UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________________________

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File No. 001-37454

CSW INDUSTRIALS, INC.

(Exact name of registrant as specified in its charter)

Delaware	47-2266942
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5420 Lyndon B. Johnson Freeway, Suite 500, Dallas, Texas	75240
(Address of principal executive offices)	(Zip Code)

(214) 884-3777

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol (s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	CSWI	Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒   Accelerated filer ☐ Non-accelerated filer ☐ (Do not check if smaller reporting company)
Smaller reporting company ☐ Emerging growth company ☐     

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

As of January 30, 2023, there were 15,474,925 shares of the issuer’s common stock outstanding.

CSW INDUSTRIALS, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page No.
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended December 31, 2022 and 2021 (unaudited)	2
	Condensed Consolidated Balance Sheets as of December 31, 2022 and March 31, 2022 (unaudited)	3
	Condensed Consolidated Statements of Equity as of December 31, 2022 and 2021 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2022 and  2021 (unaudited)	6
	Notes to the Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6.	Exhibits	36
SIGNATURES		37

PART I — FINANCIAL INFORMATION

Item 1.    Financial Statements.

CSW INDUSTRIALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended December 31,				Nine Months Ended December 31,
(Amounts in thousands, except per share amounts)	2022		2021*		2022		2021*
Revenues, net	$	171,093	$	136,286	$	562,219	$	453,136
Cost of revenues	(105,295)		(84,943)		(329,349)		(269,516)
Gross profit	65,798		51,343		232,870		183,620
Selling, general and administrative expenses	(42,686)		(37,894)		(133,568)		(115,177)
Operating income	23,112		13,449		99,302		68,443
Interest expense, net	(4,200)		(1,184)		(9,090)		(4,151)
Other expense, net	(737)		(127)		(529)		(432)
Income before income taxes	18,175		12,138		89,683		63,860
Provision for income taxes	(2,676)		(2,388)		(20,232)		(15,066)
Net income	15,499		9,750		69,451		48,794
Less: Loss (income) attributable to redeemable noncontrolling interest	100		(444)		(79)		(855)
Net income attributable to CSW Industrials, Inc.	$	15,599	$	9,306	$	69,372	$	47,939
Net income per share attributable to CSW Industrials, Inc.
Basic	$	1.01	$	0.59	$	4.47	$	3.04
Diluted	$	1.01	$	0.59	$	4.46	$	3.03
Weighted average number of shares outstanding:
Basic	15,476		15,794		15,520		15,752
Diluted	15,512		15,844		15,554		15,809

*Prior period has been adjusted to reflect the change in inventory accounting method, as described in the Company's fiscal 2022 Annual Report on Form 10-K.

See accompanying notes to condensed consolidated financial statements.

1

CSW INDUSTRIALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended December 31,				Nine Months Ended December 31,
(Amounts in thousands)	2022		2021*		2022		2021*
Net income	$	15,499	$	9,750	$	69,451	$	48,794
Other comprehensive income (loss):
Foreign currency translation adjustments	1,606		(71)		(4,076)		(113)
Cash flow hedging activity, net of taxes of $10, $(25), $(152) and $(19), respectively	(39)		93		570		71
Pension and other postretirement effects, net of taxes of $(35), $14, $(39) and $5, respectively	133		(52)		146		(20)
Other comprehensive gain (loss)	1,700		(30)		(3,360)		(62)
Comprehensive income	$	17,199	$	9,720	$	66,091	$	48,732
Less: Comprehensive loss (income) attributable to redeemable noncontrolling interest	100		(444)		(79)		(855)
Comprehensive income attributable to CSW Industrials, Inc.	$	17,299	$	9,276	$	66,012	$	47,877

*Prior period has been adjusted to reflect the change in inventory accounting method, as described in the Company's fiscal 2022 Annual Report on Form 10-K.

See accompanying notes to condensed consolidated financial statements.

2

CSW INDUSTRIALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in thousands, except for per share amounts)	December 31, 2022		March 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	14,721	$	16,619
Accounts receivable, net of allowance for expected credit losses of $1,273 and $1,177, respectively	103,213		122,804
Inventories, net	177,909		150,114
Prepaid expenses and other current assets	26,494		10,610
Total current assets	322,337		300,147
Property, plant and equipment, net of accumulated depreciation of $89,078 and $80,393, respectively	85,814		87,032
Goodwill	243,452		224,658
Intangible assets, net	322,268		300,837
Other assets	73,801		82,686
Total assets	$	1,047,672	$	995,360
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	42,031	$	47,836
Accrued and other current liabilities	66,784		69,005
Current portion of long-term debt	561		561
Total current liabilities	109,376		117,402
Long-term debt	275,973		252,214
Retirement benefits payable	1,307		1,027
Other long-term liabilities	144,844		140,306
Total liabilities	531,500		510,949
Commitments and contingencies (See Note 14)
Redeemable noncontrolling interest	17,404		15,325
Equity:
Common shares, $0.01 par value	163		162
Shares authorized – 50,000
Shares issued – 16,376 and 16,283, respectively
Preferred shares, $0.01 par value	—		—
Shares authorized (10,000) and issued (0)
Additional paid-in capital	120,860		112,924
Treasury shares, at cost (902 and 576 shares, respectively)	(82,729)		(46,448)
Retained earnings	468,908		407,522
Accumulated other comprehensive loss	(8,434)		(5,074)
Total equity	498,768		469,086
Total liabilities, redeemable noncontrolling interest and equity	$	1,047,672	$	995,360

See accompanying notes to condensed consolidated financial statements.

3

CSW INDUSTRIALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(Amounts in thousands)	Common Stock		Treasury Shares		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total
Balance at March 31, 2022	$	162	$	(46,448)	$	112,924	$	407,522	$	(5,074)	$	469,086
Share-based compensation	—		—		2,284		—		—		2,284
Stock activity under stock plans	—		(2,002)		—		—		—		(2,002)
Reissuance of treasury shares	—		2,016		1,075		—		—		3,091
Repurchase of common shares	—		(30,491)		—		—		—		(30,491)
Net income	—		—		—		29,443		—		29,443
Dividends	—		—		22		(2,691)		—		(2,669)
Other comprehensive income, net of tax	—		—		—		—		(2,022)		(2,022)
Balance at June 30, 2022	$	162	$	(76,925)	$	116,305	$	434,274	$	(7,096)	$	466,720
Share-based compensation	—		—		2,447		—		—		2,447
Stock activity under stock plans	—		(11)		—		—		—		(11)
Repurchase of common shares	—		(5,064)		—		—		—		(5,064)
Reissuance of treasury shares	—		770		(497)		—		—		273
Net income	—		—		—		24,331		—		24,331
Dividends	—		—		18		(2,643)		—		(2,625)
Other comprehensive loss, net of tax	—		—		—		—		(3,038)		(3,038)
Balance at September 30, 2022	$	162	$	(81,230)	$	118,273	$	455,962	$	(10,134)	$	483,033
Share-based compensation	—		—		2,566		—		—		2,566
Stock activity under stock plans	1		(1,399)		—		—		—		(1,398)
Repurchase of common shares	—		(100)		—		—		—		(100)
Net income	—		—		—		15,599		—		15,599
Dividends	—		—		21		(2,653)		—		(2,632)
Other comprehensive income, net of tax	—		—		—		—		1,700		1,700
Balance at December 31, 2022	$	163	$	(82,729)	$	120,860	$	468,908	$	(8,434)	$	498,768

4

(Amounts in thousands)	Common Stock		Treasury Shares		Additional Paid-In Capital		Retained Earnings*		Accumulated Other Comprehensive Loss		Total*
Balance at March 31, 2021	$	161	$	(34,075)	$	104,690	$	350,670	$	(5,996)	$	415,450
Share-based compensation	—		—		1,888		—		—		1,888
Stock activity under stock plans	—		(3,168)		(1)		—		—		(3,169)
Reissuance of treasury shares	—		1,375		936		—		—		2,311
Net income	—		—		—		20,461		—		20,461
Dividends	—		—		19		(2,377)		—		(2,358)
Other comprehensive income, net of tax	—		—		—		—		387		387
Balance at June 30, 2021	$	161	$	(35,868)	$	107,532	$	368,754	$	(5,609)	$	434,970
Share-based compensation	—		—		2,049		—		—		2,049
Stock activity under stock plans	—		(13)		—		—		—		(13)
Reissuance of treasury shares	—		1,568		(994)		—		—		574
Net income	—		—		—		18,171		—		18,171
Dividends	—		—		18		(2,378)		—		(2,360)
Other comprehensive income, net of tax	—		—		—		—		(419)		(419)
Balance at September 30, 2021	$	161	$	(34,313)	$	108,605	$	384,547	$	(6,028)	$	452,972
Share-based compensation	—		—		2,287		—		—		2,287
Stock activity under stock plans	1		(1,698)		—		—		—		(1,697)
Repurchase of common shares	—		(477)		—		—		—		(477)
Reissuance of treasury shares	—		3,884		(119)		—		—		3,765
Net income	—		—		—		9,306		—		9,306
Dividends	—		—		18		(2,386)		—		(2,368)
Other comprehensive income, net of tax	—		—		—		—		(30)		(30)
Balance at December 31, 2021	$	162	$	(32,604)	$	110,791	$	391,467	$	(6,058)	$	463,758

*Prior period has been adjusted to reflect the change in inventory accounting method, as described in the Company's fiscal 2022 Annual Report on Form 10-K.

See accompanying notes to condensed consolidated financial statements.

5

CSW INDUSTRIALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended December 31,
(Amounts in thousands)	2022		2021*
Cash flows from operating activities:
Net income	$	69,451	$	48,794
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	9,463		8,731
Amortization of intangible and other assets	16,842		19,765
Provision for inventory reserves	1,878		1,608
Provision for doubtful accounts	1,613		1,146
Share-based and other executive compensation	7,296		6,223
Net loss (gain) on disposals of property, plant and equipment	48		(9)
Net pension benefit	141		269
Impairment of assets	156		—
Net deferred taxes	(1,094)		1,757
Changes in operating assets and liabilities:
Accounts receivable	21,963		5,621
Inventories	(28,270)		(33,268)
Prepaid expenses and other current assets	(8,343)		(4,827)
Other assets	185		378
Accounts payable and other current liabilities	(7,348)		12,032
Retirement benefits payable and other liabilities	91		1,252
Net cash provided by operating activities	84,072		69,472
Cash flows from investing activities:
Capital expenditures	(8,268)		(8,356)
Proceeds from sale of assets	70		21
Cash paid for acquisitions	(55,524)		(36,427)
Net cash used in investing activities	(63,722)		(44,762)
Cash flows from financing activities:
Borrowings on line of credit	122,777		52,513
Repayments of line of credit and term loan	(99,018)		(63,934)
Payments of deferred loan costs	(662)		(2,327)
Purchase of treasury shares	(39,064)		(5,356)
Proceeds from stock option activity	272		1,326
Proceeds from acquisition of redeemable noncontrolling interest shareholder	2,000		6,293
Dividends	(7,924)		(7,084)
Net cash used in financing activities	(21,619)		(18,569)
Effect of exchange rate changes on cash and equivalents	(629)		(45)
Net change in cash and cash equivalents	(1,898)		6,096
Cash and cash equivalents, beginning of period	16,619		10,088
Cash and cash equivalents, end of period	$	14,721	$	16,184

*Prior period has been adjusted to reflect the change in inventory accounting method, as described in the Company's fiscal 2022 Annual Report on Form 10-K.

See accompanying notes to condensed consolidated financial statements.

6

CSW INDUSTRIALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.ORGANIZATION AND OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES

CSW Industrials, Inc. (“CSWI,” “we,” “our” or “us”) is a diversified industrial growth company with a strategic focus on providing niche, value-added products in the end markets we serve. Our products include mechanical products for heating, ventilation, air conditioning and refrigeration ("HVAC/R"), plumbing products, grilles, registers and diffusers ("GRD"), building safety solutions and high-performance specialty lubricants and sealants. End markets that we serve include HVAC/R, architecturally-specified building products, plumbing, energy, rail, mining and general industrial. Our manufacturing operations are concentrated in the United States (“U.S.”), Canada and Vietnam, and we have distribution operations in the U.S., Australia, Canada and the United Kingdom (“U.K.”). Our products are sold directly to end users or through designated channels in over 100 countries around the world, primarily including Australia, Canada, the U.K. and the U.S.

Many of our products are used to protect the capital assets of our customers that are expensive to repair or replace and are critical to their operations. We have a source of recurring revenue from the maintenance, repair, overhaul and consumable nature of many of our products. We also provide some custom engineered products that strengthen and enhance our customer relationships. The reputation of our product portfolio is built on more than 100 well-respected brand names, such as RectorSeal No. 5®, Kopr-Kote®, KATS Coatings®, Safe-T-Switch®, Air Sentry®, Big Red®, Cover GuardTM, AC GuardTM, Deacon®, Leak Freeze®, Falcon Stainless, Inc.®, Greco®, TRUaire® and Shoemaker Manufacturing®.

During the three and nine months of our prior fiscal year ended December 31, 2021, the COVID-19 pandemic had direct and indirect impacts on our operations including reduced production activities at our Vietnam operations, material and freight cost inflation, supply chain disruptions and freight delays, driven by numerous factors including government actions, labor supply shortages and recovering demand. In addition, COVID-19 and its indirect effects also contributed to increased demand in certain parts of our business, including the HVAC/R end market. During the three and nine months of our current fiscal year ended December 31, 2022, the direct and indirect impacts of the COVID-19 pandemic on our consolidated operating results were immaterial as economic activities recovered and the effects of the pandemic lessened.

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, potential subsequent waves of COVID-19 infection or potential new variants, the effectiveness and adoption of COVID-19 vaccines and therapeutics, its impact on our employees, customers and suppliers, the broader implications of the macro-economic recovery on our business, and the extent to which normal economic and operating conditions are impacted. Therefore, we cannot reasonably estimate the future impact of the COVID-19 pandemic at this time.

We are closely monitoring the Russian invasion of Ukraine and its global impacts. We have no operations, employees or assets in Russia, Belarus or Ukraine, nor do we source goods or services of any material amount from those countries, whether directly or indirectly. Shortly after the Russian invasion of Ukraine began in February 2022, we indefinitely suspended all commercial activities in Russia. Additionally, during the quarter ended December 31, 2022, we had no sales into Belarus or Ukraine. While the conflict continues to evolve and the outcome remains highly uncertain, we do not currently believe the Russia-Ukraine conflict will have a material impact on our business and results of operations. However, if the Russia-Ukraine conflict continues or worsens, leading to greater global economic or political disruptions and uncertainty, our business and results of operations could be materially impacted as a result.

7

Basis of Presentation

The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2022 (“Quarterly Report”), include all revenues, costs, assets and liabilities directly attributable to CSWI and have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The condensed consolidated financial statements are for us and our consolidated subsidiaries, each of which is a wholly-owned subsidiary, except our 50% investment in a variable interest entity ("VIE") for which we have determined that we are the primary beneficiary and therefore have consolidated into our financial statements. All significant intercompany transactions have been eliminated in consolidation.

The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of CSWI’s financial position as of December 31, 2022, and the results of operations for the three and nine months periods ended December 31, 2022 and 2021. All adjustments are of a normal, recurring nature.

The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in CSWI’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022 (the “Annual Report”).

Accounting Policies

We have consistently applied the accounting policies described in our Annual Report in preparing these condensed consolidated financial statements.  

Accounting Developments

Pronouncements Implemented

In October 2021, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU") No. 2021-08, "Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." This update improves comparability for both the recognition and measurement of acquired customer revenue contracts at the date of and after a business combination. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company early adopted the ASU 2021-08 on a prospective basis on April 1, 2022 and did not have a material impact on our condensed consolidated financial statements.

In August 16, 2022, The Inflation Reduction Act of 2022 ("IRA") was signed into law effective in taxable years beginning after December 31, 2022. The bill was meant to address the high inflation rate in the U.S. through various climate, energy, healthcare, and other incentives. These incentives are meant to be paid for by the tax provisions included in the IRA, such as a new fifteen percent corporate minimum tax, a one percent new excise tax on stock buybacks, additional IRS funding to improve taxpayer compliance, and others. At this time, none of the IRA tax provisions are expected to have a material impact to the Company's fiscal 2023 tax provision. The Company will continue to monitor for updates to the Company's business along with guidance issued with respect to the IRA to determine whether any adjustments are needed to the Company's tax provision in future periods.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and London Interbank Offered Rate ("LIBOR"). This ASU includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This ASU is effective for all entities through December 31, 2022. In December 2022, the FASB issued ASU 2022-06 to defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. As discussed in Note 9, the Company terminated our interest rate swap agreement in January 2023 and therefore, will not apply the practical expedients and exceptions as required by the ASU. As discussed in Note 7, the Company’s Second Amendment includes a transition clause in the event LIBOR is discontinued, as such, we do not expect the transition of LIBOR to have a material impact on our consolidated financial statements. The adoption of this ASU did not have an impact on our consolidated financial condition and results of operations.

8

2. ACQUISITIONS

Shoemaker Manufacturing, LLC

On December 15, 2021, we acquired 100% of outstanding equity of Shoemaker Manufacturing, LLC (“Shoemaker”), based in Cle Elum, Washington, for an aggregate purchase price of $43.6 million, including working capital and closing cash adjustments and contingent consideration. Shoemaker offers high-quality customizable GRD for commercial and residential markets, and expands CSWI’s HVAC/R product offering and regional exposure in the northwest U.S. The aggregate purchase price was comprised of cash consideration of $38.6 million (including $1.2 million cash acquired), 25,483 shares of the Company's common stock valued at $3.0 million at transaction close and additional contingent consideration of $2.0 million based on Shoemaker meeting a defined financial target during the quarter ended March 31, 2022. The cash consideration was funded with cash on hand and borrowings under our existing Revolving Credit Facility (as defined in note 7). The 25,483 shares of common stock delivered to the sellers as consideration were issued from treasury shares. As of the acquisition date, the estimated fair value of the contingent consideration obligation was classified as a current liability of $2.0 million and was determined using a scenario-based analysis on forecasted future results. In May 2022, the full contingent consideration amount of $2.0 million was remitted to the sellers due to the performance obligation being met.

The Shoemaker acquisition was accounted for as a business combination under FASB Accounting Standards Codification Topic 805, Business Combinations ("Topic 805"). The excess of the purchase price over the preliminary fair value of the identifiable assets acquired was $8.1 million allocated to goodwill, which represents the value expected to be obtained from owning a more extensive GRD product portfolio for the HVAC/R market and increased regional exposure to the northwest U.S. The preliminary allocation of the fair value of the net assets acquired included customer lists ($23.0 million), trademarks ($6.5 million), noncompete agreements ($0.7 million), backlog ($0.3 million), inventory ($3.6 million), accounts receivable ($1.7 million), cash ($1.2 million), equipment ($1.4 million) and prepaid expenses ($0.2 million), net of current liabilities ($3.1 million). Customer lists, noncompete agreements and backlog are being amortized over 15 years, 5 years and 1 month, respectively, while trademarks and goodwill are not being amortized.  The Company completed the analysis of the assets acquired and liabilities assumed and the related allocation during the three months ended December 31, 2022. Goodwill and all intangible assets, including customer lists, trademarks, noncompete agreements and backlog are deductible and amortized over 15 years for income tax purposes. Shoemaker activity has been included in our Contractor Solutions segment since the acquisition date. No pro forma information has been provided due to immateriality.

Cover Guard, Inc. and AC Guard, Inc.

On July 8, 2022, we acquired the assets of Cover Guard, Inc. (“CG”) and AC Guard, Inc. ("ACG"), based in Orlando, Florida, for an aggregate purchase price of $18.4 million, comprised of cash consideration of $18.0 million and additional contingent considerations initially measured at $0.4 million based on CG and ACG meeting defined financial targets over a period of 5 years. In conjunction with the acquisition, we agreed to pay an additional $3.7 million, comprised of cash consideration of $1.5 million and 5-year annuity payments (value of $2.2 million) to a third party to secure the related intellectual property. The total cash consideration at closing of $19.5 million was funded with cash on hand and borrowings under our existing Revolving Credit Facility (as defined in footnote 7). CG and ACG product lines further expand Contractor Solutions’ offering of leading HVAC/R accessories. Through these differentiated products, our Contractor Solutions segment expects to achieve incremental ductless and ducted HVAC/R market penetration. As of the acquisition date, the estimated fair value of the contingent consideration was classified as a long term liability of $0.4 million and was determined using an option pricing model simulation that determines an average projected payment value across numerous iterations.

The CG and ACG acquisition was accounted for as a business combination under Topic 805. The excess of the purchase price over the preliminary fair value of the identifiable assets acquired was $1.7 million allocated to goodwill, which represents the value expected to be obtained from owning products that are complementary to our existing HVAC/R and plumbing offerings and provide a meaningful value proposition to our end use customers. The preliminary allocation of the fair value of the assets acquired included customer lists ($9.8 million), patent ($1.8 million), trademarks ($0.7 million), inventory ($3.1 million), accounts receivable ($1.0 million) and equipment ($0.3 million). Customer lists and patent are being amortized over 15 years and 10 years, respectively, while trademarks and goodwill are not being amortized.  The Company's evaluation of the facts and circumstances available as of July 8, 2022, to assign fair values to assets acquired is ongoing. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date. Goodwill and

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all intangible assets, including customer lists, trademarks and patent are deductible and amortized over 15 years for income tax purposes. CG and ACG activity has been included in our Contractor Solutions segment since the acquisition date. No pro forma information has been provided due to immateriality.

The additional $3.7 million we agreed to pay a third party was accounted for as an acquisition of intellectual property and will be amortized over 15 years.

Falcon Stainless, Inc.

On October 4, 2022, we acquired 100% of the outstanding equity of Falcon Stainless, Inc ("Falcon"), based in Temecula, California, for an aggregate purchase price of $37.1 million (including $1.0 million cash acquired), comprising cash consideration of $34.6 million and an additional payment of $2.5 million due one-year from the acquisition date assuming certain business conditions are met. The cash consideration was funded with cash on hand and borrowings under our existing Revolving Credit Facility (as defined in footnote 7). Falcon products are well-known among the professional trades for supplying enhanced water flow delivery and increased customer satisfaction and supplement our Contractor Solutions segment's existing product portfolio.

The Falcon acquisition was accounted for as a business combination under Topic 805. The excess of the purchase price over the preliminary fair value of the identifiable assets acquired was $18.2 million allocated to goodwill, which represents the value expected to be obtained from owning products that are complementary to our existing plumbing offerings and provide a meaningful value proposition to our end use customers. The preliminary allocation of the fair value of the assets acquired comprises customer lists ($17.7 million), trademarks ($4.7 million), accounts receivable ($1.4 million), cash ($1.0 million), inventory ($0.7 million), other current asset ($0.1 million) and other assets ($2.9 million), net of current liabilities (0.5 million) and other liabilities ($9.1 million). Customer lists are being amortized over 15 years, while trademarks and goodwill are not being amortized.  The Company's evaluation of the facts and circumstances available as of October 4, 2022, to assign fair values to assets acquired is ongoing. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date. Goodwill and all intangible assets are not deductible for income tax purposes. Falcon activity has been included in our Contractor Solutions segment since the acquisition date. No pro forma information has been provided due to immateriality.

3. CONSOLIDATION OF VARIABLE INTEREST ENTITY AND REDEEMABLE NONCONTROLLING INTEREST

Whitmore Joint Venture

On April 1, 2021, Whitmore Manufacturing, LLC (“Whitmore”), a wholly-owned subsidiary of CSWI, completed the formation of the joint venture (the "Whitmore JV") with Pennzoil-Quaker State Company dba SOPUS Products (“Shell”), a wholly-owned subsidiary of Shell Oil Company that comprises Shell’s U.S. lubricants business. The formation was consummated through a transaction in which Whitmore sold to Shell a 50% interest in a wholly-owned subsidiary (containing certain existing operating assets) in exchange for consideration of $13.4 million from Shell in the form of cash ($5.3 million) and intangible assets ($8.1 million). The Whitmore JV has been consolidated into the operations of the Company and its activity has been included in our Specialized Reliability Solutions segment since the formation date.

The Whitmore JV is deemed to be a VIE as the equity investors at risk, as a group, lack the characteristics of a controlling financial interest. The major factor that led to the conclusion that the Company is the primary beneficiary of this VIE is that Whitmore has the power to direct the most significant activities due to its ability to direct the manufacturing decisions of the Whitmore JV. Whitmore JV's total net assets are presented below (in thousands):

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	December 31, 2022
Cash	$	4,128
Accounts receivable, net	6,783
Inventories, net	2,990
Prepaid expenses and other current assets	202
Property, plant and equipment, net	10,638
Intangible assets, net	6,681
Other assets	76
Total assets	$	31,498
Accounts payable	$	2,980
Accrued and other current liabilities	1,798
Other long-term liabilities	5
Total liabilities	$	4,783

During the three and nine months ended December 31, 2022, the Whitmore JV generated net (loss) income of $(0.2) million and $0.2 million, respectively.

The Whitmore JV's LLC Agreement contains a put option that gives either member the right to sell its 50% equity interest in the Whitmore JV to the other member at a dollar amount equivalent to 90% of the initiating member's equity interest determined based on the fair market value of the Whitmore JV's net assets. This put option can be exercised, at either member's discretion, by providing written notice to the other member after three years from the Whitmore JV's formation, subject to certain timing restrictions. This redeemable noncontrolling interest is recorded at the higher of the redemption value or carrying value each reporting period. Changes in redeemable noncontrolling interest for the nine-month period ended December 31, 2022 were as follows (in thousands):

Balance at March 31, 2022	$	15,325
Net income attributable to redeemable noncontrolling interest	79
Contributions from noncontrolling interest	2,000
Balance at December 31, 2022	$	17,404

4. INVENTORIES

Inventories consist of the following (in thousands):

	December 31, 2022		March 31, 2022
Raw materials and supplies	$	51,303	$	46,136
Work in process	4,935		7,471
Finished goods	126,921		100,792
Total inventories	183,159		154,399
Less: Obsolescence reserve	(5,250)		(4,285)
Inventories, net	$	177,909	$	150,114

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5. GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill as of December 31, 2022 and March 31, 2022 were as follows (in thousands):

	Contractor Solutions		Engineered Building Solutions		Specialized Reliability Solutions		Total
Balance at March 31, 2022	$	190,152	$	25,007	$	9,499	$	224,658
Falcon acquisition	18,196		—		—		18,196
CG and ACG acquisitions	1,686		—		—		1,686
Shoemaker acquisition	6		—		—		6
Currency translation	(82)		(728)		(284)		(1,094)
Balance at December 31, 2022	$	209,958	$	24,279	$	9,215	$	243,452

The following table provides information about our intangible assets (in thousands, except years): 

		December 31, 2022				March 31, 2022
	Weighted Avg Life (Years)	Ending Gross Amount		Accumulated Amortization		Ending Gross Amount		Accumulated Amortization
Finite-lived intangible assets:
Patents	11	$	11,223	$	(8,384)	$	9,417	$	(8,065)
Customer lists and amortized trademarks	14	324,395		(76,463)		297,909		(61,368)
Non-compete agreements	5	800		(230)		939		(258)
Other	8	8,543		(4,064)		5,123		(3,957)
		$	344,961	$	(89,141)	$	313,388	$	(73,648)
Trade names and trademarks not being amortized:		$	66,448	$	—	$	61,097	$	—

Amortization expenses for the three and nine months ended December 31, 2022 were $5.8 million and $16.4 million, respectively. Amortization expenses for the three and nine months ended December 31, 2021 were $5.2 million and $19.4 million (including the amortization of inventory purchase accounting adjustment of $3.9 million), respectively. The following table shows the estimated future amortization for intangible assets, as of December 31, 2022, for the remainder of the current fiscal year and the next four fiscal years ending March 31 (in thousands):

2023	$	5,800
2024	20,662
2025	19,927
2026	19,321
2027	18,553
Thereafter	171,557
Total	$	255,820

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6. SHARE-BASED COMPENSATION

Refer to Note 6 to our consolidated financial statements included in our Annual Report for a description of the 2015 Equity and Incentive Compensation Plan (the "2015 Plan"). As of December 31, 2022, 421,174 shares were available for issuance under the 2015 Plan.

We recorded share-based compensation expense as follows for the three and nine months ended December 31, 2022 and 2021 (in thousands): 

	Three Months Ended December 31,				Nine Months Ended December 31,
	2022		2021		2022		2021
Share-based compensation expense	$	2,566	$	2,287	$	7,296	$	6,223
Related income tax benefit	(640)		(549)		(1,823)		(1,494)
Net share-based compensation expense	$	1,926	$	1,738	$	5,473	$	4,729

Stock option activity was as follows:

	Nine Months Ended December 31, 2022
	Number of Shares	Weighted Average Price		Remaining Contractual Life (Years)	Aggregate Intrinsic Value (in Millions)
Outstanding at April 1, 2022	10,800	$	25.23
Exercised	(10,800)	25.23
Outstanding at December 31, 2022	—	$	—	0	$	—
Exercisable at December 31, 2022	—	$	—	0	$	—

All compensation costs related to stock options were recognized prior to April 1, 2019.

Restricted share activity was as follows:

	Nine Months Ended December 31, 2022
	Number of Shares	Weighted Average Grant Date Fair Value
Outstanding at April 1, 2022:	228,331	$	126.02
Granted	96,189	131.21
Vested