share Distribution and provide a framework for the relationship between Capital Southwest and us before and after the Share Distribution. These agreements provide for the allocation between Capital Southwest and us of certain assets, liabilities and obligations attributable to periods prior to the Share Distribution and will also govern our relationship with Capital Southwest after the Share Distribution. Among other things, the Distribution Agreement provides for the transfer, immediately prior to the Share Distribution, of $13.0 million in cash from Capital Southwest to CSWI. For a more detailed description of these agreements, see “Certain Relationships and Related Party Transactions—Agreements between Capital Southwest and CSWI Relating to the Share Distribution.”

 

38


Table of Contents

Conditions to the Share Distribution

The Share Distribution is subject to a number of conditions, including:

 

  the SEC will have declared effective CSWI’s Registration Statement on Form 10, of which this Information Statement is a part, under the Exchange Act, with no stop order in effect with respect to the Form 10, and this Information Statement shall have been mailed to the shareholders of Capital Southwest;

 

  Capital Southwest shall have received a favorable opinion from a nationally recognized accounting firm with respect to the tax-free nature of the Share Distribution for federal income tax purposes (see “—Material U.S. Federal Income Tax Consequences”);

 

  the Capital Southwest Board will not have withdrawn its authorization and approval regarding (1) the Share Distribution and (2) the transfers of assets and assumptions of liabilities contemplated by the Distribution Agreement;

 

  the Capital Southwest Board shall have declared the distribution of outstanding shares of common stock of CSWI to Capital Southwest shareholders as of the Record Date;

 

  the actions and filings necessary under securities and blue sky laws of the states of the U.S. and any comparable laws under any foreign jurisdictions have been taken and become effective;

 

  no order, injunction, decree or regulation issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Share Distribution shall be in effect;

 

  CSWI common stock shall have been approved for listing on NASDAQ, subject to official notice of issuance;

 

  each of the ancillary agreements related to the Share Distribution shall have been entered into before the Share Distribution and shall not have been materially breached by any party thereto; and

 

  no other events or developments have occurred that, in the judgment of the Capital Southwest Board, in its sole and absolute discretion, would result in the Share Distribution having a material adverse effect on Capital Southwest or its shareholders.

In the event that the Capital Southwest Board waives a material condition or amends, modifies or abandons the Share Distribution, Capital Southwest will notify its shareholders in a manner reasonably calculated to inform them of such modifications with a Current Report on Form 8-K, press release, or other means.

Material U.S. Federal Income Tax Consequences

The following is a summary of the material U.S. federal income tax consequences to Capital Southwest and the holders of Capital Southwest common stock in connection with the Share Distribution. This summary is based on the Code, Treasury Regulations promulgated thereunder and judicial and administrative interpretations thereof, each as in effect on the date of this Information Statement, and each of which is subject to change at any time, possibly with retroactive effect. Any such change could materially and adversely affect the tax consequences described below.

This summary is limited to holders of Capital Southwest common stock that are U.S. Holders. A “U.S. Holder” is a beneficial owner of Capital Southwest common stock that is, for U.S. federal income tax purposes:

 

  an individual who is a citizen or a resident of the U.S.;

 

  a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the U.S., any state thereof or the District of Columbia;

 

  an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

  a trust, if (1) a court within the U.S. is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (2) it has a valid election in place under applicable Treasury Regulations to be treated as a U.S. person.

 

39


Table of Contents

This summary does not discuss all tax considerations that may be relevant to shareholders in light of their particular circumstances, nor does it address the tax consequences to shareholders subject to special treatment under the U.S. federal income tax laws, such as:

 

  dealers or traders in securities or currencies;

 

  regulated investment companies;

 

  real estate investment trusts;

 

  tax-exempt entities;

 

  banks, financial institutions or insurance companies;

 

  persons who acquired Capital Southwest common stock pursuant to the exercise of employee stock options or otherwise as compensation;

 

  shareholders who own, or are deemed to own, at least 10% or more, by voting power or value, of Capital Southwest’s common stock;

 

  holders owning Capital Southwest common stock as part of a position in a straddle or as part of a hedging, conversion or other risk reduction transaction for U.S. federal income tax purposes;

 

  certain former citizens or long-term residents of the U.S.;

 

  holders who are subject to the alternative minimum tax; or

 

  persons who own Capital Southwest common stock through partnerships or other pass-through entities.

This summary does not address the U.S. federal income tax consequences to Capital Southwest shareholders who do not hold Capital Southwest common stock as a capital asset. Moreover, this summary does not address any state, local or non-U.S. tax consequences or any estate, gift or other non-income tax consequences.

If a partnership, or any other entity treated as a partnership for U.S. federal income tax purposes, holds Capital Southwest common stock, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its own tax advisor as to its tax consequences.

YOU SHOULD CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL AND NON-U.S. TAX CONSEQUENCES OF THE SHARE DISTRIBUTION. THIS SUMMARY IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR INVESTOR.

The Share Distribution is conditioned on Capital Southwest’s receipt of an opinion from a nationally recognized accounting firm that the Share Distribution (and the Pre-Share Distribution reorganization) should meet the requirements necessary to be tax free to Capital Southwest and holders of Capital Southwest’s common stock under Sections 355 and 368(a)(1)(D) of the Code, except, in the case of Capital Southwest’s shareholders, with respect to any cash received in lieu of fractional shares of CSWI’s common stock. The opinion will be based on, among other things, current tax law and certain facts, assumptions, representations and undertakings made by Capital Southwest and us, which if incomplete, incorrect or not satisfied in certain material respects would jeopardize the conclusions reached by the accounting firm in its opinion. The opinion of the accounting firm will not be binding on the IRS or the courts. Although the receipt of the opinion is a condition to the Share Distribution, it and as all other conditions to the Share Distribution may be waived by Capital Southwest in its sole discretion. Capital Southwest and CSWI have not sought and will not seek any ruling from the IRS regarding any matters relating to the Share Distribution, and, as a result, there can be no assurance that the IRS will not assert, or that a court would not sustain, a position contrary to the conclusions set forth below. In that event, the consequences described below would not apply and Capital Southwest and holders of Capital Southwest common stock who receive shares of CSWI common stock in the Share Distribution could be subject to significant U.S. federal income tax liability as a result of the Share Distribution.

 

40


Table of Contents

Assuming the Share Distribution (and the Pre-Share Distribution reorganization) satisfies the requirements necessary for it to qualify for tax-free treatment under Sections 355 and 368(a)(1)(D) of the Code, the following describes the material U.S. federal income tax consequences of the Share Distribution to Capital Southwest and Capital Southwest’s shareholders:

 

  no income, gain or loss will be recognized by a holder of Capital Southwest common stock solely as a result of the receipt of CSWI common stock;

 

  subject to the discussion below regarding Section 355(e) of the Code, no gain or loss will be recognized by Capital Southwest as a result of the Share Distribution;

 

  the aggregate tax basis of the Capital Southwest common stock and CSWI common stock (including fractional shares of CSWI common stock that are sold) in the hands of a Capital Southwest shareholder immediately after the Share Distribution will be the same as the aggregate tax basis of the Capital Southwest common stock held by the holder immediately before the Share Distribution, allocated between the common stock of Capital Southwest and the common stock of CSWI (including fractional shares of CSWI common stock that are sold) in proportion to their relative fair market values on the date of the Share Distribution;

 

  the holding period of the shares of CSWI common stock received by a Capital Southwest shareholder will include the holding period of its Capital Southwest common stock, provided that such Capital Southwest common stock is held as a capital asset on the date of the Share Distribution; and

 

  a Capital Southwest shareholder who receives cash in lieu of a fractional share of CSWI common stock will recognize gain or loss measured by the difference between the tax basis of the fractional share and the amount of cash received.

Capital Southwest shareholders that have acquired different blocks of Capital Southwest common stock at different times or at different prices should consult their tax advisors regarding the allocation of their aggregate adjusted tax basis among, and their holding period of, CSWI common stock distributed with respect to such blocks of Capital Southwest common stock.

U.S. Treasury Regulations require certain shareholders that receive stock in a spin-off to attach to their respective U.S. federal income tax returns, for the year in which the spin-off occurs, a detailed statement setting forth certain information relating to the spin-off. Within a reasonable period of time after the Share Distribution, Capital Southwest expects to make available to its shareholders information pertaining to compliance with this requirement.

If the Share Distribution (and the Pre-Share Distribution reorganization) were not to qualify as tax-free for U.S. federal income tax purposes as described above, each Capital Southwest shareholder that receives shares of CSWI common stock in the Share Distribution would be treated as receiving a distribution in an amount equal to the fair market value of such shares (including fractional shares of CSWI common stock that are sold), which generally would be treated in the following manner:

 

  first as a taxable dividend to the extent of such shareholder’s pro rata share of Capital Southwest’s current and accumulated earnings and profits;

 

  then as a non-taxable return of capital to the extent of such shareholder’s tax basis in its Capital Southwest common stock; and

 

  thereafter as capital gain with respect to any remaining value.

Additionally, each shareholder’s basis in the CSWI common stock received in the Share Distribution (including fractional shares of CSWI common stock that are sold) would be equal to its fair market value on the date of the distribution and its holding period in the CSWI common stock would begin on the date of the distribution. Furthermore, Capital Southwest would recognize a taxable gain to the extent that the fair market value of the CSWI common stock exceeds Capital Southwest’s tax basis in CSWI’s common stock on the Distribution Date.

 

41


Table of Contents

Even if the Share Distribution (and the Pre-Share Distribution reorganization) otherwise qualifies for tax-free treatment under Sections 355 and 368(a)(1)(D) of the Code, it may be taxable to Capital Southwest as described in the prior paragraph (but not Capital Southwest’s shareholders) under Section 355(e) of the Code if 50 percent or more, by vote or value, of the shares of Capital Southwest common stock or CSWI common stock are acquired or issued as part of a plan or series of related transactions that includes the Share Distribution. For this purpose, any acquisitions or issuances of Capital Southwest common stock within two years before the Share Distribution, and any acquisitions or issuances of CSWI common stock or Capital Southwest common stock within two years after the Share Distribution, generally are presumed to be part of such a plan, although we or Capital Southwest may be able to rebut that presumption. Even if these rules were to apply to cause the Share Distribution to be taxable to Capital Southwest, it would remain tax-free to the Capital Southwest shareholders if the Share Distribution (and the Pre-Share Distribution reorganization) otherwise qualifies for tax-free treatment under Sections 355 and 368(a)(1)(D) of the Code.

In connection with the Share Distribution, we and Capital Southwest will agree to be subject to certain restrictions to preserve the tax-free nature of the Share Distribution. For a description of such restrictions, see “Certain Relationships and Related Person Transactions—Tax Matters Agreement.”

The preceding summary of the anticipated U.S. federal income tax consequences of the Share Distribution is for general informational purposes only. Capital Southwest’s shareholders should consult their own tax advisors as to the specific tax consequences of the Share Distribution to them, including the application and effect of state, local or non-U.S. tax laws and of changes in applicable tax laws.

Regulatory Matters Related to the Share Distribution

We are required to file with the SEC a registration statement on Form 10 together with certain exhibits thereto, including the final version of this Information Statement to be delivered to holders of Capital Southwest common stock on the Record Date, in order to register our common stock under the Exchange Act.

Apart from the matter described above, Capital Southwest is not aware of any other material state or federal regulatory requirements or approvals that must be complied with or obtained in connection with the Share Distribution.

Treatment of Stock-Based Awards

In connection with the Share Distribution, all stock option and restricted stock awards held by directors, officers and employees of Capital Southwest will be adjusted to represent both Capital Southwest and CSWI stock options and restricted stock awards.

Each Capital Southwest stock option will be converted into both an adjusted Capital Southwest stock option and a CSWI stock option, with adjustments made to the exercise prices and number of shares subject to each option in order to preserve the aggregate intrinsic value of the original Capital Southwest stock option as measured immediately before and immediately after the Share Distribution, subject to rounding. The number of shares of CSWI common stock and of Capital Southwest common stock subject to each option will be determined based on the volume weighted average price per share of Capital Southwest shares on NASDAQ during the 10 full trading days immediately prior to the Share Distribution and on the volume weighted average price per share of Capital Southwest shares and CSWI shares on NASDAQ during the first 10 full trading days immediately after the Share Distribution. The adjusted Capital Southwest stock options and CSWI stock options will be subject to substantially the same terms, vesting conditions, post-termination exercise rules and other restrictions that applied to the original Capital Southwest stock option immediately before the Share Distribution.

The Capital Southwest restricted stock awards will remain outstanding and the awardees will additionally receive one share of CSWI restricted stock for each share of Capital Southwest restricted stock held, which shares will be subject to substantially the same terms, vesting conditions and other restrictions applicable to the Capital Southwest restricted stock award immediately before the Share Distribution.

 

42


Table of Contents

The CSWI Equity Plan

Prior to consummation of the Share Distribution, we will adopt the CSW Industrials, Inc. 2015 Equity and Incentive Compensation Plan (the “CSWI Equity Plan”). The CSWI Equity Plan will generally be administered by the CSWI Compensation and Talent Development Committee. The CSWI Equity Plan will enable the Compensation and Talent Development Committee to provide equity and incentive compensation to our officers, other key employees and non-employee directors. The following description of the CSWI Equity Plan is only a summary of its principal terms and provisions and is subject to the actual text of the CSWI Equity Plan.

Types of Awards Under the CSWI Equity Plan

Pursuant to the CSWI Equity Plan, we may grant stock options (including “incentive stock options” as defined in Section 422 of the Code), stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units, cash incentive awards and certain other awards based on or related to our common stock. The CSWI Equity Plan will permit the CSWI Compensation and Talent Development Committee to grant both awards that are intended to qualify as “qualified performance-based compensation” under Section 162(m) of the Code and awards that are not intended to so qualify, and provides that any awards may be granted subject to the achievement of certain specified management objectives.

The CSWI Equity Plan authorizes the grant of “replacement awards” to current holders of Capital Southwest equity awards under Capital Southwest’s equity compensation. In connection with the Share Distribution, the CSWI Board has authorized replacement awards of CSWI stock options and restricted shares under the CSWI Equity Plan to current holders of corresponding awards covered by Capital Southwest’s equity compensation plans.

Shares Available for Awards and Other Limitations Under the CSWI Equity Plan

Subject to adjustments provided in the CSWI Equity Plan, the maximum number of shares of our common stock that may be issued or transferred in connection with awards granted under the CSWI Equity Plan, in the aggregate, is limited to 1,230,000 common shares. These shares may be common shares of original issuance, treasury shares or a combination of the foregoing. Common shares subject to an award granted under the CSWI Equity Plan that is subsequently cancelled or forfeited, expires or is settled in cash (in whole or in part) will be added back to the aggregate share limit and again be available for issuance or transfer under the CSWI Equity Plan. Shares of our common stock subject to “replacement awards” as described above will not reduce or count against the aggregate limit of our common shares available under the CSWI Equity Plan.

The CSWI Equity Plan also provides for, subject to adjustments provided in the CSWI Equity Plan, the following individual limitations:

 

  the aggregate number of our common shares actually issued or transferred upon the exercise of “incentive stock options,” as defined in Section 422 of the Code, will not exceed 1,230,000 common shares;

 

  no participant will be granted stock options or stock appreciation rights, in the aggregate, for more that 400,000 common shares during any calendar year;

 

  no participant will be granted awards of restricted shares, restricted stock units, performance shares and/or other stock-based awards that are intended to qualify as “qualified performance-based compensation” under Section 162(m) of the Code, in the aggregate, for more than 400,000 common shares during any calendar year;

 

  no participant in any calendar year will receive an award of performance units and/or other awards payable in cash that are intended to qualify as “qualified performance-based compensation” under Section 162(m) of the Code, having an aggregate maximum value as of their respective grant dates in excess of $5,000,000;

 

  no participant in any calendar year will receive a cash incentive award that is intended to qualify as “qualified performance-based compensation” under Section 162(m) of the Code, having an aggregate maximum value in excess of $5,000,000; and

 

43


Table of Contents
  no non-employee director of CSWI will receive in any calendar year awards in excess of 40,000 common shares.

Amendment of the CSWI Equity Plan

The CSWI Board generally will be able to amend the CSWI Equity Plan from time to time in whole or in part, subject to stockholder approval in certain circumstances as described in the CSWI Equity Plan.

Reason for Furnishing this Information Statement

This Information Statement is being furnished solely to provide information to Capital Southwest shareholders who will receive shares of our common stock in the Share Distribution. It is not to be construed as an inducement or encouragement to buy or sell any of our securities or any securities of Capital Southwest, nor is it to be construed as a solicitation of proxies for the proposed distribution or any other matter. We believe that the information contained in this Information Statement is accurate as of the date set forth on the cover. Changes to the information contained in this Information Statement may occur after that date, and neither we nor Capital Southwest undertake any obligation to update the information except in the normal course of our respective public disclosure obligations and practices or as otherwise required by law.

DIVIDEND POLICY

Any payment of dividends will be at the discretion of the CSWI Board and will depend upon various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, any contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that the CSWI Board may deem relevant. We do not currently expect to pay dividends on our common stock for the foreseeable future following the Share Distribution. See “Risk Factors—Risks Relating to Our Common Stock—We do not expect to pay dividends for the foreseeable future.”

 

44


Table of Contents

CAPITALIZATION

The following table presents capitalization as of June 30, 2015 on:

 

  a historical combined basis for the CSWI Businesses; and

 

  a pro forma basis for CSWI to give effect to the Share Distribution and the related transactions described in the notes to our unaudited pro forma condensed combined financial statements as if the Share Distribution and the related transactions had occurred on June 30, 2015.

The historical information presented in the table below is derived from the combined financial statements of the CSWI Businesses appearing elsewhere in this Information Statement. You should read the information presented below together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed Combined Financial Statements” and the combined financial statements of the CSWI Businesses appearing elsewhere in this Information Statement.

We are providing the information presented in the table below for informational purposes only. It should not be construed to be indicative of our capitalization or financial condition had the Share Distribution and related transactions been completed on June 30, 2015. Further, the information presented in the table below may not reflect our capitalization or financial condition that would have resulted had we been operating as a separate, standalone entity at that date and is not necessarily indicative of our future capitalization or financial condition.

The amounts in the following table are presented in thousands.

 

     As of June 30, 2015     Pro Forma
as of June 30, 2015(1)(2)
 

Cash:

    

Cash and cash equivalents

   $ 31,885      $ 45,586   

Debt:

    

Current portion of long-term debt and capital lease obligations

     4,499        4,499   

Long-term debt and capital lease obligations, less current portion

     90,690        90,690   
  

 

 

   

 

 

 

Total debt and capital lease obligations

     95,189        95,189   
  

 

 

   

 

 

 

Equity:

    

Common stock, at par value

     12        156   

Preferred stock

     1,000        —     

Additional paid-in capital

     7,810        247,143   

Treasury stock

     (2,712     —     

Retained Earnings

     217,194        —     

Accumulated other comprehensive loss

     (8,670     (8,670
  

 

 

   

 

 

 

Total equity

     214,634        238,629   
  

 

 

   

 

 

 

Total capitalization

   $ 309,823      $ 333,818   
  

 

 

   

 

 

 
(1) Gives effect to the Share Distribution and related transactions, including the estimated incremental expenses related to operating as an independent publicly traded company and the elimination of the one time non-recurring expenses.
(2) Capital Southwest will contribute $13.0 million of cash to CSWI upon consummation of the Share Distribution.

 

45


Table of Contents

SELECTED HISTORICAL FINANCIAL DATA

The following presents selected historical combined financial data as of and for the fiscal years ended March 31, 2015, 2014, 2013, 2012 and 2011, as of June 30, 2015 and for the three months ended June 30, 2015 and 2014. The following selected historical combined financial data as of March 31, 2015 and 2014 and for the fiscal years ended March 31, 2015, 2014 and 2013 has been derived from the audited combined financial statements of the CSWI Businesses. The following selected historical combined financial data as of June 30, 2015 and for the three months ended June 30, 2015 and 2014 has been derived from the unaudited combined financial statements of the CSWI Businesses. The selected historical combined financial data as of March 31, 2013, 2012 and 2011 and for the fiscal years ended March 31, 2012 and 2011 has been derived from the accounting records of the CSWI Businesses. The data below was prepared by combining the results of the CSWI Businesses. CSWI was formed on November 6, 2014 solely for the purpose of effecting the Share Distribution and to date, CSWI has not conducted any material activities or operations. The data set forth below is not necessarily indicative of CSWI’s future financial position or results of operations and should be read in conjunction with the combined financial statements of the CSWI Businesses, the unaudited pro forma condensed combined financial statements of CSWI and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Three Months
Ended June 30,
    Fiscal Year Ended March 31,  
     2015     2014     2015     2014     2013     2012     2011  
                

(in thousands)

 

Statements of Operations Data:

              

Net revenues

   $ 88,909      $ 68,798      $ 261,834      $ 231,713      $ 199,094      $ 171,035      $ 142,824   

Cost of revenues

     (48,465     (35,000     (135,409     (119,627     (104,512     (92,646     (76,542

Selling, distribution, general and administrative, and other operating expenses

     (26,156     (19,655     (82,391     (74,173     (62,335     (53,743     (46,625
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 14,288      $ 14,143      $ 44,034      $ 37,913      $ 32,247      $ 24,646      $ 19,657   

Operating margin

     16.1     20.6     16.8     16.4     16.2     14.4     13.8

Other income (expense)

     (732     312        894        (387     973        (62     765   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 13,556      $ 14,455      $ 44,928      $ 37,526      $ 33,220      $ 24,584      $ 20,422   

Provision for income taxes

     (4,906     (4,707     (15,223     (12,794     (10,707     (7,755     (6,249
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     8,650        9,748        29,705        24,732        22,513        16,829        14,173   

Loss on disposal of operation, net of income tax benefit

                                 (1,326              

Income from discontinued operation, net of income taxes

                                 511                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss on discontinued operations, net of income taxes

                                 (815              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 8,650      $ 9,748      $ 29,705      $ 24,732      $ 21,698      $ 16,829      $ 14,173   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

              

Depreciation and amortization

   $ 3,327      $ 2,601      $ 10,515      $ 9,113      $ 6,701      $ 5,809      $ 4,819   

Interest (expense) income, net

     (667     (168     (611     (131     74        523        639   
     As of June 30,      As of March 31,  
     2015      2015      2014      2013      2012      2011  
            (in thousands)  

Balance Sheet Data (end of period)

                 

Working capital

   $ 124,834       $ 96,391       $ 90,884       $ 77,196       $ 85,688       $ 72,447   

Goodwill, intangibles and other assets, net

   $ 152,229       $ 94,675       $ 89,400       $ 75,857       $ 55,534       $ 49,481   

Total assets

   $ 376,100       $ 286,521       $ 277,820       $ 236,521       $ 195,957       $ 166,223   

Short-term borrowings and current portion of long-term debt

   $ 4,499       $ 13,561       $ 13,764       $ 9,515       $       $   

Long-term debt

   $ 90,690       $ 13,143       $ 31,333       $ 13,833       $ 6,100       $   

Other non-current liabilities

   $ 32,564       $ 30,159       $ 12,233       $ 12,070       $ 12,531       $ 17,731   

Equity

   $ 214,634       $ 204,601       $ 196,186       $ 176,522       $ 160,029       $ 148,492   

 

46


Table of Contents

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma condensed combined financial statements of CSWI presented below consist of an unaudited pro forma combined balance sheet as of June 30, 2015 and unaudited pro forma combined statements of operations for the fiscal year ended March 31, 2015 and for the three months ended June 30, 2015. The unaudited pro forma combined financial information for the fiscal year ended March 31, 2015 gives effect to the acquisition of substantially all of the assets of Strathmore and the Share Distribution and the related transactions described below based on assumptions and adjustments set forth in the accompanying notes. The unaudited pro forma combined financial information as of June 30, 2015 and for the three months ended June 30, 2015 gives effect to the Share Distribution and the related transactions described below based on assumptions and adjustments set forth in the accompanying notes. The historical combined financial data as of June 30, 2015 and for the three months ended June 30, 2015 includes the financial data of Strathmore since the date of its acquisition (effective April 1, 2015), and therefore no pro forma adjustments related to the Strathmore acquisition are required to adjust the most recent interim period financial data. The following unaudited pro forma condensed combined financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical combined financial statements of the CSWI Businesses appearing elsewhere in this Information Statement.

The unaudited pro forma condensed combined financial statements have been derived from the historical combined financial statements of the CSWI Businesses appearing elsewhere in this Information Statement and are not intended to be a complete presentation of our financial condition or results of operations had the Strathmore acquisition, if applicable, and the Share Distribution and related transactions occurred as of that date and for the period presented. In addition, they are provided for illustrative and informational purposes only and are not necessarily indicative of our future financial condition or results of operations as a standalone, publicly traded company. The pro forma adjustments are based upon available information and assumptions that management believes are reasonable, that reflect the expected impacts of events directly attributable to the Share Distribution and related transactions, and that are factually supportable and for purposes of the statement of operations, are expected to have a continuing impact. However, such adjustments are subject to change based on the finalization of the terms of the Share Distribution and related transactions.

 

47


Table of Contents

CSWI BUSINESSES

Unaudited Pro Forma Condensed Combined Balance Sheet

as of June 30, 2015

(In thousands)

 

     Historical     Share
Distribution
    Note    Pro Forma  

ASSETS

         

Current assets:

         

Cash and cash equivalents

   $ 31,885      $ 701      (a) (d)    $ 45,586   
       13,000      (b)   

Restricted cash

     —          —             —     

Bank time deposits

     8,353        —             8,353   

Accounts receivable, net

     62,928        —             62,928   

Inventories

     54,444        —             54,444   

Deferred income taxes

     2,713        —             2,713   

Prepaid expenses and other current assets

     2,723        —             2,723   
  

 

 

   

 

 

      

 

 

 

Total current assets

     163,046        13,701           176,747   
  

 

 

   

 

 

      

 

 

 

Property, plant & equipment, net

     60,825        —             60,825   

Goodwill

     55,975        —             55,975   

Intangibles, net

     82,326        —             82,326   

Deferred income taxes

     3,763        —             3,763   

Property held for investment

     9,297        —             9,297   

Other assets

     868        —             868   
  

 

 

   

 

 

      

 

 

 

Total assets

   $ 376,100      $ 13,701         $ 389,801   
  

 

 

   

 

 

      

 

 

 

LIABILITIES AND EQUITY

         

Current liabilities:

         

Accounts payable and accrued expenses

   $ 33,713      $ —           $ 33,713   

Current portion of long-term debt

     4,499        —             4,499   
  

 

 

   

 

 

      

 

 

 

Total current liabilities

     38,212        —             38,212   
  

 

 

   

 

 

      

 

 

 

Long-term debt

     90,690        —             90,690   

Retirement benefits payable

     23,302        (10,294   (b)      13,008   

Other long-term liabilities

     9,262        —             9,262   
  

 

 

   

 

 

      

 

 

 

Total liabilities

     161,466        (10,294        151,172   
  

 

 

   

 

 

      

 

 

 

Equity:

         

Common stock

     12        144      (c)      156   

Preferred stock

     1,000        (1,000   (c)      —     

Additional paid in capital

     7,810        23,294      (b)      247,143   
       216,039      (c)   

Treasury stock

     (2,712     2,712      (c)      —     

Retained earnings

     217,194        701      (a) (d)      —     
       (217,895   (c)   

Accumulated other comprehensive loss

     (8,670     —             (8,670
  

 

 

   

 

 

      

 

 

 

Total shareholder’s equity

     214,634        23,995           238,629   
  

 

 

   

 

 

      

 

 

 

Total liabilities and equity

   $ 376,100      $ 13,701         $ 389,801   
  

 

 

   

 

 

      

 

 

 

 

48


Table of Contents

CSWI BUSINESSES

Unaudited Pro Forma Condensed Combined Statement of Operations

for the Three Months Ended June 30, 2015

(In thousands, except per share data)

 

     Historical     Share
Distribution
    Note    Pro Forma  

Net revenues

   $ 88,909      $ —           $ 88,909   

Cost of revenues

     48,465        —             48,465   
  

 

 

   

 

 

      

 

 

 

Gross profit

     40,444        —             40,444   
  

 

 

   

 

 

      

 

 

 

Expenses:

         

General and administrative expenses

     12,621        (1,078   (a)      11,543   

Selling and distribution expenses

     12,295        —             12,295   

Research and development expenses

     1,240        —             1,240   

Impairment loss

     —          —             —     
  

 

 

   

 

 

      

 

 

 

Total expenses

     26,156        (1,078        25,078   
  

 

 

   

 

 

      

 

 

 

Operating income

     14,288        1,078           15,366   
  

 

 

   

 

 

      

 

 

 

Interest (expense) income, net

     (667     —             (667

Other expense

     (65     —             (65
  

 

 

   

 

 

      

 

 

 

Income before income taxes

     13,556        1,078           14,634   

Provision for income taxes

     4,906        377      (d)      5,283   
  

 

 

   

 

 

      

 

 

 

Net income

   $ 8,650      $ 701         $ 9,351   
  

 

 

   

 

 

      

 

 

 

Weighted average common shares assumed outstanding

            15,583   
         

 

 

 

Pro forma basic earnings per share

          $ 0.60   
         

 

 

 

 

49


Table of Contents

CSWI

Unaudited Pro Forma Condensed Combined Statement of Operations

for the Fiscal Year Ended March 31, 2015

(In thousands, except per share data)

 

    Historical     Strathmore
Historical
(g)
    Strathmore     Note     Subtotal     Share
Distribution
    Note     Pro Forma  

Net revenues

  $ 261,834      $ 63,191      $ —          $ 325,025      $ —          $ 325,025   

Cost of revenues

    135,409        46,067        446        (e     181,922        —            181,922   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Gross profit

    126,425        17,124        (446       143,103        —            143,103   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Expenses:

               

General and administrative expenses

    35,508        2,641        1,320        (e     39,469        3,213        (a     42,682   

Selling and distribution expenses

    40,485        6,308        —            46,793        —            46,793   

Research and development expenses

    5,688        —          —            5,688        —            5,688   

Impairment loss

    710        —          —            710        —            710   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total expenses

    82,391        8,949        1,320          92,660        3,213          95,873   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Operating income

    44,034        8,175        (1,766       50,443        (3,213       47,230   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Interest income

    404        —              404        —            404   

Interest expense

    (1,015     (737     (1,851     (f     (3,603     —            (3,603

Other income

    1,505        —              1,505        —            1,505   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Income before income taxes

    44,928        7,438        (3,617       48,749        (3,213       45,536   

Provision for income taxes

    15,223        42        1,472        (d     16,737        (1,125     (d     15,612   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Net income

  $ 29,705      $ 7,396      $ (5,089     $ 32,012      $ (2,088     $ 29,924   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Weighted average common shares assumed outstanding

                  15,489   
               

 

 

 

Pro forma basic earnings per share

                $ 1.93   
               

 

 

 
(a) Reflects the incremental expenses related to operating as a stand alone independent company, net of $2,254 and $1,491 of non-recurring charges related to the Jet-Lube integration into Whitmore and Strathmore acquisition costs for June 30, 2015 and March 31, 2015, respectively. Incremental expenses include compensation, professional service fees, director fees, compliance costs, rent and office expenses. Cash is impacted by the pro forma general and administrative expenses of $(1,078), net of taxes of $377. The pro forma expenses presented are based on currently available compensation and office expense information and certain estimates and assumptions CSWI believes are reasonable. The actual adjustments may differ from the pro forma adjustments. However, management believes that the assumptions provide a reasonable basis for presenting significant effects of the transaction as contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma financial statements.
(b) Reflects contribution of pension assets of $10,294 and cash of $13,000 from Capital Southwest. It is contemplated that CSWI will assume both the pension assets and obligations associated with Capital Southwest participants upon consummation of the Share Distribution.
(c) Represents the reclassification of historical underlying company equity as recorded on the books of the CSWI Businesses. We have assumed the number of outstanding shares of common stock based on the number of Capital Southwest outstanding at June 30, 2015, which would result in approximately 15.6 million shares being distributed, at a par value of $0.01 per share, to holders of Capital Southwest shares at an assumed distribution ratio of one share of CSWI for each Capital Southwest share.
(d) The pro forma adjustment to provision for income taxes was determined using the statutory tax rate in effect in the respective tax jurisdictions.
(e) Represents adjustments to depreciation and amortization as a result of the application of the acquisition method of accounting.
(f) Represents the net increase in debt of CSWI applicable to the financing of Strathmore acquisition and the corresponding increase in interest expense anticipated as if the transaction was completed on April 1, 2014. The interest costs, net of taxes, were deducted from cash. The interest rate on the debt ($70.0 million) was assumed to be 3.7%, which is the actual average interest rate of June 30, 2015. The net proceeds from this borrowing were $69.7 million after debt issuance costs.
(g) Represents historical results of the acquired Strathmore business derived from audited historical financial statements.

 

50


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and results of operations of the CSWI Businesses should be read together with the combined financial statements of the CSWI Businesses and related notes appearing elsewhere in this Information Statement. This discussion and analysis contains forward-looking statements based on current expectations relating to future events and CSWI’s future performance that involve risks and uncertainties. See “Cautionary Statement Concerning Forward-Looking Statements.” CSWI’s actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under the caption “Risk Factors.” For purposes of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the term CSWI Businesses does not include Strathmore as of and for the periods prior to April 1, 2015, as substantially all of the assets were acquired after the periods indicated. The financial condition and results of operations as of and for the three months ended June 30, 2015 includes the financial data of Strathmore since the date of its acquisition (effective April 1, 2015).

The Share Distribution

On December 2, 2014, Capital Southwest announced its plan to effect the Share Distribution, pursuant to which Capital Southwest will spin-off certain of its control assets into a stand-alone, publicly traded company. These assets include the CSWI Businesses: RectorSeal, Whitmore, Jet-Lube, Balco, Smoke Guard and CapStar.

CSWI is a Delaware corporation that is currently a wholly owned subsidiary of Capital Southwest. CSWI was formed solely to effect the Share Distribution. To date, we have not conducted any material activities or operations. Prior to the Share Distribution, Capital Southwest will contribute to us the outstanding capital stock of the CSWI Businesses.

While most costs related to the Share Distribution will be the responsibility of Capital Southwest, we will incur expenses as a result of the Share Distribution, including the costs of our organization and any compliance with the federal securities laws. CSWI believes its cash flows from operations will be sufficient to fund these corporate expenses.

The combined financial statements of the CSWI Businesses have been prepared on a stand-alone basis and are derived from the underlying accounting records of the CSWI Businesses. The combined financial statements reflect the historical results of operations, financial position, and cash flows of the CSWI Businesses in conformity with U.S. generally accepted accounting principles. All significant intercompany transactions and accounts within the CSWI Businesses have been eliminated.

The combined financial statements include all revenues, costs, assets and liabilities directly attributable to the CSWI Businesses. Management believes the assumptions underlying these financial statements are reasonable. However, the combined financial statements may not include all of the expenses that would have been incurred had CSWI been stand-alone during the periods presented and may not reflect CSWI’s combined results of operations, financial position, and cash flows as a stand-alone company during the periods presented.

For a more detailed description of the Share Distribution, see “The Share Distribution.”

Executive Summary

CSWI is comprised of the CSWI Businesses. The following is a brief description of the CSWI Businesses that were owned by Capital Southwest as of June 30, 2015:

 

 

RectorSeal. RectorSeal formulates and manufactures specialty chemical products including pipe thread sealants, firestop sealants, plastic solvent cements and other formulations for plumbing, HVAC, refrigeration, electrical and industrial applications, electrical control and measurement devices, and accessories for ductless mini-split HVAC systems. RectorSeal also makes specialty tools for tradesmen and innovative systems for containing flames and smoke from building fires. These products are distributed both

 

51


Table of Contents
 

domestically and internationally through an extensive distribution network serving the plumbing, industrial, HVAC and refrigeration, construction, electrical and hardware markets. Portions of RectorSeal’s operating results are included in each of our three business segments.

 

  Whitmore. Whitmore manufactures high performance, specialty lubricants for heavy equipment used in surface mining, railroad and other industries and has operations in the U.S. and the U.K. Whitmore also manufactures lubrication equipment, specifically for rail applications, and lubrication-centric reliability solutions for a wide variety of industries. In addition, Whitmore produces water-based coatings for the automotive and primary metals industries. Portions of Whitmore’s operating results are included in each of our three business segments.

 

  Jet-Lube. Jet-Lube is a world leader in anti-seize compounds, thread sealants and specialty lubrication products and greases for the energy industry. Jet-Lube serves customers worldwide in a wide variety of industries, including oil and gas, water well, mining, manufacturing, electric utility, food processing and agriculture, water utility, construction, transportation, valve maintenance, forestry, groundwater, military, HVAC and plumbing. Portions of Jet-Lube’s operating results are included in both our Coatings, Sealants and Adhesives and our Specialty Chemicals segments.

 

  Strathmore. Strathmore is engaged in the manufacturing of paint for sale to industrial clients located throughout North America. Strathmore is a leading manufacturer of specialized industrial coating products including urethanes, epoxies, acrylics and alkyds. The results of operations of Strathmore are included in the Coatings, Sealants and Adhesives segment of the CSWI Businesses since the acquisition date.

 

  Balco. Balco is engaged in the fabrication of aluminum and plastic extrusions and other materials related to safety, slip resistance and emergency egress for products used by the commercial building industry worldwide. Balco’s operating results are included in our Industrial Products segment.

 

  Smoke Guard. Smoke Guard manufactures certified custom safety products for the commercial construction market and other markets requiring smoke and fire protection. Smoke Guard’s proprietary technologies control the movement of smoke and are sold through exclusive distributors primarily in the U.S. Smoke Guard’s operating results are included in our Industrial Products segment.

 

  CapStar. CapStar acquires, holds and manages certain real estate and other assets. The operations of CapStar are not material to the CSWI Businesses.

The CSWI Businesses operate in three business segments: Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals.

Recent Developments

 

  The CSWI Businesses reported net revenues for the three months ended June 30, 2015 of $88.9 million, up 29% from $68.8 million for the three months ended June 30, 2014.

 

  Industrial Products: Net revenues increased $5.7 million, or 16.7%, for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The increase was primarily due to incremental sales of existing products, fire and smoke prevention products and new products from recent acquisitions, and to a lesser extent, greater demand for condensate switches and new products. These increases in net revenues were partially offset by a decrease in sales of rail lubricators.

 

  Coatings, Sealants and Adhesives: Net revenues increased $15.8 million, or 124.2%, for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The increase was primarily attributable to sales of new products from the Strathmore acquisition and increased sales of existing products, partially offset by a decrease in sales associated with products offered to the oil and gas industry.

 

 

Specialty Chemicals: Net revenues decreased $1.4 million, or 6.5%, for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The decrease was caused by lower sales primarily

 

52


Table of Contents
 

related to a slowdown in the oil and gas industry, partially offset by both an increase in prices and sales of new and existing lubricant products offered to the rail industry.

 

  General and administrative and selling and distribution expenses increased compared to the three months ended June 30, 2014. The increase in general and administrative expenses was largely attributable to higher costs in the Coatings, Sealants and Adhesives segment caused by the addition of Strathmore’s operations and one-time Strathmore acquisition transaction costs of $2.3 million. The increase in selling and distribution expenses occurred due to the addition of Strathmore’s operations in the Coatings, Sealants and Adhesives segment and an increase in sales volumes in the Industrial Products segment.

In addition to the financial highlights discussed above, effective April 1, 2015, the CSWI Businesses acquired substantially all of the assets of Strathmore, a coatings manufacturer. Strathmore is a leading manufacturer of specialized industrial coating products including urethanes, epoxies, acrylics and alkyds. The net cash purchase price of the assets acquired was $68.9 million, plus up to an additional $16.5 million within a prescribed period of time following March 31, 2017 if certain financial metrics are met. The initial purchase was funded from borrowings of $70.0 million. The acquisition will be accounted for as a purchase under ASC 805.

For the years ended December 31, 2014 and December 31, 2013, Strathmore’s net revenues and operating income were $63.2 million and $8.2 million and $42.9 million and $4.0 million, respectively.

Known Trends and Uncertainties

The following is a summary of key trends and uncertainties which could have a significant impact on our results of operations, financial position or cash flows:

 

  The CSWI Businesses currently operate as separate companies, and they are not currently integrated. We expect to incur significant time and expense in integrating the CSWI Businesses. In connection with the integration of the CSWI Businesses, we expect to consolidate some of the CSWI Businesses’ manufacturing facilities, including the Jet-Lube manufacturing facility in Houston, and other corporate functions. As a result of these efforts, we expect to operate more efficiently and effectively.

 

  We anticipate incurring significant expenditures associated with the Share Distribution primarily consisting of (1) additional costs associated with being a public company, including additional employee-related costs, costs to start up certain standalone corporate functions and information technology systems, and (2) organizational-related costs.

 

  The CSWI Businesses’ wide array of products are used for a variety of purposes and in a number of industries. Changes in the statutory or regulatory framework, including, changes to building codes or environmental laws, could have a material adverse effect on the CSWI Businesses. The CSWI Businesses’ products may no longer comply with federal or state laws or rules and the CSWI Businesses may be required to incur significant expenses in order to make our products compliant with the new laws or rules. Additionally, changes in sociopolitical attitudes towards the environment could adversely affect CSWI Businesses. Further changes in attitude towards fossil fuels and coal in particular could result in a decrease in demand for the CSWI Businesses’ products and could have a material adverse effect on the CSWI Businesses.

 

  The global economic environment remains in a relative state of uncertainty, which has led to interest rate volatility. Increases in market interest rates could have a material adverse effect on the CSWI Businesses due to their level of indebtedness and the variable interest rates on the indebtedness. Further, overall economic uncertainty and interest rate volatility could lead to a downturn in the construction or mining industry or in the economy overall. A downturn in the industries the CSWI Businesses serve or in the economy generally could have a material adverse effect on the CSWI Businesses.

 

 

The CSWI Businesses use contract manufacturers to manufacture certain products. A majority of the products are either privately labeled or manufactured exclusively for the CSWI Businesses. These products

 

53


Table of Contents
 

accounted for approximately 48% of the revenues derived from the Industrial Products segment, approximately 19% of the revenues derived from the Coatings, Sealants and Adhesives segment and approximately 9% of the revenues derived from the Specialty Chemicals segment during the year ended March 31, 2015. The use of third-party manufacturers resulted in an increase of approximately 7% in operating margins when compared to the operating margins for internally manufactured products.

Results Of Operations

The following discussion provides an analysis of the combined results and the results of operations of the CSWI Businesses and each of its segments for the fiscal periods presented.

Effective April 1, 2015, the CSWI Businesses completed the acquisition of substantially all of the assets of Strathmore. The results of operations of Strathmore have been included in the Coatings, Sealants and Adhesives segment of the CSWI Businesses since the acquisition date.

Currency effects reported in the following discussion have been calculated by translating current year results at prior year exchange rates for the same periods.

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

Combined Results

 

     Three Months Ended June 30,      Change  
             2015                      2014              Amount      Percent  
    

(In thousands)

 

Net revenues

   $ 88,909       $ 68,798       $ 20,111         29.0

Cost of revenues

     48,465         35,000         13,465         38.5
  

 

 

    

 

 

    

 

 

    

Gross profit

     40,444         33,798         6,646         19.7
  

 

 

    

 

 

    

 

 

    

Expenses:

           

General and administrative expenses

     12,621         7,643         4,978         65.1

Selling and distribution expenses

     12,295         10,566         1,729         16.4

Research and development expenses

     1,240         1,446         (206      (14.2 )% 
  

 

 

    

 

 

    

 

 

    

Total expenses

     26,156         19,655         6,501         33.1
  

 

 

    

 

 

    

 

 

    

Operating income

     14,288         14,143         145         1.0
  

 

 

    

 

 

    

 

 

    

Interest expense, net

     (667      (168      (499      N/M   

Other (expenses) income, net

     (65      480         (545      (113.5 )% 
  

 

 

    

 

 

    

 

 

    

Income before income taxes

     13,556         14,455         (899      (6.2 )% 

Provision for income taxes

     4,906         4,707         199         4.2
  

 

 

    

 

 

    

 

 

    

Net income

   $ 8,650       $ 9,748       $ (1,098      (11.3 )% 
  

 

 

    

 

 

    

 

 

    

Net Revenues

The CSWI Businesses generally recognize revenue upon shipment of product, at which time title passes to the customer. Net revenues represent gross revenues invoiced to customers less certain related charges for contractual discounts or rebates. Shipping and handling fees billed to customers are included in net revenues, while other shipping and handling costs are expensed as incurred and included in selling and distribution expenses in the accompanying combined statements of operations of the CSWI Businesses. Revenues generated by an acquired business are disclosed for the first 12 months following the date of acquisition. After 12 months, the acquired business is considered to be fully integrated.

 

54


Table of Contents

Net revenues were $88.9 million for the three months ended June 30, 2015, an increase of $20.0 million, or 29.0%, compared to the three months ended June 30, 2014. The increase included negative currency effects of less than $1.0 million. The net revenues associated with acquisitions were $17.0 million for the three months ended June 30, 2015. On a combined basis and excluding the effect of Strathmore’s net revenues, approximately 83% and 17% of the total increase in net revenues were due to increases in sales volumes and price, respectively. Excluding Strathmore’s net revenues, the increase in net revenues was primarily attributable to higher sales volumes of both existing products and new products from recent acquisitions as well as increased prices in the Specialty Chemicals segment. These increases to net revenues were partially offset by a decrease in sales volumes related to products offered to the oil and gas industry and rail lubricators.

Net Revenues by Geographic Region

Net revenues derived from the U.S. represented approximately 85% of total net revenues, while Non-U.S. net revenues were approximately 15% of total net revenues for the three months ended June 30, 2015, compared to approximately 77% and 23% of net revenues, respectively, for the three months ended June 30, 2014. The increase in the percentage of net revenues in the U.S. for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 was partially attributable to the addition of Strathmore’s net revenues which are derived from sales in the U.S. The presentation of net revenues by geographic region is based on the destination of product, service or delivery.

Cost of Revenues

Cost of revenues primarily consists of material costs, compensation and related expenses for personnel involved in the manufacture of products for customer delivery, facilities rent and associated costs, depreciation of equipment and buildings used in operations, and related overhead costs.

For the three months ended June 30, 2015, each significant component of cost of revenues represented the following percentage of total cost of revenues:

 

Material costs

     77.7

Compensation and related costs

     12.0

Facilities rent and associated costs

     0.8

Equipment and building depreciation

     2.3

Other overhead costs

     7.2
  

 

 

 

Total cost of revenues

     100.0

Cost of revenues was $48.5 million for the three months ended June 30, 2015, an increase of $13.5 million, or 38.5%, compared to the three months ended June 30, 2014. The increase was attributable to an increase in sales volumes consistent with the growth in net revenues in the Industrial Products and Coatings, Sealants and Adhesives segments, partially offset by a decrease in sales volumes consistent with the decrease in net revenues in the Specialty Chemicals segment. As a result of the Strathmore acquisition, cost of revenues was also incrementally higher than the three months ended June 30, 2014 due to Strathmore’s lower gross profit margin.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation and related expenses of personnel, professional services, facility costs and unallocated overhead expenses.

General and administrative expenses were $12.6 million for the three months ended June 30, 2015, an increase of $5.0 million, or 65.1%, compared to the three months ended June 30, 2014. The increase was largely attributable to higher costs in the Coatings, Sealants and Adhesives segment caused by increases in general and administrative expenses related to one-time Strathmore acquisition transaction costs of $2.3 million and

 

55


Table of Contents

the addition of Strathmore’s operations ($1.3 million). The Industrial Products segment recognized an increase of $0.6 million due to the valuation of the contingent consideration liability for a prior acquisition and personnel related expenses.

Selling and Distribution Expenses

Selling and distribution expenses consist primarily of compensation and related expenses of sales and marketing expenses.

Selling and distribution expenses were $12.3 million for the three months ended June 30, 2015, an increase of $1.7 million, or 16.4%, compared to the three months ended June 30, 2014. The increase was mainly due to the addition of Strathmore’s operations ($1.5 million) in the Coatings, Sealants and Adhesives segment. Additionally, an increase consistent with the increase in sales volumes in the Industrial Products segment was mostly offset by lower costs due to the decrease in sales volumes in the Specialty Chemicals segment.

Research and Development Expenses

Research and development expenses primarily consist of personnel-related costs involved in product development.

Research and development expenses were $1.2 million for the three months ended June 30, 2015, a decrease of $0.2 million, or 14.2%, compared to the three months ended June 30, 2014. The decrease was primarily attributable to lower costs related to the development of certain fire and smoke prevention products in the Industrial Products segment.

Operating Income

Operating income was $14.3 million for the three months ended June 30, 2015 and was comparable to the three months ended June 30, 2014. The increase in gross profit was mostly offset by an increase in general and administrative expenses.

Interest Expense, net

Interest expense, net was $0.7 million for the three months ended June 30, 2015, an increase of $0.5 million, compared to the three months ended June 30, 2014. The increase was primarily attributable to the interest recognized on the borrowings related to the Strathmore acquisition.

Other (Expenses) Income, net

Other expense, net was $0.1 million for the three months ended June 30, 2015, a decrease of $0.5 million, or 113.5%, compared to the three months ended June 30, 2014. The decrease in other income, net was primarily attributable to gains recognized on the sale of real estate ($0.7 million) in the three months ended June 30, 2014.

Provision for Income Taxes

The provision for income taxes was $4.9 million for the three months ended June 30, 2015, representing an effective tax rate of 36.2%, compared to the provision for income taxes of $4.7 million, representing an effective tax rate of 32.6% for the three months ended June 30, 2014. The change in the effective tax rate for the three months ended June 30, 2015, compared to the three months ended June 30, 2014, was primarily attributable to a decrease in foreign operations activity in countries with lower statutory rates and an increase in state taxes due to increased domestic operations activity in states with higher statutory rates.

Net Income

Net income was $8.7 million for the three months ended June 30, 2015, a decrease in net income of $1.1 million, or 11.3%, compared to the three months ended June 30, 2014, due primarily to the reasons discussed above.

 

56


Table of Contents

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

Segment Results

 

     Net Revenues for the
Three Months Ended June 30,
     Change  
             2015                      2014              Amount      Percent  
Segment    (In thousands)  

Industrial Products

   $ 39,976       $ 34,257       $ 5,719         16.7

Coatings, Sealants, and Adhesives

     28,449         12,691         15,758         124.2

Specialty Chemicals

     20,163         21,576         (1,413      (6.5 )% 

Other

     321         274         47         17.2
  

 

 

    

 

 

    

 

 

    

Total net revenues

   $ 88,909       $ 68,798       $ 20,111         29.2
  

 

 

    

 

 

    

 

 

    
     Operating Income for the
Three Months Ended June 30,
     Change  
     2015      2014      Amount      Percent  
Segment    (In thousands)  

Industrial Products

   $ 9,686       $ 6,806       $ 2,880         42.3

Coatings, Sealants, and Adhesives

     1,845         3,463         (1,618      (46.7 )% 

Specialty Chemicals

     2,730         3,853         (1,123      (29.1 )% 

Other

     27         21         6         28.6
  

 

 

    

 

 

    

 

 

    

Total operating income

   $ 14,288       $ 14,143       $ 145         1.0
  

 

 

    

 

 

    

 

 

    

Industrial Products

Net revenues were $40.0 million for the three months ended June 30, 2015, an increase of $5.7 million, or 16.7%, compared to the three months ended June 30, 2014. The increase was primarily attributable to higher sales volumes for the three months ended June 30, 2015. The increase in sales volumes resulted mainly from increased sales of existing products ($2.1 million) and sales of fire and smoke prevention products related to projects that were expected to begin in the prior fiscal year, but were started or completed in the first quarter because of customer delays ($2.5 million). Sales of new products from recent acquisitions ($1.2 million) and greater demand for condensate switches and new products ($0.9 million) also contributed to the increase in net revenues. These increases in sales volumes were partially offset by a decrease in sales volumes for rail lubricators ($1.1 million).

Operating income was $9.7 million for the three months ended June 30, 2015, an increase of $2.9 million, or 42.3%, compared to the three months ended June 30, 2014 supported by an increase in sales volumes consistent with the growth in net revenues, partially offset by increases in general and administrative expenses and selling and distribution expenses. The increase in general and administrative expenses was caused mainly by increases in the valuation of the contingent consideration liability for a prior acquisition and personnel related expenses. The increase in selling and distribution expenses was due to higher freight and commissions expenses associated with the increase in sales volumes.

Coatings, Sealants and Adhesives

Net revenues were $28.4 million for the three months ended June 30, 2015, an increase of $15.8 million, or 124.2%, compared to the three months ended June 30, 2014. The increase was primarily attributable to higher sales volumes, largely driven by sales of new products from the Strathmore acquisition ($15.9 million). Decreased sales into the oil and gas market were offset by increased sales into other markets.

Operating income was $1.8 million for the three months ended June 30, 2015, a decrease of $1.6 million, or 46.7%, compared to the three months ended June 30, 2014. The increase in sales volumes, consistent with the

 

57


Table of Contents

growth in net revenues, was more than offset by increases in general and administrative expenses of $1.3 million and selling and distribution expenses of $1.5 million related to Strathmore’s operations and an increase in general and administrative expenses due to one-time Strathmore acquisition transaction costs of $2.3 million.

Specialty Chemicals

Net revenues were $20.2 million for the three months ended June 30, 2015, a decrease of $1.4 million, or 6.5%, compared to the three months ended June 30, 2014. The decrease was attributable to a decrease in sales volumes related primarily to a slowdown in the oil and gas industry ($3.4 million), partially offset by an increase in prices. These decreases in sales volumes were partially offset by an increase in sales volumes associated with both new and existing lubricant products offered to the rail industry ($2.0 million), and to a lesser extent, an increase in prices.

Operating income was $2.7 million for the three months ended June 30, 2015, a decrease of $1.1 million, or 29.1%, compared to the three months ended June 30, 2014. The decrease was a result of the decreases in sales volumes referenced above and an increase in general and administrative expenses. These amounts were partially offset by an increase in prices and a decrease in selling and distribution expenses. The increase in general and administrative expenses resulted mainly from an increase in ERP system implementation costs and personnel related expenses. The decrease in selling and distribution expenses was a result of lower freight and commissions expenses due to the decrease in sales volumes.

Fiscal Year Ended March 31, 2015 Compared to Fiscal Year Ended March 31, 2014

Combined Results

 

     Fiscal Years Ended March 31,      Change  
             2015                      2014              Amount      Percent  
     (In thousands)  

Net revenues

   $ 261,834       $ 231,713       $ 30,121         13.0

Cost of revenues

     135,409         119,627         15,782         13.2
  

 

 

    

 

 

    

 

 

    

Gross profit

     126,425         112,086         14,339         12.8
  

 

 

    

 

 

    

 

 

    

Expenses:

           

General and administrative expenses

     35,508         29,450         6,058         20.6

Selling and distribution expenses

     40,485         37,924         2,561         6.8

Research and development expenses

     5,688         5,490         198         3.6

Impairment loss

     710         1,309         (599      (45.8 )% 
  

 

 

    

 

 

    

 

 

    

Total expenses

     82,391         74,173         8,218         11.1
  

 

 

    

 

 

    

 

 

    

Operating income

     44,034         37,913         6,121         16.1
  

 

 

    

 

 

    

 

 

    

Interest expense, net

     (611      (131      (480      N/M   

Other (expenses) income, net

     1,505         (256      1,761         N/M   
  

 

 

    

 

 

    

 

 

    

Income before income taxes

     44,928         37,526         7,402         19.7

Provision for income taxes

     15,223         12,794         2,429         19.0
  

 

 

    

 

 

    

 

 

    

Net income

   $ 29,705       $ 24,732       $ 4,973         20.1
  

 

 

    

 

 

    

 

 

    

Net Revenues

Net revenues were $261.8 million for the fiscal year ended March 31, 2015, an increase of $30.1 million, or 13.0%, compared to the fiscal year ended March 31, 2014. The net revenues associated with acquisitions were $15.2 million for the fiscal year ended March 31, 2015. On a combined basis, the total increase in net revenues was entirely due to an increase in sales volume. The increase was primarily attributable to an increase in sales volumes in the Industrial Products segment, and to a lesser degree, in the Coatings, Sealants and Adhesives segment. The

 

58


Table of Contents

primary drivers for Industrial Products net revenues growth were HVAC products and new products from acquisitions. The increase in Coatings, Sealants and Adhesives net revenues was mainly derived from higher sales volumes of caulking products. These increases in net revenues were partially offset by a decrease in sales volumes in the Specialty Chemicals segment due largely to a slowdown in global mining activity.

Net Revenues by Geographic Region

Net revenues in the Americas, Europe, Middle East and Africa (or EMEA), and Asia Pacific (or APAC) represented approximately 84%, 9%, and 7% of net revenues, respectively, for the fiscal year ended March 31, 2015 compared to approximately 82%, 11%, and 7% of net revenues, respectively, for the fiscal year ended March 31, 2014. The presentation of net revenues by geographic region is based on the location of the customer. For additional information regarding net revenues by geographic region, see “Segments,” Note 24 to the audited combined financial statements of the CSWI Businesses.

Foreign Currency Impact on Net Revenues

The functional currency of the CSWI Businesses for financial reporting purposes is the U.S. dollar. The majority of the CSWI Businesses’ net revenues for the fiscal year ended March 31, 2015 were derived from transactions denominated in U.S. dollars. All other net revenues were derived from transactions denominated in various foreign currencies, primarily the British pound, Canadian dollar, and Australian dollar. Fluctuations in the U.S. dollar relative to foreign currencies in which the CSWI Businesses conducted business for the fiscal year ended March 31, 2015 compared to the fiscal year ended March 31, 2014 unfavorably impacted net revenues by $0.8 million. For additional information regarding the foreign operations of the CSWI Businesses, see “Foreign Operations,” Note 17 to the audited combined financial statements of the CSWI Businesses.

Cost of Revenues

For the fiscal year ended March 31, 2015, each significant component of cost of revenues represented the following percentage of total cost of revenues:

 

Material costs

     75.2

Compensation and related costs

     13.6

Facilities rent and associated costs

     1.1

Equipment and building depreciation

     2.9

Other overhead costs

     7.2
  

 

 

 

Total cost of revenues

     100.0

Cost of revenues was $135.4 million for the fiscal year ended March 31, 2015, an increase of $15.8 million, or 13.2%, compared to the fiscal year ended March 31, 2014. The increase was attributable to an increase in sales volumes consistent with the growth in net revenues in the Industrial Products and Coatings, Sealants and Adhesives segments and higher raw material and packaging costs for certain products in the Specialty Chemicals segment.

General and Administrative Expenses

General and administrative expenses were $35.5 million for the fiscal year ended March 31, 2015, an increase of $6.1 million, or 20.6%, compared to the fiscal year ended March 31, 2014. The increase was largely attributable to higher costs in the Specialty Chemicals segment caused by the reserve for a bad debt related to one non-U.S. customer ($1.2 million), retention and severance costs associated with the consolidation of selected manufacturing activities ($1.3 million), incentive plan accruals ($0.4 million) and ERP system implementation costs ($0.3 million).

 

59


Table of Contents

Selling and Distribution Expenses

Selling and distribution expenses were $40.5 million for the fiscal year ended March 31, 2015, an increase of $2.6 million, or 6.8%, compared to the fiscal year ended March 31, 2014. The increase was attributable to an increase in sales volumes consistent with the growth in net revenues in the Industrial Products segment, and to a lesser degree, in the Coatings, Sealants and Adhesives segment.

Research and Development Expenses

Research and development expenses were $5.7 million for the fiscal year ended March 31, 2015, an increase of $0.2 million, or 3.6%, compared to the fiscal year ended March 31, 2014.

Impairment Loss

The CSWI Businesses have intangible assets which consist of patents, trademarks, customer lists, non-compete agreements, and organization costs. Definite-lived intangible assets are assessed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

In addition, the CSWI Businesses have other trademarks and license agreements which are considered to have indefinite lives. The CSWI Businesses review indefinite-lived intangible assets at least annually for impairment, or whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

Total impairment losses of $0.7 million were recognized on a patent (definite-lived intangible asset) and on a trademark (indefinite-lived intangible asset) for the fiscal year ended March 31, 2015, a decrease of $0.6 million, or 45.8%, compared to the fiscal year ended March 31, 2014.

Operating Income

Operating income was $44.0 million for the fiscal year ended March 31, 2015, an increase of $6.1 million, or 16.1%, compared to the fiscal year ended March 31, 2014. The increase in operating income was primarily attributable to an increase in operating income of $7.1 million and $2.1 million at the Industrial Products and Coatings, Sealants and Adhesives segments, respectively, partially offset by a decrease in operating income of $2.9 million at the Specialty Chemicals segment.

Interest Expense, net

Interest expense, net was $0.6 million for the fiscal year ended March 31, 2015, an increase of $0.5 million, compared to the fiscal year ended March 31, 2014.

Other (Expenses) Income, net

Other income, net was $1.5 million for the fiscal year ended March 31, 2015, an increase of $1.8 million, compared to the fiscal year ended March 31, 2014. The increase in other income, net was primarily attributable to gains recognized on the sale of real estate ($0.9 million) that were partially offset by foreign currency exchange losses related to the payment of vendors at one of the CSWI Businesses’ foreign subsidiaries ($0.4 million). See “Property Sales,” Note 18 to the audited combined financial statements of the CSWI Businesses, and “Foreign Currency Exchange Rate Risk” below.

Provision for Income Taxes

The provision for income taxes was $15.2 million for the fiscal year ended March 31, 2015, representing an effective tax rate of 33.9%, compared to the provision for income taxes of $12.8 million, representing an effective tax rate of 34.1% for the fiscal year ended March 31, 2014.

 

60


Table of Contents

Net Income

Net income was $29.7 million for the fiscal year ended March 31, 2015, an increase in net income of $5.0 million, or 20.1%, compared to the fiscal year ended March 31, 2014 due primarily to the reasons discussed above.

Fiscal Year Ended March 31, 2015 Compared to Fiscal Year Ended March 31, 2014

Segment Results

 

     Net Revenues for the
Fiscal Years Ended March 31,
     Change  
               2015                2014      Amount      Percent  
     (In thousands)  

Segment

           

Industrial Products

   $ 118,422       $ 93,043       $ 25,379         27.3

Coatings, Sealants and Adhesives

     52,119         46,950         5,169         11.0

Specialty Chemicals

     89,738         90,744         (1,006      (1.1 )% 

Other

     1,555         976         579         59.3
  

 

 

    

 

 

    

 

 

    

Total net revenues

   $ 261,834       $ 231,713       $ 30,121         13.0
  

 

 

    

 

 

    

 

 

    
     Operating Income for the
Fiscal Years Ended March 31,
     Change  
               2015                2014      Amount      Percent  
     (In thousands)  

Segment

           

Industrial Products

   $ 19,711       $ 12,593       $ 7,118         56.5

Coatings, Sealants and Adhesives

     11,420         9,360         2,060         22.0

Specialty Chemicals

     13,016         15,877         (2,861      (18.0 )% 

Other

     (113      83         (196      N/M   
  

 

 

    

 

 

    

 

 

    

Total operating income

   $ 44,034       $ 37,913       $ 6,121         16.1
  

 

 

    

 

 

    

 

 

    

Industrial Products

Net revenues were $118.4 million for the fiscal year ended March 31, 2015, an increase of $25.4 million, or 27.3%, compared to the fiscal year ended March 31, 2014. The increase was primarily attributable to higher sales volumes for the fiscal year ended March 31, 2015. The increase in sales volumes resulted from greater demand for HVAC products ($5.6 million), sales of new products from acquisitions ($15.1 million), and sales of newly developed fire and smoke prevention products ($0.7 million).

Operating income was $19.7 million for the fiscal year ended March 31, 2015, an increase of $7.1 million, or 56.5%, compared to the prior fiscal year supported by an increase in sales volumes consistent with the growth in net revenues and modest increases in general and administrative expenses and selling and distribution expenses relative to the increase in net revenues.

Coatings, Sealants and Adhesives

Net revenues were $52.1 million for the fiscal year ended March 31, 2015, an increase of $5.2 million, or 11.0%, compared to the fiscal year ended March 31, 2014. The increase was primarily attributable to higher sales volumes, largely driven by sales of caulking products ($3.4 million) which were supported by recent acquisitions.

Operating income was $11.4 million for the fiscal year ended March 31, 2015, an increase of $2.1 million, or 22.0%, compared to the prior fiscal year. The increase was due to an increase in sales volumes consistent with the

 

61


Table of Contents

growth in net revenues and modest increases in general and administrative expenses and selling and distribution expenses relative to the increase in net revenues.

Specialty Chemicals

Net revenues were $89.7 million for the fiscal year ended March 31, 2015, a decrease of $1.0 million, or 1.1%, compared to the fiscal year ended March 31, 2014. The decrease was attributable to a decrease in sales volumes related primarily to a slowdown in global mining activity ($3.5 million). These decreases in sales volumes were partially offset by an increase in sales volumes associated with a new product offered to the rail industry ($1.0 million).

Operating income was $13.0 million for the fiscal year ended March 31, 2015, a decrease of $2.9 million, or 18.0%, compared to the prior fiscal year. The decline was a result of the decreases in sales volumes referenced above and increases in cost of revenues and general and administrative expenses. These amounts were partially offset by a decrease in selling and distribution expenses. The increase in cost of revenues was caused mainly by higher raw material and packaging costs for certain products. The increase in general and administrative expenses resulted from an increase in the reserve for bad debts ($1.2 million), retention and severance costs associated with the consolidation of selected manufacturing activities ($1.3 million), incentive plan accruals ($0.4 million), and ERP system implementation costs ($0.3 million). The decrease in selling and distribution expenses was a combined result of lower commissions due to the decrease in sales volumes and lower travel and marketing costs ($0.8 million).

For additional information on segments, see “Segments,” Note 24 to the audited combined financial statements of the CSWI Businesses.

 

62


Table of Contents

Fiscal Year Ended March 31, 2014 Compared to Fiscal Year Ended March 31, 2013

Combined Results

 

     Fiscal Years Ended March 31,     Change  
             2014                     2013             Amount     Percent  
     (In thousands)  

Net revenues

   $ 231,713      $ 199,094      $ 32,619        16.4

Cost of revenues

     119,627        104,512        15,115        14.5
  

 

 

   

 

 

   

 

 

   

Gross profit

     112,086        94,582        17,504        18.5
  

 

 

   

 

 

   

 

 

   

Expenses:

        

General and administrative expenses

     29,450        24,699        4,751        19.2

Selling and distribution expenses

     37,924        33,314        4,610        13.8

Research and development expenses

     5,490        4,322        1,168        27.0

Impairment loss

     1,309        —          1,309        100.0
  

 

 

   

 

 

   

 

 

   

Total expenses

     74,173        62,335        11,838        19.0
  

 

 

   

 

 

   

 

 

   

Operating income

     37,913        32,247        5,666        17.6
  

 

 

   

 

 

   

 

 

   

Interest (expense) income, net

     (131     74        (205     N/M   

Other (expenses) income, net

     (256     899        (1,155     N/M   
  

 

 

   

 

 

   

 

 

   

Income before income taxes

     37,526        33,220        4,306        13.0

Provision for income taxes

     12,794        10,707        2,087        19.5
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     24,732        22,513        2,219        9.9
  

 

 

   

 

 

   

 

 

   

Loss on disposal of operation, net of income tax benefit

     —          (1,326     1,326        N/M   

Income from discontinued operation, net of income taxes

     —          511        (511     N/M   
  

 

 

   

 

 

   

 

 

   

Net income (loss) on discontinued operations, net of income taxes

     —          (815     815        100.0
  

 

 

   

 

 

   

 

 

   

Net income

   $ 24,732      $ 21,698      $ 3,034        14.0
  

 

 

   

 

 

   

 

 

   

Net Revenues

Net revenues were $231.7 million for the fiscal year ended March 31, 2014, an increase of $32.6 million, or 16.4%, compared to the fiscal year ended March 31, 2013. The net revenues associated with acquisitions were $7.3 million for the fiscal year ended March 31, 2014. On a combined basis, the total increase in net revenues was entirely due to an increase in sales volumes. The increase was primarily attributable to an increase in sales volumes across all operating segments. In particular, Industrial Products net revenues benefited from factors including greater demand for HVAC products and sales of new products related to recent acquisitions.

Net Revenues by Geographic Region

Net revenues in the Americas, EMEA and APAC represented approximately 82%, 11%, and 7% of the net revenues, respectively, for the fiscal year ended March 31, 2014 compared to approximately 82%, 10%, and 8% of net revenues respectively, for the fiscal year ended March 31, 2013. The presentation of net revenues by geographic region is based on the location of the customer. For additional information regarding net revenues by geographic region, see “Segments,” Note 24 to the audited combined financial statements of the CSWI Businesses.

Foreign Currency Impact on Net Revenues

The CSWI Businesses’ functional currency for financial reporting purposes is the U.S. dollar. The majority of net revenues for the fiscal year ended March 31, 2014 were derived from transactions denominated in U.S. dollars. All other net revenues were derived from transactions denominated in various foreign currencies,

 

63


Table of Contents

primarily the British pound and Canadian dollar. Fluctuations in the U.S. dollar relative to foreign currencies in which the CSWI Businesses conducted business for the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013 unfavorably impacted net revenues by $0.3 million. For additional information, see “Foreign Operations,” Note 17 to the audited combined financial statements of the CSWI Businesses.

Cost of Revenues

For the fiscal year ended March 31, 2014, each significant component of cost of revenues represented the following percentage of total cost of revenues:

 

Material Costs

     75.2

Compensation and related costs

     13.7

Facilities rent and associated costs

     1.2

Equipment and building depreciation

     2.7

Other overhead costs

     7.2
  

 

 

 

Total cost of revenues

     100.0

Cost of revenues was $119.6 million for the fiscal year ended March 31, 2014, an increase of $15.1 million, or 14.5%, compared to the fiscal year ended March 31, 2013. The increase was attributable to increased sales volumes consistent with the growth in net revenues across all operating segments combined with higher costs resulting from an expansion of manufacturing capacity in the Specialty Chemicals segment. The increase was partially offset by lower raw material costs for certain product lines in the Industrial Products and Coatings, Sealants and Adhesives segments.

General and Administrative Expenses

General and administrative expenses were $29.5 million for the fiscal year ended March 31, 2014, an increase of $4.8 million, or 19.2%, compared to the fiscal year ended March 31, 2013. In the Industrial Products segment, increases in amortization expense related to intangible assets acquired in recent acquisitions ($1.1 million) and acquisition integration expenses ($0.7 million) contributed to the increase in general and administrative expenses. The increase was also attributable to higher costs in the Specialty Chemicals segment caused by increased depreciation expense related to facilities expansion ($0.7 million) and expansion of the quality assurance function ($0.5 million).

Selling and Distribution Expenses

Selling and distribution expenses were $37.9 million for the fiscal year ended March 31, 2014, an increase of $4.6 million, or 13.8%, compared to the fiscal year ended March 31, 2013. The increase was attributable to an increase in sales volumes consistent with the growth in net revenues across all operating segments.

Research and Development Expenses

Research and development expenses were $5.5 million for the fiscal year ended March 31, 2014, an increase of $1.2 million, or 27.0%, compared to the fiscal year ended March 31, 2013. The increase was primarily attributable to higher costs related to the development of certain fire and smoke prevention products in the Industrial Products segment.

Impairment Loss

Impairment losses of $1.2 million and $0.1 million were recognized on a patent (definite-lived intangible asset) and on a trademark (indefinite-lived intangible asset), respectively, for the fiscal year ended March 31, 2014, an increase of $1.3 million compared to the fiscal year ended March 31, 2013.

 

64


Table of Contents

Operating Income

Operating income was $37.9 million for the fiscal year ended March 31, 2014, an increase of $5.7 million, or 17.6%, compared to the fiscal year ended March 31, 2013. The increase in operating income was primarily attributable to an increase in operating income of $1.6 million, $1.6 million, and $2.5 million at the Industrial Products, Coatings, Sealants and Adhesives and Specialty Chemicals segments, respectively.

Interest Expense, net

Interest expense, net was $0.1 million for the fiscal year ended March 31, 2014, a decrease of $0.2 million, compared to the fiscal year ended March 31, 2013.

Other (Expenses) Income, net

Other expenses, net was $0.3 million for the fiscal year ended March 31, 2014, a decrease of $1.2 million compared to the fiscal year ended March 31, 2013. The decrease in other income, net was primarily attributable to a decrease in gains recognized on the sale of real estate.

Provision for Income Taxes from Continuing Operations

The provision for income taxes from continuing operations was $12.8 million for the fiscal year ended March 31, 2014, representing an effective tax rate of 34.1%, compared to the provision for income taxes from continuing operations of $10.7 million, representing an effective tax rate of 32.2% for the fiscal year ended March 31, 2013.

The change in the effective tax rate for the fiscal year ended March 31, 2014, compared to the fiscal year ended March 31, 2013 was primarily attributable to an adjustment that increased income tax expense to correct an error originally made in calculating the income tax provision for the fiscal year ended March 31, 2013.

Loss on Disposal of Operation, Net of Income Tax Benefit

In November 2012, one of the CSWI Businesses sold the stock of a subsidiary, Blue Magic, Inc. (“Blue Magic”) for $13.2 million. The sale resulted in a loss, net of income tax benefit, of $1.3 million which is reported as discontinued operations for the fiscal year ended March 31, 2013.

Income from Discontinued Operations, Net of Income Taxes

Income from discontinued operations, net of income taxes, was $0 for the fiscal year ended March 31, 2014, compared to $0.5 million for the fiscal year ended March 31, 2013. Income from discontinued operations, net of income taxes, represents the results of operations of Blue Magic for the fiscal year ended March 31, 2013 less applicable income taxes. Blue Magic net revenues were $12.7 million for the fiscal year ended March 31, 2013.

Net Income

Net income was $24.7 million for the fiscal year ended March 31, 2014, an increase in net income of $3.0 million, or 14.0%, compared to the fiscal year ended March 31, 2013 due primarily to the reasons discussed above.

 

65


Table of Contents

Fiscal Year Ended March 31, 2014 Compared to Fiscal Year Ended March 31, 2013

Segment Results

 

     Net Revenues for the
Fiscal Years Ended March 31,
     Change  
     2014      2013      Amount      Percent  
     (In thousands)  

Segment

           

Industrial Products

   $ 93,043       $ 73,331       $ 19,712         26.9

Coatings, Sealants and Adhesives

     46,950         42,555         4,395         10.3

Specialty Chemicals

     90,744         82,352         8,392         10.2

Other

     976         856         120         14.0
  

 

 

    

 

 

    

 

 

    

Total net revenues

   $ 231,713       $ 199,094       $ 32,619         16.4
  

 

 

    

 

 

    

 

 

    
     Operating Income for the
Fiscal Years Ended March 31,
     Change  
             2014                      2013              Amount      Percent  
     (In thousands)  

Segment

           

Industrial Products

   $ 12,593       $ 10,945       $ 1,648         15.1

Coatings, Sealants and Adhesives

     9,360         7,732         1,628         21.1

Specialty Chemicals

     15,877         13,421         2,456         18.3

Other

     83         149         (66      (44.3 )% 
  

 

 

    

 

 

    

 

 

    

Total operating income

   $ 37,913       $ 32,247       $ 5,666         17.6
  

 

 

    

 

 

    

 

 

    

Industrial Products

Net revenues were $93.0 million for the fiscal year ended March 31, 2014, an increase of $19.7 million, or 26.9%, compared to the fiscal year ended March 31, 2013. The increase was primarily attributable to higher sales volumes resulting from greater demand for HVAC products ($6.1 million) and sales of new products from acquisitions ($4.8 million).

Operating income was $12.6 million for the fiscal year ended March 31, 2014, an increase of $1.6 million, or 15.1%, compared to the prior fiscal year. This increase was a result of an increase in sales volumes consistent with the growth in net revenues, lower raw material costs for certain product lines ($0.5 million) and operating efficiencies associated with certain product lines ($0.4 million). An increase in amortization expense related to intangible assets acquired in recent acquisitions ($1.1 million), higher new product development costs incurred for fire and smoke prevention products ($0.8 million) and acquisition integration expenses ($0.7 million) partially offset the increase in operating income.

Coatings, Sealants and Adhesives

Net revenues were $47.0 million for the fiscal year ended March 31, 2014, an increase of $4.4 million, or 10.3%, compared to the fiscal year ended March 31, 2013. The increase was primarily attributable to higher sales volumes driven largely by sales of thread sealants, caulking, and solvent cement products ($4.3 million).

Operating income was $9.4 million for the fiscal year ended March 31, 2014, an increase of $1.6 million, or 21.1%, compared to the prior fiscal year. This increase was due to an increase in sales volumes consistent with the growth in net revenues and lower raw material costs for certain product lines ($0.2 million).

 

66


Table of Contents

Specialty Chemicals

Net revenues were $90.7 million for the fiscal year ended March 31, 2014, an increase of $8.4 million, or 10.2%, compared to the fiscal year ended March 31, 2013. The increase was primarily attributable to higher sales volumes. The CSWI Businesses recognized increased sales volumes in its drilling compounds ($2.0 million) and mining, rail and industrial lubricants products ($5.2 million).

Operating income was $15.9 million for the fiscal year ended March 31, 2014, an increase of $2.5 million, or 18.3%, compared to the prior fiscal year. This increase was from an increase in sales volumes consistent with the growth in net revenues partially offset by increases in cost of revenues and general and administrative expenses. The increase in cost of revenues was caused by additional expenses related to an expansion of manufacturing capacity ($0.8 million). The increases in general and administrative expenses resulted mainly from increased depreciation expense related to facilities expansion ($0.7 million) and expansion of the quality assurance function ($0.5 million).

For additional information, see “Segments,” Note 24 to the audited combined financial statements of the CSWI Businesses.

Liquidity and Capital Resources

Overview

Historically, the principal sources of liquidity for the CSWI Businesses consisted of cash and cash equivalents, cash flows from operations, including changes in working capital, borrowings, and the sale of investments and assets. CSWI believes that its future sources of liquidity will include existing cash and cash equivalents and cash flows from operations, and may include new borrowings, cash generated from asset divestitures, or proceeds from the issuance of equity or debt securities.

We expect the Share Distribution to have a net positive effect on our liquidity and capital resources. In connection with the Share Distribution, Capital Southwest will provide to us $13.0 million in cash. Further, we will no longer pay management fees or dividends to Capital Southwest. These factors will have an immediate positive impact on our liquidity and capital resources. As described in “Business—Our Growth Strategy,” we expect our business to generate increasing revenue, profitability and free cash flow, which should improve our liquidity over the coming periods. In addition, as a result of becoming a public company, we will have the ability to access the debt and equity capital markets. With our greater combined total assets, revenues and net income following the Share Distribution, we also expect to have better access to bank financing. Although we will experience the added operating and overhead costs associated with being a public company, we expect the other factors discussed to outweigh these additional costs.

On August 4, 2015, the Capital Southwest Board approved an amendment to the pension plan that will cease benefit accruals and modify certain ancillary benefits effective as of September 30, 2015, provided that the Share Distribution occurs on that date. If the Share Distribution does not occur on September 30, 2015, the amendment will be effective as of October 31, 2015. In connection with the Share Distribution, we will assume the Capital Southwest pension liabilities and Capital Southwest will contribute to us approximately $10 million of pension assets. As a result of this contribution, we expect the net liabilities associated with the pension plan to decrease in connection with the Share Distribution. We currently do not expect to be required to make contributions to the pension plan in the near term. Further, we do not expect the assumption of the Capital Southwest pension liabilities to have an adverse impact on our liquidity or financial position.

During the three months ended June 30, 2015 and 2014 and during the fiscal years ended March 31, 2015, 2014 and 2013, the principal uses of liquidity for the CSWI Businesses were to fund operating expenses, complete business acquisitions, make capital expenditures, and repay indebtedness.

 

67


Table of Contents

Financial Condition

Liquidity

As of June 30, 2015, the CSWI Businesses had cash, cash equivalents, bank time deposits, and restricted cash of $40.2 million, compared to $32.1 million as of March 31, 2015 and $31.8 million as of March 31, 2014. During the three months ended June 30, 2015, the CSWI Businesses made the following significant disbursements:

 

  $68.9 million to acquire substantially all of the assets of Strathmore;

 

  $1.9 million for the purchase of property, plant and equipment; and

 

  $0.2 million for the payment of dividends to Capital Southwest

During the fiscal year ended March 31, 2015, the CSWI Businesses made the following significant disbursements:

 

  $3.2 million to acquire selected assets of SureSeal brand from SureSeal Manufacturing;

 

  $4.0 million to acquire selected assets from Evolve Supply Chain Pty. Ltd.;

 

  $8.7 million for the purchase of property plant and equipment;

 

  $18.4 million in net repayments on long-term debt; and

 

  $8.3 million for the repayment of dividends to Capital Southwest.

Restricted cash totaled $0, $2.4 million and $2.1 million as of June 30, 2015, March 31, 2015 and March 31, 2014, respectively. Restricted cash includes compensating cash balances related to certain credit facilities.

The CSWI Businesses’ cash, cash equivalents and bank time deposits are primarily maintained at high credit-quality financial institutions.

Effective April 1, 2015, the CSWI Businesses completed the acquisition of substantially all of the assets of Strathmore. In connection with this acquisition, Whitmore entered into a $70.0 million term loan to fund the acquisition. Additionally, Whitmore’s existing $12.0 million line of credit was replaced by a $20.0 million line of credit. The total of $90.0 million in available financing was provided by a syndicate of four commercial banks. Required principal payments for the fiscal year ending March 31, 2016 will be $3.5 million for the $70.0 million term loan.

Additionally, the CSWI Businesses are in the process of streamlining some manufacturing operations. As a result, the CSWI Businesses are consolidating the manufacturing of some of our lubricant and grease products into our Rockwall, Texas facility. The CSWI Businesses’ total capital expenditure requirements related to this consolidation are currently expected to require approximately $5.4 million and $5.0 million of cash funding during the fiscal years ending March 31, 2016 and March 31, 2017, respectively, and may require additional capital expenditures in later periods.

CSWI believes that available cash and cash equivalents will be sufficient to meet its liquidity needs, including capital expenditures, for at least the next 12 months.

Sources of Liquidity

The following discussion highlights the CSWI Businesses’ primary sources of cash and cash equivalents, and changes in those amounts due to operating, financing, and investing activities.

 

68


Table of Contents

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

 

     Three Months Ended June 30,  
            2015                    2014         
     (In thousands)  

Net cash provided by operating activities

   $ 10,176       $ 7,073   

Net cash used in investing activities

     (67,067      (3,001

Net cash provided by (used in) financing activities

     68,245         (332

Effect of exchange rates on cash and cash equivalents

     83         220   
  

 

 

    

 

 

 

Net increase in cash and cash equivalents

     11,437         3,960   

Cash and cash equivalents, beginning of period

     20,448         15,411   
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 31,885       $ 19,371   
  

 

 

    

 

 

 

Operating Cash Flows

During the three months ended June 30, 2015, net cash provided by operating activities was $10.2 million primarily attributable to $2.0 million in net income after the add-back of non-cash items and a $5.5 million increase in accounts payable and accrued expenses. This amount was partially offset by a $7.1 million increase in trade and other receivables and a $0.6 million increase in inventories.

Investing Cash Flows

During the three months ended June 30, 2015, net cash used in investing activities was $67.1 million primarily attributable to cash outflows of $68.9 million in cash paid for acquisitions, and $1.9 million in purchases of property, plant and equipment. These amounts were partially offset by $3.6 million in the net change in bank time deposits and restricted cash.

Financing Cash Flows

During the three months ended June 30, 2015, net cash provided by financing activities was $68.2 million and was primarily attributable to $68.5 million in net borrowings of long-term debt used to acquire substantially all of the assets of Strathmore.

Fiscal Year Ended March 31, 2015 Compared to Fiscal Year Ended March 31, 2014

 

     Fiscal Years Ended March 31,  
            2015                    2014         
     (In thousands)  

Net cash provided by operating activities

   $ 35,468       $ 21,629   

Net cash used in investing activities

     (2,625      (39,942

Net cash (used in) provided by financing activities

     (26,893      13,069   

Effects of exchange rates on cash and cash equivalents

     (913      (704
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     5,037         (5,948

Cash and cash equivalents, beginning of period

     15,411         21,359   
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 20,448       $ 15,411   
  

 

 

    

 

 

 

Operating Cash Flows

During the fiscal year ended March 31, 2015, net cash provided by operating activities was $35.5 million primarily attributable to $36.3 million in net income after add-back of non-cash items, a $4.5 million decrease in

 

69


Table of Contents

prepaid expenses and other assets, a $1.1 million increase in accounts payable and accrued expenses, and a $0.3 million increase in other long-term liabilities. This amount was partially offset by a $6.7 million increase in inventories.

Investing Cash Flows

During the fiscal year ended March 31, 2015, net cash used in investing activities was $2.6 million primarily attributable to cash outflows of $8.7 million in purchases of property, plant, and equipment and $7.2 million in cash paid for acquisitions, net of cash acquired. These amounts were partially offset by $6.4 million in proceeds from the sale of assets, $3.4 million in the net change in bank time deposits and restricted cash, and $3.5 million in proceeds from the sale of assets held for investment.

Financing Cash Flows

During the fiscal year ended March 31, 2015, net cash used in financing activities was $26.9 million primarily attributable to $18.4 million in net repayments on long-term debt and $8.3 million in dividends paid.

Fiscal Year Ended March 31, 2014 Compared to Fiscal Year Ended March 31, 2013

 

     Fiscal Years Ended March 31,  
     2014      2013  
     (In thousands)  

Net cash provided by operating activities

   $ 21,629       $ 27,806   

Net cash used in investing activities

     (39,942      (34,092

Net cash provided by financing activities

     13,069         11,302   

Effects of exchange rates on cash and cash equivalents

     (704      (9
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     (5,948      5,007   

Cash and cash equivalents, beginning of period

     21,359         16,352   
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 15,411       $ 21,359   
  

 

 

    

 

 

 

Operating Cash Flows

During the fiscal year ended March 31, 2014, net cash provided by operating activities was $21.6 million primarily attributable to $37.6 million in net income after the add-back of non-cash items, a $1.3 million decrease in prepaid expenses and other assets, and a $0.3 million increase in other long-term liabilities. This amount was partially offset by a $10.0 million increase in trade and other receivables, a $6.8 million increase in inventories and a $0.9 million decrease in accounts payable and accrued expenses.

Investing Cash Flows

During the fiscal year ended March 31, 2014, net cash used in investing activities was $39.9 million primarily attributable to cash outflows of $24.6 million in cash paid for acquisitions, net of cash acquired, $15.0 million in purchases of property, plant, and equipment and $2.0 million in the net change in bank time deposits and restricted cash. These amounts were partially offset by $1.7 million in proceeds from the sale of assets held for investment.

Financing Cash Flows

During the fiscal year ended March 31, 2014, net cash provided by financing activities was $13.1 million and was primarily attributable to $21.7 million in net borrowings of long-term debt partially offset by $8.7 million in dividends paid.

 

70


Table of Contents

Indebtedness

RectorSeal Line of Credit

As of June 30, 2015, RectorSeal had a $30.0 million secured line of credit with a bank available for acquisitions and general corporate purposes. The line of credit matures on July 31, 2016. Borrowings under the line of credit bear interest at a variable annual rate of either the one month LIBOR plus 1.5% or 0.75% less than the bank floating rate. The line of credit is secured by accounts receivable, inventory, equipment, investments, and other assets of RectorSeal (excluding its subsidiaries). The agreement contains certain restrictive covenants requiring RectorSeal to maintain a minimum tangible net worth (excluding its subsidiaries). RectorSeal was in compliance with all covenants as set forth in the loan agreement as of June 30, 2015. As of June 30, 2015, RectorSeal had $12.5 million in outstanding borrowings under the line of credit.

Whitmore Line of Credit and Term Loans

As of June 30, 2015, Whitmore had a $20.0 million secured line of credit with a syndicate of four commercial banks available for general corporate purposes. The line of credit matures on April 27, 2020. Borrowings under the line of credit bear interest at a variable annual rate of 0.5% less than the bank floating rate. As of June 30, 2015, Whitmore had no outstanding borrowings under the line of credit.

As of June 30, 2015, Whitmore had a secured term loan outstanding to support the CSWI Businesses’ acquisition of Strathmore. The term loan matures on April 27, 2020. Borrowings under the term loan bear interest at a variable annual rate equal to one month LIBOR plus 3.0%. As of June 30, 2015, Whitmore had $69.1 million in outstanding borrowings under the term loan. Whitmore has entered into an interest rate swap agreement with respect to 50% of the outstanding principal amount to hedge against interest rate risk.

As of June 30, 2015, Whitmore had a secured term loan outstanding related to a newly constructed warehouse and corporate office building and the remodel of an existing manufacturing and research and development facility. The term loan matures on July 31, 2029. Borrowings under the term loan bear interest at a variable annual rate equal to one month LIBOR plus 2.0%. As of June 30, 2015, Whitmore had $13.6 million in outstanding borrowings under the term loan. Whitmore has entered into an interest rate swap agreement with respect to 100% of the outstanding principal amount to hedge against interest rate risk.

The Whitmore line of credit and term loans are secured by the Whitmore property referenced above and other assets of Whitmore. The agreements contain certain restrictive covenants requiring Whitmore to limit capital expenditures and maintain a minimum fixed charge coverage ratio and a maximum leverage ratio. Whitmore was in compliance with all covenants as set forth in the loan agreement as of June 30, 2015.

Balco Line of Credit

As of June 30, 2015, Balco had a $1.5 million unsecured revolving line of credit with a bank available for working capital purposes. The line of credit matures on October 29, 2015. Borrowings under the line of credit bear interest at a variable annual rate of 0.5% less than Prime, with a floor of 3.75%. The agreement does not contain any financial covenants. As of June 30, 2015, Balco had no outstanding borrowings under the line of credit.

Off-Balance Sheet Arrangements

As of June 30, 2015, the CSWI Businesses did not have any off-balance sheet arrangements that they believe have or are reasonably likely to have a material adverse effect on its financial condition or results of operations.

 

71


Table of Contents

Contractual Obligations

The following table presents the CSWI Businesses’ contractual obligations as of June 30, 2015:

 

     Payments due by period(6)  
     Total      < 1 year      1-3 years      3-5 years      > 5 years  
     (In thousands)  

Long-term debt obligations—principal(1)

   $ 95,189       $ 3,046       $ 25,872       $ 13,372       $ 52,899   

Long-term debt obligations—interest(1)

     16,617         2,540         5,854         4,330         3,893   

Operating lease obligations(2)

     6,130         1,772         1,909         1,156         1,293   

Purchase obligations(3)

     27,908         24,807         1,683         1,418         0   

Other long-term liabilities(4)

     9,262         23         7,777         690         772   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(5)

   $ 155,106       $ 32,188       $ 43,095       $ 20,966       $ 58,857   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amounts include principal and interest cash payments through the maturity of the outstanding debt obligations. See “Debt,” Note 8 to the unaudited combined financial statements of the CSWI Businesses.
(2) Amounts exclude sublease rental income related to certain non-cancelable operating leases. Sales taxes, value added taxes, and goods and services taxes included as part of recurring lease payments are excluded from the amounts shown above. See “Leases,” Note 9 to the unaudited combined financial statements of the CSWI Businesses.
(3) Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding, and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty, but include open purchase orders which represent amounts the CSWI Businesses anticipate will become payable for goods and services it has negotiated for delivery.
(4) Amounts primarily include settlement of the liability recorded for the interest rate swap agreement associated with the term loan, contingent consideration payable due to acquisitions, and future payments required under outstanding incentive awards. The liability for retirement benefits payable related to the CSWI Businesses’ defined benefit pension plans is excluded from the contractual obligations table because it does not represent expected liquidity requirements. See “Derivative Instruments and Hedge Accounting”, “Business Combinations”, “Cash Incentive Awards” and “Retirement Plans”, Notes 10, 3, 14, and 12, respectively, to the unaudited combined financial statements of the CSWI Businesses.
(5) Operating lease and purchase obligations denominated in foreign currencies are projected based on the exchange rate in effect on June 30, 2015. Excludes amounts that have been eliminated in the combined financial statements of the CSWI Businesses.
(6) The less than one year category represents the remainder of fiscal year 2016 (7/1/15 - 3/31/16), the 1-3 years category represents fiscal years 2017 and 2018, the 3-5 years category represents fiscal years 2019 and 2020 and the greater than five years category represents fiscal years 2021 and thereafter.

Quantitative and Qualitative Disclosures About Market Risk

The CSWI Businesses are exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely affect their combined financial position and results of operations. The CSWI Businesses seek to minimize these risks through regular operating and financing activities, and when deemed appropriate, through the use of interest rate swaps. It is the CSWI Businesses’ policy to enter into interest rate swaps only to the extent considered necessary to meet its risk management objectives. The CSWI Businesses do not purchase, hold or sell derivative financial instruments for trading or speculative purposes.

Variable Rate Indebtedness

The CSWI Businesses are also subject to interest rate risk on its variable rate indebtedness. Fluctuations in interest rates have a direct effect on interest expense associated with our outstanding indebtedness. As of June 30, 2015, the CSWI Businesses had outstanding variable rate indebtedness of $95.2 million.

 

72


Table of Contents

The CSWI Businesses may manage, or hedge, interest rate risks related to our borrowings by means of interest rate swap agreements. At June 30, 2015, the CSWI Businesses had interest rate swap agreements that covered $48.1 million of the $95.2 million of the CSWI Businesses’ total outstanding indebtedness.

At June 30, 2015 unhedged variable rate indebtedness of $47.1 million had a weighted average interest rate of 2.79%. Each quarter point change in interest rates would result in a change of less than $0.2 million in our interest expense on an annual basis.

The CSWI Businesses may also be exposed to credit risk in derivative contracts it may use. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for the CSWI Businesses. If the fair value of a derivative contract is negative, a CSWI Business will owe the counterparty and, therefore, does not have credit risk. The CSWI Businesses have sought to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties.

Foreign Currency Exchange Rate Risk

The CSWI Businesses conduct a small portion of their operations outside of the U.S. in currencies other than the U.S. dollar. The non-U.S. operations are conducted primarily in their local currencies, which are also their functional currencies, and include the British pound, Canadian dollar and Australian dollar. Foreign currency exposures arise from translation of foreign-denominated assets and liabilities into U.S. dollars and from transactions denominated in a currency other than a non-U.S. operation’s functional currency. The CSWI Businesses realized net gains associated with foreign currency translation of $1.1 million and $1.3 million for the three months ended June 30, 2015 and June 30, 2014, respectively, which are included in other comprehensive income. The CSWI Businesses recognized foreign currency transaction net losses of $0.2 million for each of the three month periods ended June 30, 2015 and June 30, 2014, which are included in other income (expenses), net in the combined statements of operations.

Based on a sensitivity analysis at June 30, 2015, a 10% change in the foreign currency exchange rates for the three months ended June 30, 2015 would have impacted our net earnings by a negligible amount. This calculation assumes that all currencies change in the same direction and proportion relative to the U.S. dollar and that there are no indirect effects, such as changes in non-U.S. dollar sales volumes or prices.

Critical Accounting Estimates and Judgments

The accounting estimates and judgments discussed in this section are those that the CSWI Businesses’ consider to be most critical to understand its combined financial statements, because they involve significant judgments and uncertainties. The accounting estimates and judgments outlined below are critical because they can materially affect the CSWI Businesses’ operating results and financial condition, inasmuch as they require management to make subjective judgments. Many of these estimates include determinations of fair value. All of these estimates reflect the CSWI Businesses’ best judgment about current and, for some estimates, future, economic and market conditions and effects based on information available as of the date of the accompanying financial statements. As a result, the accuracy of these estimates and the likelihood of future changes depend on a range of possible outcomes and a number of underlying variables, some of which are beyond the CSWI Businesses’ control.

Revenue Recognition

The CSWI Businesses generally recognize revenue upon shipment of product, at which time title passes to the customer. Net revenues represent gross revenues invoiced to customers less certain related charges for contractual discounts or rebates. Shipping and handling fees billed to customers are included in net revenues, while other shipping and handling costs are expensed as incurred and included in selling and distribution expenses in the accompanying combined statements of operations.

 

73


Table of Contents

Goodwill

Goodwill represents the excess of the aggregate purchase price over the fair value of identifiable net assets acquired in a business combination. The CSWI Businesses test goodwill at least annually for impairment at the reporting unit level, which is an operating segment or one level below an operating segment. Goodwill is tested for impairment more frequently if conditions arise or events occur that indicate that the fair value of the reporting unit is lower than the carrying value of that reporting unit. The CSWI Businesses’ goodwill is recorded in eight reporting units.

The CSWI Businesses first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Qualitative assessments use an evaluation of events and circumstances such as macroeconomic conditions, industry and market considerations, cost factors, financial performance factors, entity specific events, and changes in carrying value to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill.

If a reporting unit fails the qualitative assessment, then valuation models and other relevant data are used to estimate the reporting unit’s fair value. The valuation models require the input of subjective assumptions. The CSWI Businesses use an income approach for impairment testing of goodwill using a discounted cash flow method. Significant estimates include future revenue and expense projections, growth estimates made to calculate terminal value, and a discount rate that approximates the CSWI Businesses’ weighted average cost of capital. The CSWI Businesses perform qualitative and quantitative assessments to test asset carrying values for impairment at January 31, which is the annual impairment testing date.

For purposes of completing the annual goodwill impairment test for fiscal year 2015, the CSWI Businesses first utilized the qualitative approach for testing goodwill. As a result of this assessment, it was determined that it was not more likely than not that the fair values of seven reporting units were less than their respective carrying values and, thus, the two-step quantitative analysis was not required. However, one reporting unit was identified for which management could not readily determine whether the fair value of the reporting unit exceeded the carrying value of the reporting unit based solely on qualitative factors. As a result, a quantitative assessment was utilized to further assess the recoverability of goodwill for this reporting unit. The estimated fair value was determined using a discounted cash flow technique, and the key inputs used in the evaluation are consistent with those inputs noted above. Management concluded that the fair value of the reporting unit substantially exceeded the carrying value of the reporting unit as a result of completing step one of the quantitative assessment. There were no goodwill impairment losses recognized for the three months ended June 30, 2015 and 2014 or for the fiscal years ended March 31, 2015 and 2014.

Intangible Assets

The CSWI Businesses have intangible assets consisting of patents, trademarks, customer lists, non-compete agreements, and organization costs. Definite-lived intangible assets are assessed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. In addition, the CSWI Businesses have other trademarks and license agreements which are considered to have indefinite lives. The CSWI Businesses review these intangible assets at least annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Significant assumptions used in the impairment test include the discount rate, royalty rate, future projections, and terminal value growth rate. These inputs are considered non-recurring level three inputs within the fair value hierarchy. An impairment loss would be recognized when estimated future cash flows are less than their carrying amount. The CSWI Businesses recorded no impairment of intangible assets in each of the three months ended June 30, 2015 and June 30, 2014. The CSWI Businesses recorded an impairment of intangible assets of $0.7 million and $1.3 million for the fiscal years ended March 31, 2015 and 2014.

 

74


Table of Contents

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The CSWI Businesses recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The CSWI Businesses did not recognize any uncertain tax positions as of or for the three months ended June 30, 2015 or as of or for the fiscal year ended March 31, 2015. The CSWI Businesses’ policy is to classify interest in the financial statements as interest expense and classify penalties as other expense.

Accounts Receivable

Accounts receivable reflects amounts billed to customers less trade discounts and an allowance for doubtful accounts. Management continually monitors accounts receivable from customers for collectability issues based on review of individual customer accounts, recent loss experience, current economic conditions, and other pertinent factors.

The CSWI Businesses estimate a bad debt reserve under the allowance method. Using payment history in light of current economic conditions, management examines the status of customer accounts on the aged accounts receivable report. With this information, management estimates an appropriate allowance for doubtful accounts. Accounts receivable are written off when it is determined the receivable will not be collected. Bad debt reserves were $1.7 million, $1.7 million and $0.3 million as of June 30, 2015, March 31, 2015 and March 31, 2014, respectively.

Inventories

Inventories are stated at the lower of cost or market and include raw materials, supplies, direct labor, and manufacturing overhead. Cost is determined using the last-in, first-out method for valuing inventories of the CSWI Businesses’ primary domestic operations. The CSWI Businesses’ foreign subsidiaries use either the first-in, first out method or the weighted average cost method to value inventory. Foreign inventories represent approximately 8.1%, 10.1% and 11.9% of total inventories as of June 30, 2015, March 31, 2015 and March 31, 2014, respectively. A portion of foreign inventories is attributable to inventory consigned to third parties to be sold abroad.

Reserves are provided for slow-moving or excess and obsolete inventory based on the difference between the cost of the inventory and its net realizable value and by reviewing quantities on hand in comparison to historical and expected future usage. In estimating the reserve for excess or slow-moving inventory, management considers factors such as product aging, current and future customer demand, and market conditions. The excess and obsolete inventory reserve was $0.8 million, $0.2 million and $0.2 million as of June 30, 2015, March 31, 2015 and March 31, 2014, respectively.

Retirement Plans

Certain of the CSWI Businesses participate in a qualified defined benefit pension plan (the “Retirement Plan”) which covers substantially all of their domestic employees hired prior to January 1, 2015. Those CSWI Businesses record on their financial statements annual amounts relating to the Retirement Plan based on calculations

 

75


Table of Contents

which include various actuarial assumptions such as discount and mortality rates and assumed rates of return. Material changes in pension costs may occur in the future due to changes in the discount or mortality rate, the expected long-term rate of return, levels of contributions to the plan, and other factors. The funded status of the Retirement Plan is the difference between the fair value of plan assets and the accrued benefit obligation. The applicable CSWI Businesses recognize changes in the funded status of the Retirement Plan in shareholder’s equity in the year in which the changes occur and measure Retirement Plan assets and obligations as of the date of those CSWI Businesses’ fiscal year-end. Those CSWI Businesses presently use March 31 as the measurement date for the Retirement Plan. The Retirement Plan is closed to any employees hired or re-hired on or after January 1, 2015. The Retirement Plan has been amended to freeze benefit accruals and to modify certain ancillary benefits provided under the Retirement Plan effective as of September 30, 2015, provided that the Distribution Date occurs on September 30, 2015. If the Distribution Date does not occur on September 30, 2015, such amendment will become effective as of October 31, 2015.

Certain of the CSWI Businesses participate in an unfunded retirement restoration plan (the “Restoration Plan”) which is a non-qualified plan that provides for the payment to participating employees, upon the later to occur of the participant’s separation from service with the applicable CSWI Business or attainment of age 55, of the difference between the maximum annual payment permissible under the Retirement Plan pursuant to limitations under the Code and the amount which would otherwise have been payable under the Retirement Plan in the absence of those limitations.

A foreign subsidiary of the CSWI Businesses has a defined benefit pension plan covering substantially all of its employees. The plan is subject to actuarial revaluation every three years.

A subsidiary of the CSWI Businesses has a 401(k) plan covering substantially all of its employees. Contributions to the 401(k) plan are made at management’s discretion.

Employee Stock Ownership Plan

Certain of the CSWI Businesses sponsor two qualified, non-leveraged employee stock ownership plans (collectively, the “ESOP”) in which all U.S. employees of the participating CSWI Businesses are eligible to participate following the completion of one year of service. The ESOP provides annual discretionary employer contributions of up to the maximum amount that is deductible by the CSWI Businesses for tax purposes under the Code. Contributions to the ESOP are invested in Capital Southwest common stock. A participant’s interest in contributions to the ESOP fully vests after three years of credited service or upon retirement or permanent disability (each, as defined in the ESOP) or death. ESOP expenses are included in general and administrative expenses in the combined statements of operations.

Cash Incentive Awards

The CSWI Businesses have historically issued incentive awards to several of their key employees based on an increase in net asset value (“NAV”). Each recipient is entitled to the appreciation in NAV over the established performance period, provided the key employee remains employed by the applicable CSWI Business. The duration of these incentive awards is approximately five years from the date of grant.

More recently, the CSWI Businesses have issued incentive awards to several of their key employees based on an increase in earnings before interest, income tax expense, depreciation and amortization (“EBITDA”). Each recipient is entitled to an established rate multiplied by the excess of positive “Annual EBITDA” over the established “Base EBITDA.” To receive this incentive award, recipients generally must remain employed by the applicable CSWI Businesses through the last day of the applicable performance period. However, in the event an award recipient terminates employment prior to the end of the applicable performance period due to the award recipient’s death, disability or retirement after attainment of age 65, such cash incentive award shall generally accelerate and be paid within 60 days following such termination of employment.

 

76


Table of Contents

Because the Share Distribution will significantly affect the NAV and EBITDA performance metric used for the incentive awards, the CSWI Businesses will use commercially reasonable efforts to enter into an agreement with each holder of an incentive award as of the Distribution Date to cause the value of such award to be determined based upon NAV or EBITDA, as applicable, as of the last day of the financial quarter ending immediately prior to the Distribution Date. Such awards shall continue to be otherwise subject to substantially the same terms and conditions after the Distribution Date as applied to such awards immediately prior to the Distribution Date. The CSWI Businesses will use commercially reasonable efforts to enter into a new incentive agreement with the holders of each such incentive awards. Such new awards shall remain subject to substantially the same terms and conditions after the Distribution Date as applied to the incentive awards immediately prior to the Distribution Date, to the extent necessary to comply with Section 409A of the Code.

Related Party Transactions

The CSWI Businesses paid $100,000 in management fees for each of the three months ended June 30, 2015 and June 30, 2014 to a management company subsidiary of Capital Southwest for services rendered during each respective period. The CSWI Businesses paid $0.5 million in management fees for each of the fiscal years ended March 31, 2015 and March 31, 2014 to a management company subsidiary of Capital Southwest for services rendered during each respective period. These amounts are presented as general and administrative expenses in the combined statements of operations.

The CSWI Businesses paid $0.2 million and $0.3 million in dividends to its shareholder, Capital Southwest, during the three months ended June 30, 2015 and June 30, 2014, respectively. The CSWI Businesses paid $8.3 million and $8.7 million in dividends to its shareholder, Capital Southwest, during the fiscal years ended March 31, 2015 and March 31, 2014, respectively.

As of June 30, 2015, 933,176 shares of Capital Southwest stock were held under the ESOP and 238,252 shares of Capital Southwest stock were held in its qualified defined benefit pension plan.

On June 4, 2015, the CSWI Businesses extended a promissory note to an officer of the RectorSeal Corporation for the amount of $100,000. Borrowings under the agreement bear no interest and are scheduled to be paid in five annual payments of equal amounts.

Derivative Instruments and Hedge Accounting

The CSWI Businesses enter into derivative financial arrangements such as interest rate swaps to hedge interest rate risk associated with its long-term debt. The CSWI Businesses account for derivative financial instruments in accordance with ASC Topic 815, Derivatives and Hedging, and record all derivatives as either assets or liabilities on the combined balance sheet measured at estimated fair value. The recognition of these changes in fair value depends on the intended use of the derivatives and resulting designation. The CSWI Businesses record the changes in fair value of derivative instruments, which do not qualify and therefore are not designated for hedge accounting, in the combined statement of operations. If it is determined that they do qualify for hedge accounting treatment, the following is a summary of the impact on the CSWI Businesses’ combined financial statements:

 

  For designated cash flow hedges, the effective portion of the changes in the fair value of derivatives is recorded in accumulated other comprehensive (loss) income and subsequently recorded in interest expense in the combined statement of operations at the time the hedged item affects earnings.

 

  For designated cash flow hedges, the ineffective portion of a hedged derivative instrument’s change in fair value is immediately recognized in interest expense in the combined statement of operations.

 

77


Table of Contents

Recent Accounting Pronouncements

Standards to be Implemented

In April 2015, the FASB issued ASU 2015-03—Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. Amortization of those costs should be reported as interest expense. This ASU is effective for financial statements issued for annual and interim periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The new guidance should be applied on a retrospective basis for each period presented in the balance sheet. The CSWI Businesses are currently evaluating the impact of adopting this guidance.

In April 2015, the FASB issued ASU 2015-05—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes software. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The CSWI Businesses are currently evaluating the impact of adopting this guidance.

In June 2015, the FASB issued ASU 2015-10—Technical Corrections and Improvements, which makes minor amendments to the FASB Accounting Standards Codification. The amendments to transition guidance are effective for fiscal years beginning after December 15, 2015. All other changes are effective upon issuance of this ASU. The CSWI Businesses are currently evaluating the impact of adopting this guidance.

In August 2015, the FASB issued ASU 2015-14—Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in ASU 2015-14 defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and 2 interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in Update 2014-09. The CSWI Businesses are currently evaluating the impact of adopting this guidance.

 

78


Table of Contents

BUSINESS

Overview

We were incorporated in the State of Delaware on November 6, 2014 as a wholly owned subsidiary of Capital Southwest. We were formed solely for the purpose of effecting the Share Distribution and to become the holding company for a group of companies that were owned by Capital Southwest prior to the Share Distribution. To date, we have not conducted any material activities or operations.

Prior to the Share Distribution, Capital Southwest will contribute to us $13.0 million in cash and 100% of the outstanding capital stock of the following Capital Southwest operating companies:

 

•       RectorSeal

 

•       Jet-Lube

 

•       Strathmore

•       Whitmore

 

•       Balco

 

•       Smoke Guard

Our Company

We are a diversified industrial growth company with well-established, scalable platforms and deep domain expertise across three segments: Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals. Our broad portfolio of leading products provides performance optimizing solutions to our customers. Our products include mechanical products for HVAC and refrigeration applications, coatings and sealants and high performance specialty lubricants. Markets that we serve include plumbing, HVAC, refrigeration, electrical, commercial construction, rail car and locomotive, oil and gas, mining, steel, transportation and general industrial markets.

Drawing on our innovative and proven technologies, we seek to deliver solutions to our professional customers that require superior performance and reliability. Our industrial brands, such as RectorSeal No. 5® and KOPR-KOTE®, are well known in the specific industries we serve and have a reputation for high quality and reliability. Through organic growth and acquisitions, we believe we are well positioned to offer our customers an increasingly broad portfolio of performance optimizing solutions. We have a successful record of making accretive acquisitions—in the last five years, we completed 10 acquisitions for an aggregate purchase price of $148.1 million. We believe there are further attractive acquisition opportunities available within the markets in which we operate.

Our pro forma net revenues and pro forma operating income for the three months ended June 30, 2015 were $88.9 million and $15.4 million, respectively. Our actual net revenues and operating income for the three months ended June 30, 2014 were $68.8 million and $14.1 million respectively. Pro forma net revenues and pro forma operating income increased 29.2% and 8.6%, respectively, compared to the three months ended June 30, 2014. Our pro forma net revenues and pro forma operating income for the fiscal year ended March 31, 2015 were $325.0 million and $46.2 million, respectively. Our actual net revenues and operating income for the fiscal year ended March 31, 2014 were $231.7 million and $37.9 million, respectively. Pro forma net revenue and pro forma operating income for the fiscal year March 31, 2015 increased 40.3% and 22.0%, respectively, compared to the fiscal year March 31, 2014. We expect to focus on generating free cash flow by growing organically and through complementary and synergistic acquisitions.

CSWI has a long history of providing high quality specialty chemicals and other products, accompanied by dependable service and attention to customer satisfaction. For example, our Whitmore subsidiary has been in operation since 1893 and its lubricants were used in the construction of the Panama Canal. CSWI also has a long history of innovation. We believe our RectorSeal subsidiary was the first to develop a unique method for removing internal acid from air conditioning and refrigeration systems, pioneering the market for acid neutralizers. We partner with our customers to solve specific challenges, such as CSWI’s environmental compound formula product series, which was specifically developed to provide high performance in general applications combined with biodegradability and no eco-toxicity to satisfy the strict environmental requirements.

 

79


Table of Contents

Prior to the Share Distribution, the CSWI Businesses operated as disparate businesses and included the following operating companies:

 

  RectorSeal. RectorSeal formulates and manufactures specialty chemical products including pipe thread sealants, firestop sealants, plastic solvent cements and other formulations for plumbing, HVAC, electrical and industrial applications, electrical control and measurement devices, and accessories for ductless mini-split HVAC systems. RectorSeal also makes specialty tools for tradesmen and innovative systems for containing flames and smoke from building fires. These products are distributed both domestically and internationally through an extensive distribution network serving the plumbing, industrial, HVAC, refrigeration, construction, electrical and hardware markets.

RectorSeal was established in 1937 and acquired by Capital Southwest in 1969. It has facilities in Houston, Texas, Fall River, Massachusetts and Brisbane, Australia. Portions of RectorSeal’s operating results are included in each of our three business segments.

 

  Whitmore. Established in 1893 in Cleveland, Ohio, Whitmore manufactures high performance, specialty lubricants for heavy equipment used in surface mining, railroad and other industries and has operations in the U.S. and the U.K. Whitmore also manufactures lubrication equipment, specifically for rail applications, and lubrication-centric reliability solutions for a wide variety of industries. In addition, Whitmore produces water-based coatings for the automotive and primary metals industries.

Whitmore products and services are sold in over 100 countries around the world through a service intensive distribution network committed to technical support and customer satisfaction. Whitmore’s primary customer base is located in Australia, Brazil, Canada, China, Colombia, the Netherlands, Russia, South Africa, Sweden, the U.K. and the U.S.

Capital Southwest acquired Whitmore in 1979. Portions of Whitmore’s operating results are included in each of our three business segments.

 

  Jet-Lube. Jet-Lube is a world leader in anti-seize compounds, thread sealants and specialty lubrication products and greases for the energy industry. Jet-Lube was established in 1949 and has operations in the U.S., Canada and the U.K. Capital Southwest acquired Jet-Lube in 1973.

Jet-Lube serves customers worldwide in a wide variety of industries, including oil and gas, water well, mining, manufacturing, electric utility, food processing and agriculture, water utility, construction, transportation, valve maintenance, forestry, groundwater, military, HVAC and plumbing.

Jet-Lube products are available worldwide through an extensive distribution network with a combination of factory representatives and warehouses in key locations such as Glendale, California. Portions of Jet-Lube’s operating results are included in both our Coatings, Sealants and Adhesives and our Specialty Chemicals segments.

 

  Balco. Balco is engaged in the fabrication of aluminum and plastic extrusions and other materials related to safety, slip resistance and emergency egress for products used by the commercial building industry worldwide.

Balco was founded in Wichita, Kansas in 1958 and was acquired by Capital Southwest in 1989. It also has facilities in Oklahoma City, Oklahoma. Balco’s operating results are included in our Industrial Products segment.

 

  Strathmore. Strathmore manufactures custom designed coatings and solvents for customers in various industries, including the rail, mining and industrial sectors. Strathmore was founded in 1942 in Syracuse, New York. Strathmore markets and sells its products worldwide through a direct sales force. In addition to its facility in New York, Strathmore has a facility in Longview, Texas.

Effective April 1, 2015, we acquired substantially all of the assets of Strathmore for $68.9 million, plus additional payments if certain financial metrics are achieved in future periods. Strathmore’s revenue and

 

80


Table of Contents

operating income for fiscal year ended December 31, 2014 were $63.2 million and $8.2 million, respectively. Strathmore’s operating results will be included in our Coatings, Sealants and Adhesives segment.

 

  Smoke Guard. Smoke Guard manufactures certified custom safety products for the commercial construction market and other markets requiring smoke and fire protection. It was founded and continues to operate in Boise, Idaho in 1991 and was acquired by Capital Southwest in 2004.

Smoke Guard’s proprietary technologies control the movement of smoke and are sold through exclusive distributors primarily in the U.S. Smoke Guard’s operating results are included in our Industrial Products segment.

The CSWI Businesses also include CapStar, a real estate holdings company whose operations are not material to CSWI.

Following the Share Distribution, we will benefit from our ability to organize the CSWI Businesses around key market segments, grow the CSWI Businesses by allocating capital more efficiently, offer greater investor choice through separate entities, unlock shareholder value, increase management focus and better align the interests of management and our stockholders, which we expect will allow us to increase revenue and profitability. See “The Share Distribution—Reasons for the Share Distribution.”

 

81


Table of Contents

Business Segments

We operate in three business segments: Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals. The table below provides an overview of these business segments.

 

                                             

Business

Segment

          Principal Product       Key End Use                   Pro Forma
Net Revenue*
    Categories     Markets             Representative Industrial Brands             $       %    
                                             
Industrial Products    

¡      Specialty mechanical products

¡      Fire and smoke protection products

¡     Architecturally- specified building products

¡     Storage. filtration and application equipment for use with our specialty chemicals and other products

 

   

¡     Plumbing

¡     HVAC

¡     Refrigeration

¡     Electrical

¡     Commercial construction

¡     Rail car and locomotive

¡     General industrial

   

. LOGO              LOGO

 

LOGO          LOGO

 

LOGO                LOGO

 

LOGO          LOGO

 

LOGO    LOGO

 

LOGO      LOGO

 

LOGO      LOGO

 

LOGO          LOGO

 

   

LOGO  

                                             
                     
Coatings, Sealants and Adhesives    

¡     Coatings and penetrants

¡     Pipe thread sealants

¡     Firestopping sealants and caulks

¡     Adhesives/solvent cements

   

¡     Rail car and locomotive

¡     Oil and gas

¡     Commercial construction

¡     Plumbing

¡     HVAC

¡     Refrigeration

¡     Electrical

¡     General industrial

 

   

LOGO

 

LOGO     

 

LOGO

                       LOGO

LOGO

 

 

             LOGO

 

             LOGO

   

LOGO  

                                             
                     
Specialty Chemicals    

¡     Lubricants and greases

¡     Drilling compounds

¡     Anti-seize compounds

¡     Chemical formulations

¡     Degreasers and cleaners

   

¡     Oil and gas

¡     Drilling and boring

¡     Water well drilling

¡     Mining

¡     Rail car and locomotive

¡     Steel

¡     Power generation

¡     Cement

¡     Aviation

¡     Plumbing

¡     HVAC

¡     Electrical

¡     General industrial

 

   

LOGO    LOGO    LOGO

 

LOGO        LOGO

 

LOGO

 

LOGO      LOGO

 

LOGO

   

LOGO  

 

* Reflects acquisition of substantially all of the assets of Strathmore.

 

82


Table of Contents

Industrial Products

Our Industrial Products business segment generated pro forma revenues of $40.0 million for the three months ended June 30, 2015, representing approximately 45% of total pro forma revenues in that period. Additionally, this segment generated pro forma revenues of $118.4 million for fiscal year 2015, representing approximately 36% of total pro forma revenues in that period. CSWI’s industrial products consist of:

 

  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 applications.

These industrial products are primarily manufactured by CSWI. For certain products, we strategically engage third-party manufacturers. We ensure the quality of internally- and externally-manufactured products through our stringent quality control review procedures. Our industrial products are sold domestically and internationally.

Specialty Mechanical Products. CSWI is a leading manufacturer and distributor of condensate management products for air conditioning and refrigeration units as well as installation accessories for the ductless mini split systems (DMSS) and variable refrigerant flow air conditioning units. CSWI’s offerings for HVAC applications include:

 

  condensate switches, traps and pans;

 

  line set covers;

 

  condensate removal pumps and equipment mounting brackets;

 

  air diffusers for use by professional air conditioning contractors;

 

  tamper resistant locking refrigerant caps; and

 

  DMSS installation support tools.

In addition, CSWI manufactures mechanical products for drain waste and vent systems, a line of decorative roof drain downspout nozzles for use by plumbers and other contractors, and a line of pulling head tools for pulling wire in a commercial building by electricians and other contractors.

CSWI’s specialty mechanical products are marketed under industrial brand names including: Safe-T-Switch®; EZ Trap®; Fortress®; Slim Duct™; Airtec®; Goliath® Pans; Titan™ Pans; Novent®; Mighty Bracket™; Clean Check®; Hubsett™; Sure Seal®; Magic Vent®; G-O-N®; and Wire Grabber™.

CSWI’s specialty mechanical products are generally sold through an international network of HVAC, plumbing and electrical distributors.

Fire and Smoke Protection Products. We design, certify, manufacture and sell proprietary fire-rated and smoke-rated opening protective systems under our line of Smoke Guard® branded products. These products are based on proprietary technology, and control the movement of smoke through elevator shafts and building spaces. CSWI develops or licenses different protection technologies that are more aesthetic (invisible), architecturally enabling (design intent) and cost effective (space saving) than other products that are available.

The marketing and sale of our fire and smoke protection products are dependent on building codes and related regulations. We work closely with building code officials in the various jurisdictions in which we operate to ensure our products meet or exceed all requirements. Further, our fire and smoke protection products are

 

83


Table of Contents

designed and certified to meet compliance requirements mandated in the International Building Code. We market our fire and smoke protection product offerings to both architects and contractors, primarily under the Smoke Guard® brand name. General contractors, specialty contractors and sub-contractors place purchase orders based on the architect’s specifications or the regulatory requirements for the specific building.

Our fire and smoke protection products are sold globally into the commercial construction industry through a combination of direct sales and an exclusive distribution network. In addition, in limited U.S. markets, primarily in California, we distribute and install our fire and smoke protection products.

Architecturally-Specified Building Products. CSWI manufactures an array of quality architectural and life safety products specifically designed for commercial construction. CSWI’s architecturally-specified products include: (1) expansion joint covers; (2) fire barriers; (3) specialty silicone seals; (4) stair nosings; (5) partition closure systems; (6) entrance mats and grids; (7) photoluminescent egress markings and signage; (8) trench and access covers; and (9) architectural grating.

CSWI has a number of well recognized industrial brands in the commercial construction market including: Balco®; Michael Rizza™; MetaFlex™; MetaBlock™; MetaMat™; UltraGrid™; llumiTread™; DuraFlex™; and MetaGrateTM.

CSWI services commercial and institutional building markets in the U.S. and more than 40 other countries worldwide. CSWI building products are eco-friendly, enabling them to be easily incorporated into the “Green Building” market.

We market our building product offerings to both architects and contractors. General contractors, specialty contractors and sub-contractors, such as flooring, drywall or waterproofing specialists, place purchase orders based on architect specifications or the physical condition requirement of a specific building.

Storage, Filtration and Application Equipment. CSWI’s line of lubrication application and management systems and storage and filtration devices include products for use in the rail industry as well as the mining, power generation, food and beverage, steel and other manufacturing industries. These products are marketed under industrial brand names such as Whitmore RailTM, Oil Safe®, Air Sentry® and Guardian®. These products are marketed and sold worldwide through a service-intensive distribution network. Our storage, filtration and application products are designed to work with our specialty chemicals, as well as the product offerings of other manufacturers.

Coatings, Sealants and Adhesives

Our Coatings, Sealants and Adhesives business segment generated pro forma revenues of $28.4 million for the three months ended June 30, 2015, representing approximately 32% of total pro forma revenues in that period. Additionally, this segment generated pro forma revenues of $115.3 million for fiscal year 2015, representing approximately 35% of total pro forma revenues in that period. CSWI’s coatings, sealants and adhesives product categories consist of:

 

  high performance coatings designed to increase the reliability, performance and lifespan of industrial equipment;

 

  engineered specialty thread sealants designed to seal and secure metal, plastic and fiberglass piping and fittings to eliminate leaks; and

 

  solvent cements and fire stop caulks used by plumbing, HVAC and electrical contractors.

CSWI’s coatings, sealants and adhesives products are used in a wide variety of industries, including transportation, manufacturing, construction, energy and agriculture. Customers include rail car and locomotive manufacturers, petrochemical facilities, industrial manufacturers, construction, utilities and plant maintenance customers.

 

84


Table of Contents

CSWI’s coatings, sealants and adhesives are marketed under several industrial brand names, including: Railplex®; Stratholiner™; KATS Coatings®; RectorSeal No. 5®; T plus 2®; Tru-Blu™; Metacaulk®; and Bio Fireshield™.

Our coatings, sealants and adhesives are primarily manufactured by CSWI and offered through worldwide distribution networks. Our product offerings in this segment are supported by an experienced staff of technical, sales and customer service oriented professionals, as well as independent manufacturer representatives.

Specialty Chemicals

Our Specialty Chemicals business segment generated pro forma revenues of $20.2 million for the three months ended June 30, 2015, representing approximately 23% of total pro forma revenues in that period. Additionally, this segment generated pro forma revenues of $89.7 million for fiscal year 2015, representing approximately 28% of total pro forma revenues in that period. CSWI’s specialty chemicals product categories consist of:

 

  engineered specialty lubrication products for oil and gas, mining, power generation, railroad, steel, cement and other manufacturing industries;

 

  high performance specialty chemical products designed to increase the reliability, performance and lifespan of industrial assets; and

 

  specialty chemicals for the HVAC and refrigeration industries, including air conditioning system acid neutralizers, internal system flushes, oil and hydronic heating chemicals and coil cleaners.

CSWI’s specialty chemical products are marketed under a number of industrial brands, including: KOPR-KOTE®; Caliber™; Matrix®; Gearmate®; Envirolube®; Rail Armor®; Biorail®; TOR Armor®; Acid-Away®; Renewz™; Con-Coil™; Coil-Rite™; KO Dirt Blaster™; 8-Way™; Zipp™; and Grime-Solv™.

CSWI’s products in the Specialty Chemicals segment are primarily manufactured by CSWI and offered through worldwide distribution networks.

Our Competitive Strengths

We believe we have the following competitive strengths:

Broad Portfolio of Industry Leading Products and Solutions

We have a broad portfolio of products with leading industry positions in the specific end markets in which we compete. We believe our products and solutions are differentiated from those of our competitors by superior performance and quality and total value delivered to customers. For example, our RectorSeal No. 5® product is widely regarded as an industry standard for thread sealants for HVAC, plumbing and electrical configurations. As another example, our KOPR-KOTE® product is recognized as the anti-seize compound of choice for use in oil and gas drilling operations, where it is asked for by name.

Sustainable Organic Revenue Growth and Operating Performance

Our pro forma net revenues grew by 29.2% for the three months ended June 30, 2015. This growth was driven by a 12.1% increase in revenues due to organic growth, with the remainder coming from acquisitions. Additionally, our pro forma revenues grew by 23.9%, compounded annually, for the three fiscal years ended March 31, 2015. This growth was driven by a 14.8% increase in revenues due to organic growth, with the remainder coming from acquisitions. Our organic revenue growth is benefited by a number of factors. We focus on end markets with above-average growth trends, such as rail car and locomotive, HVAC, refrigeration and construction. We also have a loyal customer base that recognizes the performance and quality of our products and solutions, including continuously evaluating the potential uses of existing products to broaden our market

 

85


Table of Contents

penetration. Further, our customer base is diverse – for the three months ended June 30, 2015, no single customer represented more than 3.0% of our net revenues on a pro forma basis. For the year ended March 31, 2015, no single customer represented more than 5.0% of our net revenues on a pro forma basis.

These factors have enabled our products to enjoy strong margins. Our pro forma operating income grew by 9.2% for the three months ended June 30, 2015. Additionally, our pro forma operating income grew by 28.4%, compounded annually, for the three fiscal years ended March 31, 2015. We continue to improve our profitability through targeted investments to further improve our manufacturing processes. For example, in the Specialty Chemicals segment, we are in the process of consolidating the manufacturing of some of our lubricant and grease products into our Rockwall, Texas facility in order to optimize capacity, improve efficiency and leverage technologies while enhancing product quality and environmental compliance. Further, we continue to refine our manufacturing processes in all of our manufacturing facilities to lower manufacturing costs, increase production capacity and improve product quality.

Stable Platform for Acquisitions with Proven Track Record

We have a demonstrated track record of identifying, completing and integrating acquisitions, as evidenced by the 31 acquisitions we have successfully completed since 1991. Since January 1, 2010, we have invested $148.1 million in acquisitions that either (1) added new products designed to service our existing end markets or (2) provided an entry into new, complementary end markets where we can drive revenue growth and improved profitability. Historically, our acquisitions have been relatively small, lower-risk acquisitions of a product that we have identified as having the potential to benefit from our extensive distribution network and manufacturing efficiencies. We also consummated larger acquisitions that complement our business model. Most recently, we acquired substantially all of the assets of Strathmore, a leading participant in the coatings market. Strathmore also has a history of successfully integrating acquisitions, having completed five acquisitions since 1993. We believe our experience in identifying, completing and integrating acquisitions is one of our core competitive strengths.

Culture of Product Enhancement and Customer Centric Solutions

We have a long history of serving our customers with high quality products and solutions. We work closely with our customers, industry experts and research partners to continuously improve our existing products to meet evolving customer and market requirements. Our highly trained and specialized personnel work directly with our current and prospective customers to enhance our product offerings by expanding the use and markets for our existing products. We focus on product enhancements and product line extensions that are designed to meet the specific application needs of our customers. We believe this focus has helped us build strong industrial brands and develop a reputation for high quality, in turn leading us to realize greater customer retention and loyalty. Further, our ability to meet the needs of high-value niche end markets with customized solutions that leverage our existing products has enabled us to differentiate ourselves from our larger competitors that may not have the flexibility or interest in responding quickly to evolving customer demands in these smaller, niche markets.

Diverse Sales and Distribution Channels

Many of our products are sold through service-intensive distribution networks committed to technical support and total customer satisfaction. We primarily go to market through an international network of independent manufacturer representatives and agents calling on our wholesale distributors, contractors and direct customers. For example, our distributors sell products from our Industrial Products and Specialty Chemicals segments to plumbers, electricians and HVAC contractors.

The strong, long-term relationships we have developed with our wholesale distribution partners allow us to introduce new products, including newly developed, as well as acquired products. In addition, our extensive distribution network allows us to exploit niche end markets that provide organic growth opportunities and form a key component of our acquisition strategy.

 

86


Table of Contents

With certain of our products, we also go to market through a direct sales force focused on specific customer needs. For example, we sell products in our Coatings, Sealants and Adhesive segment directly to rail car and locomotive manufacturers.

Experienced Management Team

Our executive officers following the Share Distribution will be: (1) Joseph B. Armes, our Chairman and Chief Executive Officer and Capital Southwest’s current Chairman and Chief Executive Officer; (2) Christopher J. Mudd, our President and Chief Operating Officer and Capital Southwest’s current Senior Vice President, Operations; and (3) Kelly Tacke, our Chief Financial Officer and Capital Southwest’s current Chief Financial Officer. See “Management” for biographical information for Mr. Armes, Mr. Mudd and Ms. Tacke.

Our management team is highly regarded in each of our business segments. Collectively, our management team, including the executive officers, has an average of 25 years of experience in the industrial manufacturing and specialty chemicals industries. They have a successful track record of enabling us to recognize and capitalize upon attractive opportunities in the key markets we serve, and our executive management team has a strong record of effectively managing capital and delivering operating efficiencies over time. In addition, our management team has demonstrated strong capabilities in sourcing and executing strategic and accretive acquisitions.

Our Growth Strategy

We are focused on creating significant stockholder value over the long term by increasing our revenue, profitability and free cash flow by (a) expanding the market and uses for our existing products and (b) growing the portfolio of products we manufacture, market and sell through targeted acquisitions. We believe the key drivers of our growth include:

Benefits Resulting from the Share Distribution

Historically, the CSWI Businesses operated as separate independent companies with discrete strategies and capital structures. The Share Distribution will allow us to pursue a strategy focused on rationalizing our organizational structure and management around our business segments. We expect this strategy to enable us to realize cost and operational synergies, implement best practices across our operations, cross-sell product offerings and thereby increase our profitability.

Following the Share Distribution, we will no longer operate as separate portfolio companies in Capital Southwest’s existing structure, which will allow us to more efficiently finance growth and more effectively allocate capital across our businesses.

For a more detailed discussion of the expected benefits and reasons for the Share Distribution, see “The Share Distribution—Reasons for the Share Distribution.”

Leveraging Existing Customer Relationships and Products and Solutions

We expect to continue to increase revenue by leveraging our reputation for providing high quality products to our long-standing customer base. Our team of sales representatives, engineers and other technical personnel continues to proactively collaborate with our distributors and end users to enhance and adapt existing products and solutions to meet evolving customer needs. In addition, we expect to leverage our existing customer base to cross-sell our products and solutions across our three business segments.

Focused Acquisitions that Leverage our Distribution Channels

While we are focused on improving our existing products and penetrating new markets with these products, we continue to identify and execute acquisitions that will broaden our portfolio of products and offer attractive risk-adjusted returns. We primarily focus on commercially proven products and solutions that currently have

 

87


Table of Contents

limited distribution but would benefit from a broader distribution network and be attractive to our customers in target end markets. Once acquired, we utilize our extensive distribution networks to increase revenue by selling those products to our diversified customer base.

Operational Excellence

We focus on operational excellence in all aspects of our business, leading to improved efficiencies and increased profitability. We will continue to expand improvement initiatives and information sharing across our entire platform, promoting best practices. For example, in order to accelerate the process of leveraging best practices across our business segments, we recently organized a technology summit among the technical and commercial leaders of our Coatings, Sealants and Adhesives and Specialty Chemicals segments. We expect to benefit from exploiting new synergy opportunities by applying our best practices when integrating acquisitions.

Competition

The competitive environment for products in our Industrial Products segment generally is highly fragmented and rapidly changing. We compete primarily on the basis of product differentiation, superior performance and reliability.

The competitive environment for products in our Coatings, Sealants and Adhesives segment varies according to product type and end use. For coatings, competitors include the industrial paint divisions of Valspar Corporation, PPG Industries, Inc., The Sherwin Williams Company and Akzo Nobel, as well as other smaller companies. Competitors to our sealants and adhesives include Dow Corning Corporation, Henkel, 3M Company and Hilti Corporation, as well as other smaller companies. We compete primarily on the basis of product differentiation, superior performance, quality and customer centric service.

The competitive environment for products in our Specialty Chemicals segment is highly fragmented and constantly changing. We compete primarily on the basis of added value, superior product performance, quality and timely delivery.

Raw Materials and Suppliers

Our products are manufactured using various raw materials, including base oils, copper flake, aluminum, polyvinyl chloride and tetra-hydrofuran. These raw materials are available from numerous sources. We generally purchase these raw materials and components as needed. We do not depend on a single source of supply for any significant raw materials.

Intellectual Property

We have numerous patents, trademarks, trade secrets and proprietary information that are important to our business. This intellectual property includes the trademarks for our well-recognized industrial brands, such as KOPR-KOTE® and RectorSeal No. 5®. We estimate these intangible assets to be valued at approximately $82.3 million as of June 30, 2015. We do not consider any single intangible asset to be material to our business.

Other Information

CSWI was incorporated in the State of Delaware on November 6, 2014. Our principal executive offices are located at 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas 75240. Our telephone number is 972-233-8242.

 

88


Table of Contents

Properties

We have 13 primary manufacturing facilities and one primary research and development facility. In addition, we have sales offices and warehouses in various U.S. and international locations. We consider the many offices, manufacturing and research and development facilities, warehouses, and other properties that we own or lease to be in good condition and generally suitable for the purposes for which they are used. The following table shows the significant locations by segment.

 

Location

 

Use

 

Segment

  Square Footage    

Owned/Leased

Dallas, Texas

  Corporate Headquarters   Corporate Headquarters     4,500      Leased

Acworth, Georgia

  Manufacturing, Office and Warehouse   Coatings, Sealants and Adhesives     25,500      Owned

Boise, Idaho

  Manufacturing   Industrial Products     17,308      Leased

Edmonton, Alberta, Canada

 

Manufacturing, Office

and Warehouse

  Coatings, Sealants and Adhesives & Specialty Chemicals     47,100      Partially Owned and Partially Leased

Fall River, Massachusetts

  Manufacturing   All     140,215      Leased

Houston, Texas

  Manufacturing and Office   All     253,928      Owned

Houston, Texas

  Manufacturing   Coatings, Sealants and Adhesives & Specialty Chemicals     146,000      Leased

Houston, Texas

  Research and Development   All Segments     8,400      Owned

Longview, Texas

  Manufacturing   Coatings, Sealants and Adhesives     77,028      Owned

Maidenhead, Berkshire, U.K.

  Manufacturing   Coatings, Sealants and Adhesives & Specialty Chemicals     16,900      Leased

Oklahoma City, Oklahoma

  Manufacturing   Industrial Products     30,600      Owned

Rockwall, Texas

 

Manufacturing, Office

and Warehouse

  All     227,600      Owned

Syracuse, New York

  Manufacturing   Coatings, Sealants and Adhesives     36,400      Owned

Welwyn Garden City, Hertfordshire, U.K.

  Manufacturing   All     6,900      Leased

Wichita, Kansas

  Manufacturing   Industrial Products     27,700      Owned

We believe that our facilities are adequate for our current operations. We may endeavor to selectively reduce or expand our existing lease commitments as circumstances warrant.

Segment Information

For a presentation of revenue from external customers, income (loss) from operations and certain other financial information for the fiscal years ended March 31, 2015, 2014 and 2013, see “Segments,” Note 24 to the audited combined financial statements and for the three months ended June 30, 2015 and 2014, see “Segments” Note 17 to the unaudited combined financial statements included elsewhere in this Information Statement.

Domestic and International Sales and Long-Lived Assets

We generate revenue domestically and internationally. Revenue by major geographical region is based upon the geographic location of the customers who purchase our products and services. The geographical locations of distributors, resellers and systems integrators who purchase products and utilize our services may be different from the geographical locations of end customers. Net revenue by geographic region and net revenue by geographic region as a percentage of total net revenue, for fiscal years ended March 31, 2015, 2014 and 2013 and for the three months ended June 30, 2015 and 2014 were as follows:

 

    Net Revenues(a)  
   

(In thousands)

 
    Three Months Ended June 30,     Fiscal Year Ended March 31,  
    2015     2014     2015
(Pro Forma)
          2015           2014           2013        

U.S.

  $ 75,733        85.2   $ 52,960        77.0   $ 261,135        80.3   $ 197,944        75.6   $ 168,473        72.7   $ 143,327        72.0

Non-U.S.

    13,176        14.8     15,838        23.0     63,890        19.7     63,890        24.4     63,240        27.3     55,621        27.9

Discounts, Freight, and Other Adjustments

    —          0.0     —          0.0     —          0.0     —          0.0     —          0.0     146        0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 88,909        100   $ 68,798        100.0   $ 325,025        100.0   $ 261,834        100.0   $ 231,713        100.0   $ 199,094        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Net revenues to external customers are attributed to geographic regions based upon the destination of product or service delivery.

 

89


Table of Contents

Our long-lived assets primarily consist of property and equipment, trademarks, patents and goodwill. We believe that property and equipment, net, is exposed to the geographic area risks and uncertainties more than other long-lived assets, because these tangible assets are difficult to move and are relatively illiquid. Property and equipment, net, by country of domicile consists of the following as of March 31, 2015, 2014 and 2013 and as of June 30, 2015:

 

     Long-Lived Assets(a)  
     As of June 30,     (In thousands)  
       As of March 31,  
     2015     2015           2014            2013        

U.S.

   $ 194,780         93.1   $ 134,117        90.3   $ 135,296         90.9   $ 110,416        89.4

Non-U.S.

     14,511         6.9     14,457        9.7     13,572         9.1     13,105        10.6
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 209,291         100   $ 148,574        100.0   $ 148,868         100.0   $ 123,521        100.0
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(a) Long-lived assets consist primarily of property, plant and equipment, trademarks, patents and goodwill.

Export Regulations

We are subject to export control regulations in countries from which we export products and services. These controls may apply by virtue of the country in which the products are located or by virtue of the origin of the content contained in the products. If the controls of a particular country apply, the level of control generally depends on the nature of the goods and services in question. Where controls apply, the export of our products generally requires an export license or authorization (either on a per-product or per transaction basis) or that the transaction qualify for a license exception or the equivalent, and may also be subject to corresponding reporting requirements.

Environmental Regulations

Our operations are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, labor and health and safety matters. Management believes that our business is operated in material compliance with all such regulations. To date, the cost of such compliance has not had a material impact on our capital expenditures, earnings or competitive position or that of our subsidiaries. However, violations may occur in the future as a result of human error, equipment failure or other causes. Further, we cannot predict the nature, scope or effect of environmental legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies, could require substantial expenditures by us and could have a material impact on our business, financial condition and results of operations.

Employees

After giving effect to the Share Distribution, as of June 30, 2015, we would have employed 732 individuals. Of these employees, 33 are covered under collective bargaining agreements.

Legal Proceedings

We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. We are not currently a party to any legal proceedings that, individually or in the aggregate, are expected to have a material effect on our business, financial condition, results of operations or financial statements, taken as a whole.

 

90


Table of Contents

MANAGEMENT

Executive Officers

Our executive officers following the Share Distribution will be Joseph B. Armes, our Chairman and Chief Executive Officer, Christopher J. Mudd, our President and Chief Operating Officer and Kelly Tacke, our Chief Financial Officer. Biographical information for Mr. Armes, Mr. Mudd and Ms. Tacke is included in the following paragraphs.

Joseph B. Armes, 53, is our Chairman and Chief Executive Officer. He has served as the Chief Executive Officer and President of Capital Southwest since June 2013, and as Chairman of the Capital Southwest Board since January 2014. Following the Share Distribution, Mr. Armes will remain a member of the Capital Southwest Board. Mr. Armes serves as a director and audit committee chair for RSP Permian, Inc., an independent oil and natural gas exploration and production company. He has been the President and Chief Executive Officer of JBA Investment Partners, a family investment vehicle, since 2010. Mr. Armes was the Chief Operating Officer of Hicks Holdings LLC, a private investment firm, from 2005 to 2010. Previously, he served as Executive Vice President, Chief Financial Officer and General Counsel of Hicks Sports Group, LLC, owner and manager of various professional sports teams, Executive Vice President and General Counsel of Suiza Foods Corporation (now Dean Foods Company), a publicly held food and beverage company, and Vice President and General Counsel of The Morningstar Group, Inc., a publicly held food and beverage company. Rangers Equity Holdings GP LLC, a subsidiary of Hicks Sports Group LLC, had an involuntary bankruptcy filed against it in the U.S. Bankruptcy Court for the Northern District of Texas on May 28, 2010. Mr. Armes holds a Bachelor of Business Administration in Finance from Baylor University, a Master of Business Administration from Baylor University and Juris Doctor from Southern Methodist University. CSWI will benefit from Mr. Armes’ extensive background in mergers and acquisitions, as well as his executive expertise in public and private companies.

Christopher J. Mudd, 54, is our President and Chief Operating Officer. He has served as Senior Vice President, Operations of Capital Southwest since January 2015. Prior to joining Capital Southwest, from 2003 to 2015, Mr. Mudd held various positions at Dexco Polymers LP, which is a subsidiary of TSRC Corporation, a publicly traded chemical company, including most recently President and General Manager. From 1998 to 2002, Mr. Mudd was the Senior Commercial Manager for Energy and Fuels at Dow Hydrocarbons and Resources and worked in other capacities at The Dow Chemical Company from 1982 to 1998. Mr. Mudd holds a Bachelor of Science in Chemical Engineering from The University of Texas at Austin. CSWI will benefit from Mr. Mudd’s extensive management experience and substantial background in the chemicals industry.

Kelly Tacke, 58, is our Chief Financial Officer. She served as Senior Vice President, Chief Financial Officer, Chief Compliance Officer, Secretary and Treasurer of Capital Southwest since November 2013. Prior to joining Capital Southwest, from April 2011 to January 2012, she served as Chief Financial Officer and as a consultant to AMC REIT, Inc., a privately held real estate investment company. From 1993 to April 2011, Ms. Tacke was the Executive Vice President, Chief Financial Officer and Corporate Secretary of Palm Harbor Homes, Inc., a publicly held builder of manufactured homes. Palm Harbor Homes, Inc. had an involuntary bankruptcy filed against it in the U.S. Bankruptcy Court in the state of Delaware on October 29, 2010. Ms. Tacke first began her career as an accountant with PricewaterhouseCoopers in 1979. Ms. Tacke holds a Bachelor of Business Administration from The University of Texas at Austin and is a Certified Public Accountant. CSWI will benefit from Ms. Tacke’s expertise in financial matters relating to public and private companies and her manufacturing industry experience.

The CSWI Board Following the Share Distribution

The CSWI Board currently consists of one member—Mr. Armes. Upon the effectiveness of the Form 10, we will have a Board of Directors consisting of five directors. We have identified the directors that will serve on the CSWI Board upon the effectiveness of the Form 10 as described below. Our proposed bylaws will vest in the CSWI Board the authority to fix the number of directors as long as there are not fewer than three or more than nine. CSWI expects to consider adding additional directors to the CSWI Board as opportunities may present themselves either in relation to acquisition transactions or as attractive candidates become available.

 

91


Table of Contents

The following is a summary of the qualifications and experience of each of the individuals who will be appointed as directors, including biographical data for at least the last five years and an assessment of the experience, qualifications and skills of each such nominee, other than Mr. Armes, whose qualifications and experience are set forth in “—Executive Officers.”

Michael Gambrell, 61, is a former Executive Vice President of The Dow Chemical Company and served as an advisor to the Chairman and CEO of Dow from 2011 to 2012. He retired in 2012 after serving 37 years with the company. During his time at Dow, Mr. Gambrell served on the company’s Executive Leadership Committee, Strategy Board, Sustainability Team and Geographic Leadership Council, and is an ex officio member of Dow’s board of director’s Environment, Health and Safety Committee. In 2012, Mr. Gambrell founded GamCo, LLC, a privately-held company providing advisory services to public, private equity, and start-up companies as well as non-profit organizations. He serves as Chairman of the Campbell Institute. In addition, Mr. Gambrell is a director and a member of the Executive Committee and Strategic Planning Committee of the National Safety Council. He also serves on various venture capital and private company boards of directors. In addition, he served as a director of TRW Automotive Inc. and as a member of the TRW audit committee until the company’s sale in 2015. He is also a Director Emeritus of the US-India Business Council. Mr. Gambrell served as a member of The University of Michigan Engineering Advisory Council from 2006 to 2012. From 2010 to 2012, Mr. Gambrell served on the U.S. Department of Commerce Manufacturing Council, which advises the Secretary of Commerce on matters related to the competiveness of the U.S. manufacturing sector. Mr. Gambrell received his Bachelor of Science degree in Chemical Engineering from Rose-Hulman Institute Technology in Terre Haute, Indiana. CSWI will benefit from Mr. Gambrell’s experience as an executive and director of public companies and his experience with mergers and acquisitions and their integration. Mr. Gambrell’s technical leadership skills and knowledge and experience in addressing health, safety and environmental issues will also be beneficial to the CSWI Board.

Linda Livingstone, Ph.D., 55, is currently Dean of The George Washington University School of Business. Prior to her current position, she served as Dean of the Graziadio School of Business and Management at Pepperdine University from June 2002 through July 2014. Dr. Livingstone began her academic career at Baylor University, where she served for eleven years as an Assistant and then Associate Professor of Management and as Associate Dean for Graduate Programs the last four years. Dr. Livingstone received her Bachelor of Science, Masters of Business Administration and Ph.D. degrees from Oklahoma State University. She is the current Chair of the Board of Directors for AACSB, the preeminent international accrediting body for business schools. Dr. Livingstone is the immediate past Chair of the Board of Directors of Oaks Christian School in Westlake Village, California, and former Board Member of the Graduate Management Admissions Council, the organization that administers the GMAT exam. CSWI will benefit from Ms. Livingstone’s experience as an administrator and educator in the field of business administration allowing her to draw on her experience and offer guidance to the CSWI Board and management on issues that affect CSWI.

William F. Quinn, 67, currently serves as Executive Chairman and Founder of American Beacon Advisors, a mutual fund advisory firm. Mr. Quinn also serves as Independent Trustee of the National Railroad Retirement Investment Trust. Mr. Quinn served as President and CEO of American Beacon Advisors from the time the firm was created in 1986 until 2009. Mr. Quinn joined American Airlines’ former subsidiary, Sky Chefs Inc., in 1974 and became Vice President and Controller in 1978. He served as Assistant Treasurer of American Airlines from 1979 to 1986 with responsibility for overseeing and managing the American Airlines short-term cash portfolio and pension funds. Prior to joining American Airlines, Mr. Quinn worked for Arthur Young & Company in New York. He holds a Bachelor of Science from Fordham University and is a New York Certified Public Accountant. Mr. Quinn is a former Chairman of the Committee for the Investment of Employee Benefits (CIEBA), a nationally recognized organization of large corporate pension funds. He previously served on the Boards of the American Airlines Federal Credit Union, Crescent Real Estate Equities, Inc. and investment companies affiliated with Thomas Hicks. CSWI will benefit from Mr. Quinn’s extensive financial and accounting experience as well as through his experience as serving as an executive officer, director and trustee.

 

92


Table of Contents

Robert Swartz, 63, will serve as the lead director of the CSWI Board. Since January 2011, Mr. Swartz has served as the Executive Vice President and Chief Operating Officer for Glazer’s, Inc., a privately held distributor of wines and spirits. Prior to that, Mr. Swartz was Managing Director and Partner of Hicks Equity Partners LLC, a privately held investment firm. Mr. Swartz has also served in various executive positions at Centex Corporation. Mr. Swartz earned his Bachelor of Science from the State University of New York in Albany and his Master of Business Administration from New Hampshire College. Mr. Swartz is a Certified Public Accountant. Mr. Swartz serves on the Board of Directors of Ocular LCD, Inc., and Arrow Environmental Services LLC. Mr. Swartz previously served on the board of directors of Resolute Energy Corporation from September 2009 to March 2015. CSWI will benefit from Mr. Swartz’s experience and expertise in mergers and acquisitions, finance, accounting and management.

Director Independence

We expect that all of the initial members of the CSWI Board, other than Mr. Armes, will qualify as independent under our independence standards and the listing standards of the NASDAQ Marketplace Rules once appointed to the CSWI Board. Mr. Armes cannot be considered an independent director due to his employment as our Chief Executive Officer.

Under the Corporate Governance Guidelines that we will adopt upon effectiveness of the Form 10, for a director to be considered independent, he or she cannot be an officer or employee of our company and the CSWI Board must affirmatively determine that the director lacks a “material relationship” with us (either directly or as a partner, controlling shareholder or executive officer of an organization that has a material relationship with us) and with members of our senior management team. A “material relationship” is defined as a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In addition, to be considered independent, a director will need to meet the listing standards of the NASDAQ Marketplace Rules.

In addition to the above analysis, the definition used by the CSWI Board to determine director independence (subject to the guidance provided by NASDAQ Marketplace Rules) will include certain transactions, relationships and arrangements specified in our proposed Corporate Governance Guidelines. Stockholders will be able to access the Corporate Governance Guidelines on our website prior to the Share Distribution.

Furthermore, all members of the Audit Committee, Compensation and Talent Development Committee and the Nominating/Corporate Governance Committee will be required to be independent in accordance with the CSWI Board’s definition of the term “independence” and with the applicable rules of the SEC and NASDAQ.

In addition to the independence standards set forth above, each director will be expected to act with integrity and to adhere to the policies set forth in the Code of Conduct and Ethics we will adopt in connection with the Share Distribution. Under the Corporate Governance Guidelines that we will adopt upon effectiveness of the Form 10, any waiver of the requirements of the Code of Conduct and Ethics for any director or executive officer will need to be approved by the CSWI Board and promptly disclosed on our website.

Committees of the CSWI Board

Upon the effectiveness of the Form 10, the CSWI Board will have the following committees:

Audit Committee

Upon the effectiveness of the Form 10, we will establish an Audit Committee. The functions of our Audit Committee will include:

 

  appointing and determining the compensation for our independent auditors;

 

  establishing procedures for the receipt, retention and treatment of complaints regarding internal accounting controls; and

 

93


Table of Contents
  reviewing and overseeing our independent registered public accounting firm.

Our Audit Committee will consist of Ms. Livingstone, Mr. Quinn and Mr. Swartz, with Mr. Quinn serving as chairman. All of our Audit Committee members will be independent as defined by Section 10A(m)(3) of the Exchange Act and the NASDAQ Marketplace Rules. The CSWI Board has determined that Mr. Quinn is an audit committee financial expert.

The CSWI Board will adopt a written charter under which the Audit Committee operates. A copy of the charter, which satisfies the applicable standards of the SEC and the NASDAQ Global Select Market, will be available on our website. The Audit Committee will have the authority to engage independent counsel and other advisors as the committee deems necessary to carry out its duties.

Compensation and Talent Development Committee

Upon the effectiveness of the Form 10, we will establish the Compensation and Talent Development Committee. The Compensation and Talent Development Committee’s functions will include:

 

  reviewing and recommending to the CSWI Board the salaries and benefits for our executive officers;

 

  recommending overall employee compensation and talent development policies; and

 

  administering our equity compensation plans.

Our Compensation and Talent Development Committee will consist of Mr. Gambrell, Ms. Livingstone, Mr. Quinn and Mr. Swartz, with Ms. Livingstone serving as chairman. All members of our Compensation and Talent Development Committee will be independent as defined by Section 10(c) of the Exchange Act, Rule 10C of the Exchange Act Rules and the NASDAQ Marketplace Rules. At least two of the members of the Compensation and Talent Development Committee will also be “non-employee directors” (within the meaning of Rule 16b-3 of the Exchange Act) and “outside directors” (within the meaning of Section 162(m) of the Code).

The CSWI Board will adopt a written charter under which the Compensation and Talent Development Committee operates. A copy of the charter, which satisfies the applicable standards of the SEC and the NASDAQ Global Select Market, will be available on our website. The Compensation and Talent Development Committee will have the sole authority to retain and terminate compensation consultants to assist in the evaluation of director or executive officer compensation and the sole authority to approve the fees and other retention terms of such compensation consultants. The Compensation and Talent Development Committee may also retain independent counsel and other independent advisors to assist it in carrying out its responsibilities.

Compensation Committee Interlocks and Insider Participation

None of our directors has interlocking or other relationships with other boards, compensation committees or our executive officers that would require disclosure under applicable SEC rules.

Nominating/Corporate Governance Committee

Upon the effectiveness of the Form 10, we will establish the Nominating/Corporate Governance Committee (the “Governance Committee”). The functions of the Governance Committee will include:

 

  identifying individuals qualified to serve as members of the CSWI Board;

 

  recommending to the CSWI Board nominees for our annual meetings of stockholders;

 

  evaluating the CSWI Board’s performance;

 

  developing and recommending to our board corporate governance guidelines; and

 

  providing oversight with respect to corporate governance and ethical conduct.

 

94


Table of Contents

Our Governance Committee will consist of Mr. Gambrell, Ms. Livingstone, Mr. Quinn and Mr. Swartz, with Mr. Swartz serving as the committee chairman. All members of our Governance Committee will be independent as defined by the NASDAQ Marketplace Rules.

The CSWI Board will adopt a written charter under which the Governance Committee will operate. A copy of the charter, which satisfies the applicable standards of the SEC and the NASDAQ Global Select Market, will be available on our website. The Governance Committee will have the sole authority to retain and terminate any search firm to assist in the identification of director candidates and the sole authority to set the fees and other retention terms of such search firms. The Governance Committee may also retain independent counsel and other independent advisors to assist it in carrying out its responsibilities.

Code of Conduct and Ethics

Upon the effectiveness of the Form 10, we will adopt a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions (“covered persons”). A copy of the code will be available on our website. Any amendments to or waivers from a provision of our code of conduct and ethics that applies to our covered persons will be disclosed on our website promptly following the date of the amendment or waiver.

Director Nomination Process

With regard to the criteria for members of the CSWI Board, we intend to seek to ensure that each director has the personal characteristics (such as integrity, business judgment, intellectual ability and capacity to work as part of a team), as well as the time and commitment, to serve effectively and contribute meaningfully as a director. In addition, we will endeavor to provide that the CSWI Board, overall, has the appropriate set of professional skills, industry experience and diversity of perspectives to fulfill roles of the CSWI Board and its committees. These include skills in the areas of finance, accounting, technology, marketing and general executive management. We also intend to seek to have a sufficient number of the CSWI Board members with prior experience working closely with, or serving on, the board of one or more public companies.

Communications with Non-Management Members of the CSWI Board

Generally, it is the responsibility of management to speak for us in communications with outside parties, but we intend to set forth, in our corporate governance policies, certain processes by which stockholders and other interested third parties may communicate with non-management members of the CSWI Board.

Board Leadership and Structure

Following the Share Distribution, the CSWI Board will have the discretion and authority to modify the board’s leadership structure to best address our circumstances from time to time. The CSWI Board recognizes that one of its responsibilities is to evaluate and determine its optimal leadership structure so as to provide independent oversight of management. The CSWI Board understands that there is no single, generally accepted approach to providing board leadership and that, given the dynamic and competitive environment in which we operate, the right board leadership structure may vary as circumstances warrant.

The CSWI Board will be led by Mr. Armes, its Chairman. In addition, Mr. Swartz will be appointed as lead director as of the Distribution Date.

The Chairman will:

 

  oversee the planning of the CSWI Board’s annual calendar;

 

95


Table of Contents
  in consultation with the other directors, schedule and set the agenda for meetings of the CSWI Board and lead the discussions at such meetings;

 

  provide guidance and oversight to other members of management;

 

  assist with the formulation and implementation of our strategic plans; and

 

  act as the CSWI Board’s liaison to the rest of management.

The Chairman will be actively engaged on significant matters affecting CSWI. The Chairman will also lead our annual meetings of stockholders and perform such other functions and responsibilities as requested by the CSWI Board from time to time.

The lead director’s duties will include:

 

  developing agendas for, and presiding over, the executive sessions of the independent directors;

 

  serving as a liaison with the Chairman and Chief Executive Officer and the independent directors;

 

  presiding at all meetings of the CSWI Board at which the Chairman is not present;

 

  approving, in collaboration with the Chairman, information sent to the CSWI Board;

 

  approving, in collaboration with the Chairman, agendas for CSWI Board meetings;

 

  approving, in collaboration with the Chairman, the CSWI Board’s meeting schedules to ensure that there is sufficient time for discussion of all agenda items;

 

  calling meetings of the independent directors;

 

  leading discussions regarding annual Board self-evaluations; and

 

  ensuring that he or she is available for consultation and direct communications with major stockholders, as appropriate.

Executive Sessions and Self-Evaluation

The independent directors will meet without members of management present in “executive session” at every regularly scheduled meeting of the CSWI Board (unless they affirmatively determine that an executive session is not necessary) and as otherwise determined by such directors, with the lead director as chair. In addition, the CSWI Board will undertake self-evaluations of the performances of the CSWI Board, its committees and, as appropriate, periodic evaluations of individual directors.

The CSWI Board’s Role in Risk Oversight

The CSWI Board will have an active role in overseeing management of CSWI’s risk. The CSWI Board will regularly review information regarding CSWI’s operational, financial, legal, regulatory, strategic and reputational risks which will be conveyed to the CSWI Board by the senior management of CSWI. Because overseeing risk is an ongoing process and inherent in CSWI’s strategic decisions, the CSWI Board will discuss risk throughout the year during its meetings in relation to specific proposed actions. The CSWI Board will delegate certain risk management oversight to the CSWI Board committees. While the CSWI Board will oversee CSWI’s overall risk management, management will be responsible for the day-to-day risk management process. Committees will meet in executive session with key management personnel and representatives of outside advisors as needed. The CSWI Board will delegate certain responsibilities to its committees in order to most efficiently address the risks facing CSWI.

 

96


Table of Contents

COMPENSATION OF DIRECTORS

Director Compensation

Following the Share Distribution, director compensation will be determined by the CSWI Board with the assistance of the Compensation and Talent Development Committee. Our non-employee director compensation will be designed to provide compensation and benefits that will attract and retain high quality directors, target director compensation at a level that is consistent with our compensation objectives and encourage ownership of our common stock to further align directors’ interests with those of our stockholders.

 

97


Table of Contents

COMPENSATION OF EXECUTIVE OFFICERS

Compensation Discussion and Analysis

Introduction

To date, CSWI has not conducted any material activities or operations. Accordingly, as of the date of this Information Statement, we have not paid any compensation to any executive officers or other employees. This Compensation Discussion and Analysis describes Capital Southwest’s compensation philosophy for the individuals (listed below) who were named executive officers (“NEOs”) of Capital Southwest in fiscal year 2015 and who we expect to be NEOs of CSWI. Initially, we expect our compensation program to be similar to that applicable to the executive officers at Capital Southwest and do not anticipate that there will be significant differences immediately following the Share Distribution, subject to the input of the CSWI Board and Compensation and Talent Development Committee. Our Compensation and Talent Development Committee will review, in due course, the impact of the Share Distribution on our compensation and may make appropriate adjustments.

In order to provide historical context with respect to the compensation paid by Capital Southwest to the NEOs of Capital Southwest that we expect will be our NEOs, this discussion describes the various compensation elements and the plans and arrangements in which the NEOs participated in fiscal year 2015 in their capacity as NEOs of Capital Southwest, the factors considered and the approach taken by the Capital Southwest Board and the Compensation Committee of the Capital Southwest Board (the “Capital Southwest Compensation Committee”) in designing the executive compensation program and how this program supports our and Capital Southwest’s overall business objectives and financial and strategic goals. Prior to the Share Distribution, the Capital Southwest Board and the Capital Southwest Compensation Committee determined the compensation of the NEOs.

The NEOs of Capital Southwest in fiscal year 2015 that we expect will be our NEOs were:

 

  Joseph B. Armes, Capital Southwest’s Chairman, Chief Executive Officer and President, and our Chairman and Chief Executive Officer;

 

  Christopher J. Mudd, Capital Southwest’s Senior Vice President, Operations, and our President and Chief Operating Officer; and

 

  Kelly Tacke, Capital Southwest’s Senior Vice President, Chief Financial Officer, Chief Compliance Officer, Secretary and Treasurer, and our Chief Financial Officer.

If the Share Distribution is consummated, Mr. Armes and Ms. Tacke will be entitled to stock option and restricted stock awards and cash award payments pursuant to Capital Southwest’s Share Distribution Executive Compensation Plan that correlate to the aggregate appreciation in Capital Southwest’s equity value from the August 28, 2014 grant date (based on a trading value of $36.16 per share) through the date of determination following the Share Distribution, including in such determination the post-Share Distribution CSWI equity value. For a more detailed description of that plan, see “—Share Distribution-Related Compensation.” Payments with respect to cash awards under the Share Distribution Executive Compensation Plan will be paid by Capital Southwest. We anticipate that the CSWI Compensation and Talent Development Committee will consider these payments when setting the compensation of our NEOs who also receive payments under that plan.

Compensation Objectives

The objectives of Capital Southwest’s compensation programs are to attract, retain and motivate competent executive officers who have the experience and ability to enhance shareholder value and to contribute to the success of Capital Southwest’s investment management activities. The individual judgments made by the Capital Southwest Compensation Committee are subjective and are based largely on the recommendations of the Capital Southwest Chief Executive Officer (except with respect to his compensation) and the Capital Southwest

 

98


Table of Contents

Compensation Committee’s perception of each executive’s contribution to both Capital Southwest’s past performance and its future growth potential. The Capital Southwest Compensation Committee attempted to ensure that the total compensation paid to each executive officer is fair, reasonable, competitive and aligns the interests of executive management and Capital Southwest’s shareholders.

The principal elements of compensation for executive officers in fiscal year 2015 were base salary, annual cash bonus opportunities, long-term cash incentives (“Cash Incentive Awards”), stock options granted under the 2009 Stock Incentive Plan, restricted stock granted under the 2010 Restricted Stock Award Plan, contributions to the ESOP, and benefit accruals under the Retirement Plan and the Restoration Plan.

Determination of Compensation

Roles and Responsibilities—Capital Southwest Compensation Committee

The Capital Southwest Compensation Committee’s responsibilities included:

 

  To review at least annually, the goals and objectives and the structure of Capital Southwest’s plans for executive compensation, incentive compensation, equity-based compensation and general compensation plans and employee benefit plans (including retirement plans), and to recommend to the Capital Southwest Board any new plans or any changes in the objectives and structure of such plans as the Capital Southwest Compensation Committee deemed necessary or desirable.

 

  To evaluate annually the performance of the Capital Southwest Chief Executive Officer, in light of the goals and objectives of Capital Southwest’s executive compensation plans, and to determine his compensation level based on this evaluation. In determining the incentive components of his compensation, the Capital Southwest Compensation Committee considered those factors it deemed relevant, including Capital Southwest’s performance and his contribution to that performance. The Capital Southwest Chief Executive Officer was not present during deliberations or voting pertaining to the Capital Southwest Compensation Committee’s determination of his compensation.

 

  To annually review and determine the compensation level of all other executive officers of Capital Southwest, in light of the goals and objectives of its executive compensation plans, market compensation data and the Capital Southwest Chief Executive Officer’s recommendations.

 

  In consultation with the Capital Southwest Chief Executive Officer, to oversee the annual evaluation of the executive officers of Capital Southwest. The Capital Southwest Compensation Committee strongly considered the Capital Southwest Chief Executive Officer’s recommendations regarding the compensation of management.

 

  Periodically, as the Capital Southwest Compensation Committee deemed necessary or desirable and pursuant to the applicable equity-based compensation plan, to recommend that the Capital Southwest Board grant equity-based compensation awards to any officer or employee of Capital Southwest for such number of shares of Capital Southwest common stock as the Capital Southwest Compensation Committee, in its sole discr