CSW Industrials, Inc. (CSW) Earnings

Management highlights

### Milestones and Portfolio Strategy - Crossed $1 billion in annual revenue in fiscal 26, achieving 15% compound annual revenue growth over 10 years since spin-off, with $1.7 billion allocated to accretive acquisitions over the period. Completed 5 synergistic, cash-flow accretive acquisitions and one incremental minority investment in fiscal 26, growing scale and diversification intentionally. - Finished fiscal 26 with a net debt to EBITDA ratio of 2.55x, comfortably inside the 1-3x target leverage range, maintaining a strong, flexible balance sheet. Returned $146 million total capital to shareholders in fiscal 26 via $128 million in open market share repurchases and $18 million in dividends. - Strategically exited the non-core GRD business line (part of Engineered Building Solutions): GRD US is held for sale, and GRD Canada will be wound down, as the business failed to meet CSW's margin and return requirements. This leaves the remaining Engineered Building Solutions segment with EBITDA margin above 20%, meeting CSW's long-stated target. ### Acquisition Integration Progress - In Contractor Solutions, the $1 billion acquisition package including Mars and Aspen is progressing ahead of expectations: Mars' main distribution center completed ERP integration and capacity upgrades in Q4, and product SKU rationalization (shifting demand to higher-margin overlapping legacy products where appropriate) is complete. Mars run rate synergies are now expected to exceed $12 million (up from the original $10 million target), with over $10 million already actioned, and a 30%+ run rate EBITDA margin is expected by the first anniversary of the acquisition in November. Aspen has delivered 13.5% growth since its acquisition, outperforming the market. - The two acquisitions completed in the third quarter of fiscal 26 in Specialized Reliability Solutions are integrating successfully. Targeted restructuring actions completed in Q4, with full financial benefits effective April 1, and full synergy realization is expected in the back half of fiscal 27. Three separate price increases have been implemented in fiscal 27 to offset rising input costs. ### Cultural and Operational Recognition - Certified as a Great Place to Work for the 4th consecutive year, reflecting the company's employee-centric culture. The board approved a 6% of salary profit sharing ESOP contribution plus an additional 3% 401(k) profit sharing contribution for fiscal 26, on top of the existing 6% match. - Contractor Solutions was recognized as Vendor of the Year by two major distribution partners, Gensco and Standard Supply, validating the segment's operational excellence and service levels. Jeff A. Underwood, primary growth driver for Contractor Solutions, was promoted to Executive Vice President of CSW Industrials.

Guidance

- All segments are expected to deliver year-over-year revenue growth in fiscal 27, with Engineered Building Solutions growth calculated excluding the exited GRD businesses. - Contractor Solutions: Expect solid revenue and EBITDA growth, with strong synergy realization from recent acquisitions throughout fiscal 27. Long-term through-cycle organic growth target of mid- to high-single-digit remains unchanged, with management committed to outperforming the broader end market. - Specialized Reliability Solutions: Expect a higher full-year adjusted EBITDA margin in fiscal 27, as synergies from recent acquisitions and completed restructuring actions are fully realized. The segment's long-term target of sustained 20%+ EBITDA margin remains on track. - Engineered Building Solutions (excluding GRD): Expect a higher full-year EBITDA margin, supported by a growing backlog weighted toward higher-margin projects. - Consolidated: Expect significant adjusted EPS growth and strong free cash flow generation in fiscal 27, with free cash flow growing meaningfully from the fiscal 26 level. GAAP EPS will be impacted by full-year higher interest expense and stepped-up intangible asset amortization from fiscal 26 acquisitions. - Annualized intangible asset amortization for fiscal 27 is expected to be approximately $61 million, with fiscal 27 interest expense estimated at approximately $46 million, based on current run-rate debt levels. The GAAP tax rate is forecast at ~23% and the adjusted tax rate at ~26% for fiscal 27.

Segment performance

1. Contractor Solutions: Fourth quarter revenue was $237 million, representing 76% of consolidated total revenue, an increase of 43% year-over-year. 40.3% of growth came from acquisitions, 2.6% from organic growth. Pro forma organic growth (including Mars and Aspen as if owned in the prior year) was 5.5%. Adjusted EBITDA was $75 million, equal to 31.7% of revenue, down from $56 million (33.7% of revenue) year-over-year, with compression from acquisition dilution ahead of full synergy realization. 2. Specialized Reliability Solutions: Fourth quarter revenue increased 22.4% to $46 million, with 13.7% of growth from acquisitions and 8.8% from organic growth (partially offset by softness in general industrial end markets). Adjusted EBITDA rose 73.7% to $10.1 million, with adjusted EBITDA margin expanding 640 basis points to 21.8%, driven by higher-margin acquisitions, pricing actions, and favorable product mix. 3. Engineered Building Solutions: Fourth quarter total revenue decreased 4% to $27.6 million, with segment EBITDA increasing 17% to $4.9 million (17.6% margin, up from 14.5% year-over-year, driven by favorable project mix). Excluding the non-core GRD businesses being exited, revenue was $21.7 million, up 10.5% year-over-year, with adjusted EBITDA of $5.6 million (25.8% margin, up from 21.2% year-over-year). The 8-quarter trailing book-to-bill excluding GRD is a healthy 1.05:1. Consolidated fourth quarter 26 total revenue was a record $309 million, up 34% year-over-year, with 2.8% organic growth. Adjusted consolidated EBITDA was a record $83 million, up 39% year-over-year, with adjusted EBITDA margin of 26.8% (up 90 basis points). Adjusted EPS was $3.14, up 21% year-over-year.

Risks & headwinds

- Short-term volatility is inherent to the Contractor Solutions segment, which faces end market uncertainty from ongoing softness in new housing and existing home sales, with interest rates expected to remain flat through the end of the calendar year, delaying a potential rebound in HVAC unit replacement demand. - Inflationary pressure remains from indirect tariff impacts, recent increases in ocean freight and diesel costs driven by Middle East geopolitical conflict, and rising prices for petroleum-based inputs (base oils, plastics), with a multi-month lag before these cost increases flow through to COGS for Contractor Solutions. - Acquisition integration carries near-term risks including temporary order fulfillment delays, gross margin dilution ahead of full synergy realization, and higher interest and amortization expenses from debt-financed transactions that have tempered EPS growth relative to revenue and EBITDA growth in the short term. - Working capital deployment to support growing revenue and acquisition integration led to a quarterly operating cash outflow and reduced free cash flow in the fourth quarter of fiscal 26. While free cash flow is expected to rebound in fiscal 27, it remains exposed to future cost inflation and working capital needs.

Analyst Q&A

• Q: Where is the most inflation pressure in cost of goods sold, how is pricing being used to offset it, and what is the timing and goal for offsetting these costs? /

  A: The main pressure comes from indirect tariff impacts, plus recent increases in ocean freight and diesel costs from Middle East tensions, which have pushed up prices for petroleum-based inputs like base oils and plastics. There is a multi-month lag before these cost increases reach COGS for Contractor Solutions, so no pricing action has been taken yet, but multiple price increases have already been implemented this quarter in Specialized Reliability Solutions, where product turnover is faster. The long-term goal is to protect full margins: in Contractor Solutions management prioritizes protecting margin dollars first while working to cut other costs to restore margin percentage, while Specialized Reliability Solutions has directly protected margins via pricing.

• Q: What is the revenue impact of Mars product rationalization and the GRD exit? /

  A: Product rationalization for Mars only shifts overlapping demand from Mars to higher-margin legacy CSW Contractor Solutions products, so it is a net positive for margins overall, with only temporary shifting of reported revenue between lines that will resolve by the November first anniversary of the Mars acquisition. For GRD, the business was non-core with sub-20% margins that failed to meet CSW's return hurdles, weakened further by a slowdown in Canadian multifamily construction. Removing GRD reduces Engineered Building Solutions reported revenue but leaves the remaining segment with healthy 25.8% EBITDA margin and growing backlog, so the impact is positive for overall profitability.

• Q: How have demand trends developed in Contractor Solutions from March to May, and how is the repair vs replacement demand balance evolving? /

  A: Distributor destocking is complete, and order volumes picked up in March and April as distributors stocked up for the peak cooling season, with momentum continuing through May, and overall market conditions have stabilized after volatile results last year. Since interest rates remain elevated and housing activity is still soft, repair demand currently has more momentum than replacement demand, but the Mars and Aspen acquisitions have given CSW balanced exposure to both, so it is prepared to pivot if replacement demand rebounds. It is too early to predict when replacement demand will see a strong rebound.

• Q: What is the current M&A pipeline, and how is excess capital being allocated amid macro volatility? /

  A: The current top priority is digesting and integrating the large acquisitions completed in fiscal 26, and delivering on the committed synergy and margin targets, which is the most accretive use of capital right now. Management remains active in pursuing small tuck-in and bolt-on acquisitions that are easy to integrate and highly accretive, and the pipeline for these remains steady. No large M&A transactions have come to market so far this year. All capital allocation levers remain available: excess cash will be used for debt paydown, opportunistic share repurchases when the stock price is attractive, and selected acquisitions, which matches the company's historical disciplined approach.