CSW Industrials, Inc. Aktie

Greetings, and welcome to CSW Industrials Fiscal Fourth Quarter and Full Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Alexa Huerta, Vice President of Investor Relations.

Thank you, Rob. Good morning, everyone, and welcome to the CSW Industrials fiscal 2026 fourth quarter and full year earnings call. Joining me today on the call is Joseph Armes, Chairman, Chief Executive Officer and President of CSW Industrials; and James Perry, Executive Vice President and Chief Financial Officer.

We issued our earnings release, updated investor relations presentation and annual report on Form 10-K prior to the market's opening today, all of which are available on the Investors portion of our website at www.ir.csw.com. This call is being webcast and information on accessing the replay is included in the earnings release.

During this call, we will make forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results could materially differ because of factors discussed today in our earnings release and the comments made during this call as well as the risk factors identified in our annual report on Form 10-K and other filings with the SEC. We do not undertake any duty to update any forward-looking statements.

I will now turn the call over to Joe.

Thank you, Alexa, and good morning, everyone.

To begin, I want to highlight what was a really strong quarter for CSW Industrials. Our team delivered record fiscal fourth quarter revenue highlighted by both organic and inorganic growth, record adjusted EBITDA and record adjusted earnings per diluted share.

We crossed the $1 billion mark in annual revenue during fiscal 2026, achieving this milestone just 10 years after our spin-off as an independent public company, delivering 15% revenue compound annual growth rate over 10 years, while allocating over $1.7 billion to accretive acquisitions. Overall, these record results demonstrate the strength of our portfolio, the excellence with which our teams are executing and the strategies that serve as our guide.

If you look at CSW today versus where we were when reporting our fiscal 2025 year-end results, we are meaningfully larger and more diversified. And that is intentional, driven by our disciplined capital allocation philosophy and facilitated by our strong balance sheet, we leaned in during fiscal 2026 and invested in multiple high-quality growth opportunities. During the year, we completed five highly synergistic cash flow accretive acquisitions and made an incremental minority investment in an HVAC/R controls technology company.

In our Contractor Solutions segment, we invested approximately $1 billion in acquisitions including MARS Parts, our largest acquisition to date for $650 million. Aspen Manufacturing were $313 million and Duckt-Strip for $21 million. In our Specialized Reliability Solutions segment, we acquired Hydrotex Holdings and ProAction Fluids for a combined $26.5 million.

In addition, CSW returned an aggregate of $146 million in capital to our shareholders through $128 million of open market share repurchases and $18 million in dividends, demonstrating our commitment to long-term value creation and utilizing all capital allocation avenues available to us. We financed these investments with a mix of cash on hand and low-cost debt, while maintaining our financial discipline.

We ended the fiscal year at a net debt-to-EBITDA of 2.55x, which is comfortably inside our target leverage range of 1 to 3x. Our prudent approach has kept our balance sheet strong and resilient and continues to provide flexibility to support future growth opportunities.

One note on comparability, with the size of the acquisitions made in fiscal 2026, especially MARS Parts and Aspen, some year-over-year comparisons can be challenging. As we have moved from a net cash position to a net debt position, interest expense is higher, and we also have more noncash amortization of acquired intangibles. These factors impact both GAAP and adjusted EPS. As you think about performance across periods, we still believe that adjusted EBITDA and free cash flow are the most appropriate metrics by which to measure how the business is performing.

From an end market perspective, the positive momentum we saw in our Contractor Solutions and Specialized Reliability Solutions segment as we exited December and moved into January continued through the fourth fiscal quarter. In Contractor Solutions, we also saw order trends pick up in March and April as our distribution partners started gearing up for the peak cooling season. We have maintained our momentum in May, though it is still early in the season.

Over the last decade, we have consistently communicated that through the cycle Contractor Solutions should be a mid to high single-digit organic growth business, while recognizing the short-term volatility is inherent in the business. The products we provide to our customers are essential, demonstrated by the strong resilience of the segment.

Historically, we have been more indexed to the replacement of HVAC units and residences with some exposure to new housing. With the addition of MARS Parts and Aspen, we have increased our exposure to the HVAC repair cycle, providing a more balanced product offering that enables us to perform well as the repair versus replace mix changes from time to time during economic cycles.

At this time, I will turn the call over to James for a detailed review of our financial performance, and then I will return with a few closing comments.

Thank you, Joe, and good morning, everyone. This was another busy quarter, and we have seen conditions in the residential HVAC/R end market stabilize as we head into the summer season. I will walk through the fourth quarter's consolidated and segment results, cash flow and the balance sheet, highlighting how we are positioning the business for growth.

Starting with the headline numbers for the fourth quarter of fiscal 2026. Revenue was a record $309 million, up 34% as compared to the prior year. Growth was primarily driven by the acquisitions completed over the last year, along with consolidated organic revenue growth of 2.8%, which was concentrated in Contractor Solutions and Specialized Reliability Solutions.

Adjusted consolidated EBITDA grew by 39%, reflecting both acquisition leverage and the resilience of our platform. Adjusted EPS for the fiscal fourth quarter was $3.14, up 21% from the same period last year. EPS growth did not fully keep pace with the strong revenue and EBITDA growth, which was expected primarily due to the higher net interest expense of $13.4 million as we moved from a net cash position last year to a net debt position following the significant acquisition activity and share repurchases in the back half of our fiscal year. Also, as expected, we saw some margin dilution from recent acquisitions ahead of full synergy realization.

Turning to items excluded from adjusted EPS and consistent with our updated methodology. The fiscal fourth quarter included net of tax, $13.6 million or $0.83 per share of expense related to impairment of goodwill, intangible assets and other long-lived assets and expenses related to restructuring and the write-down of additional assets of $1.6 million net of tax or $0.10 per share. These items are connected with a planned strategic exit and disposition of the Greco business line within Engineered Building Solutions, which I will discuss again later in my remarks.

We also had net of tax $3 million or $0.18 per share of acquisition-related transaction and integration cost. $900,000 or $0.05 per share of a nonrecurring inventory write-down $400,000 or $0.02 per share of other restructuring costs and $12.1 million or $0.73 per share of amortization of acquired intangible assets.

Looking at our revenue and gross profit in more detail. Consolidated revenue for the fourth quarter of fiscal 2026 increased $78 million or 34% as compared to the prior year quarter, driven mainly by the acquisitions. We are pleased to post consolidated organic revenue growth of 2.8% coming from the Contractor Solutions and Specialized Reliability Solutions segments.

Adjusted consolidated gross profit in the fiscal fourth quarter was $135 million, up 32%. Adjusted gross margin was 43.5%, down 70 basis points from 44.2% in the prior year period, primarily due to the acquisition-related dilution we have discussed as well as inflation and some material cost and the impact of tariffs. The team has been able to offset some of the inflation and tariff-related margin dilution with pricing actions and freight savings.

Consolidated adjusted EBITDA for the fiscal fourth quarter was a record $83 million, up $23 million or 39% as compared to the prior year period. Adjusted EBITDA margin increased 90 basis points to 26.8% from 25.9%, driven by the addition of recent acquisitions, strategic pricing actions and lower freight costs. Our already realized synergies in the operating expenses line contributed to the consolidated EBITDA margin accretion as compared to dilution at the gross margin line.

In Contractor Solutions, fiscal fourth quarter revenue was $237 million, which was 76% of consolidated revenue and the result was an increase of 43% over the prior year. Of that growth, $67 million or 40.3% was driven by acquisitions and $4.3 million or 2.6% came from organic growth. We are particularly pleased to return to organic growth, especially against a strong comparable quarter last year. Pricing actions more than offset a slight unit volume decline in organic revenue.

During the fourth quarter, Aspen delivered 10.4% revenue growth. Aspen has grown 13.5% since the time of acquisition, May 1 of last year, significantly outperforming the market. MARS Parts revenue declined about 10.4% in the quarter, driven by a mix of short and long-term items. In the short term, the primary MARS distribution center was integrated on to the CSW ERP system in January as well as upgraded to allow for greater storage and shipment capacity to realize future operational efficiencies. These upgrades delayed some order fulfillment early in the fourth quarter, though fulfillment rates at the end of the quarter were in line with expectations.

For MARS Parts in the longer term, we have completed the product SKU rationalization and portfolio review. This exercise resulted in exiting some nominal product categories where MARS did not have a differentiated product offering and/or where the legacy Contractor Solutions products have a better and more profitable offering. Because of this, over the next 12 months, the top line growth of MARS Parts will not necessarily be indicative of underlying demand as there has been and will be some shift of that demand to legacy Contractor Solutions products.

Including the MARS and Aspen fiscal fourth quarter results, total organic revenue for Contractor Solutions would have increased 5.5% if we had owned these businesses in the prior year, a pro forma metric we have been reporting following our $1 billion of capital deployed towards these acquisitions. A reminder that we will begin including Aspen in our organic growth reporting metric as of May 1 of this year. The 1-year anniversary of that acquisition per our historical methodology.

Adjusted EBITDA for the Contractor Solutions segment was $75 million or 31.7% of revenue compared to $56 million or 33.7% of revenue in the prior year period. The year-over-year margin compression primarily reflects acquisition-related dilution ahead of the full realization of expected synergies, partially offset by pricing actions and improved domestic freight efficiency.

We can now update our expectation for MARS Parts run rate synergies to be in excess of $12 million as well as attaining greater than a 30% run rate EBITDA margin by the first anniversary of our ownership in November. Our confidence is based on already actioning in excess of $10 million in synergies so far in addition to the SKU rationalization process I mentioned earlier.

As Joe mentioned, in the fiscal fourth quarter, the Contractor Solutions segment completed a $21 million acquisition of Duckt-Strip, a differentiated electrical cable for HVAC mini-split systems that combines all required conductors into a single cable and helps the Pro-Trade install more quickly and efficiently.

Based on the announced 7x trailing 12 months EBITDA multiple paid and the approximately $3 million of trailing EBITDA assumed in our purchase price, we expect incremental EBITDA to CSW to be about $2 million as CSW already participated in a portion of the business prior to the acquisition of a master distributor.

We also made a $4.8 million incremental investment in Flair, which has developed an innovative suite of HVAC/R control products, including smart grilles, registers and diffusers as well as ductless thermostat controls, enabling room level temperature control with meaningful energy savings.

Specialized Reliability Solutions revenue increased 22.4% to $46 million, up from the $38 million in the prior period. The increase included $5.2 million or 13.7% from recent acquisitions and $3.3 million or 8.8% from organic growth, partially offset by continued softness in the general industrial end market.

Adjusted segment EBITDA in the fourth quarter was $10.1 million, up 73.7% from $5.8 million a year ago, and adjusted EBITDA margin expanded 640 basis points to 21.8%. Margin expansion was driven by the inclusion of the higher-margin acquisitions, pricing actions and a favorable product mix. The integration of the 2 businesses acquired in the third fiscal quarter continues to progress very successfully.

In response to margin performance and end market challenges, the Specialized Reliability Solutions segment initiated targeted restructuring actions during the fiscal fourth quarter, as we noted on our January earnings call. These actions are intended to strengthen the integration of our recent acquisitions and support progress toward our sustained 20% EBITDA margin target for the segment.

The financial benefits from the restructuring fully took effect on April 1, and the pretax onetime charges associated with these restructuring activities in the fiscal fourth quarter were $0.5 million. We expect to fully realize the synergies from the acquisitions during the back half of the fiscal year.

In response to the recent rising costs for certain input materials in the Specialized Reliability Solutions segment, we have implemented 3 separate price increases during the fiscal first quarter to offset the impact. We are monitoring the situation very closely, and we'll continue to take appropriate action as needed. With respect to demand in the segment, we have seen solid momentum and resiliency to date in our fiscal first quarter, and the team has done a great job in meeting that demand.

Engineered Building Solutions segment revenue decreased 4% to $27.6 million from $28.7 million in the prior year period. Segment EBITDA increased 17% to $4.9 million, representing a 17.6% margin compared to $4.2 million and 14.5%, respectively, last year. The EBITDA margin expansion was driven by a favorable project mix that more than offset higher material costs indirectly linked to tariffs. The trailing 8-quarter book-to-bill ratio remained steady at 0.9:1.

We are encouraged by the improved mix in EBS backlog as our Smoke Guard and Greco business lines grew backlog by 13%, including a greater proportion of higher-margin products. Pricing actions to offset increased costs are ongoing with additional increases planned on a project-by-project basis.

During the fiscal fourth quarter of 2026, CSW finalized a plan to sell the Greco U.S. business and to strategically exit the Greco Canada business as both are increasingly noncore to CSW. These businesses are part of our EBS segment. The Greco U.S. business was classified as held for sale as of March 31, 2026. Greco Canada recognized $2.1 million of expenses related to the planned exit.

In addition, we recorded a $15.6 million impairment expense in connection with our decisions. We expect to incur $1 million to $2 million of additional costs related to the Greco Canada exit, primarily for severance and termination expenses as the process concludes. We will update our progress on these transactions on future earnings calls as warranted.

Excluding the Greco businesses, EBS segment revenue was $21.7 million, a 10.5% increase compared to $19.7 million in the prior year period. In the fiscal fourth quarter, segment adjusted EBITDA and adjusted EBITDA margin, excluding Greco, were $5.6 million and 25.8%, respectively, compared to $4.2 million and 21.2% in the prior year. The year-over-year improvement reflects stronger underlying performance of the remaining business lines.

The trailing 8-quarter book-to-bill ratio, excluding the Greco businesses, was a healthy 1.05:1. Our remaining businesses within EBS are growing the backlog faster than revenue, generating a strong future revenue stream. We want to share these results in this manner to better reflect the EBS segment model going forward, which currently has an EBITDA margin well in excess of 20%, our long-stated goal for this segment. Our new strategy is expected to support improved margins over time.

Turning to consolidated cash flow. We had an operating cash outflow of $1.7 million in the fiscal fourth quarter compared to an inflow of $27.3 million in the prior year quarter. The year-over-year change primarily reflects working capital deployed to support our record revenue, along with acquisition-related integration costs and the higher level of interest expense.

Free cash flow, defined as cash flow from operations less capital expenditures, was an outflow of $6.8 million in the fiscal fourth quarter compared with an inflow of $22.8 million in the prior year period. The $29.6 million year-over-year decline was driven by the same factors just mentioned.

Our effective tax rate for the fiscal fourth quarter was 27.1% on a GAAP basis. Our adjusted tax rate was 22%, modestly below our normal range due to discrete items that can vary quarter-to-quarter. For the full fiscal year, our tax rate was 22.5% on a GAAP basis and 24.7% on an adjusted basis.

As we enter fiscal 2027, amortization of intangible assets will step up meaningfully as a result of the significant acquisitions completed in fiscal 2026, particularly MARS Parts. On an annualized basis, we now expect amortization of intangible assets to be approximately $61 million for fiscal 2027.

We funded this year's acquisitions with cash on hand from the September 2024 follow-on equity offering, revolver borrowings and our new Term Loan A. At quarter end, we had $871.5 million outstanding across our revolver and the Term Loan A. Reflecting the shift to a net debt position, interest expense in the fourth quarter of fiscal 2026 was $11.8 million compared with interest income of $1.6 million in the prior year quarter. We currently estimate fiscal 2027 interest expense of approximately $46 million.

At quarter end, our net debt for covenant calculation purposes was $843 million, resulting in a net debt-to-EBITDA leverage ratio of 2.55x. This corresponds to an interest rate of SOFR plus 200 basis points for the revolver and Term Loan A. As a reminder, in the third quarter of fiscal 2026, we executed an interest rate swap to fix SOFR at 3.42% for 3 years to hedge $300 million of our Term Loan A balance. This swapped interest rate remains well below the current SOFR rate.

We continue to maintain a strong balance sheet with a net debt to EBITDA well within our target range of 1 to 3x. This provides ample liquidity to support growth initiatives and the rest of our capital allocation priorities. Consistent with that position, during the quarter, we repurchased approximately $35 million of our stock in the open market, representing about 132,000 shares at an average price of $265 per share, reinforcing our confidence in our ability to create long-term shareholder value. For the full fiscal year, we repurchased $128 million of our stock at an average purchase price of $253 per share.

Let me touch briefly now on tariffs and our expectations as we look ahead. We continue to monitor tariff developments and the potential impact across our businesses. Importantly, the recent 232 tariff interpretation is expected to be neutral for CSW Industrials in terms of direct tariffs paid. Of note, we have minimal exposure to inputs from Mexico with no manufacturing footprint there. However, the recent changes could have indirect commodity price impacts.

While our Specialized Reliability Solutions and Engineered Building Solutions segments have minimal direct exposure to tariffs, both experienced indirect effects during fiscal 2026 from the broader economic consequences of tariff policies. Each of these segments sources a limited number of inputs internationally, and we have also seen meaningful cost increases even on U.S. sourced materials.

As I mentioned, in SRS, we have mitigated the indirect impact of tariffs and rising commodity prices through pricing actions. In EBS, we continue to factor higher cost into bids on new projects. As we have filed our applications for tariff refunds that we are due with limited receipts to date, we will update this process during our next quarterly earnings call. I'll remind everybody that our forward-looking outlook is included in the investor presentation posted on our website this morning.

Overall, we expect all segments to show revenue growth versus the prior year. In the EBS segment, that growth excludes the impact of exiting the Greco businesses. In Contractor Solutions, we expect solid growth in revenues and EBITDA as well as strong synergy realization throughout the year from our recent acquisitions. We continue to make strategic changes to our global supply chain to reduce the impact of potential disruptions. We remain highly focused on cost discipline across the company, especially in the current economic environment.

Turning to Specialized Reliability Solutions. We expect a higher full year EBITDA margin in fiscal 2027 as we realize synergies from the recent acquisitions and the restructuring actions we've executed. In Engineered Building Solutions, we expect a higher full year EBITDA margin, excluding the Greco businesses, supported by a growing backlog in our remaining business lines that includes a higher proportion of higher-margin projects.

At a consolidated level, we expect to see significant adjusted EPS growth in fiscal 2027. As a reminder, GAAP EPS will be impacted by the full year impact from higher interest expense and the step-up in intangible amortization from our recent acquisitions. As such, we will continue to focus on adjusted EBITDA as the best comparable measure of our profitability growth over time.

We expect strong free cash flow generation in fiscal 2027 with significant growth from the fiscal 2026 level due to our expectations for earnings growth and prudent management of working capital.

Finally, we currently forecast our fiscal year 2027 GAAP tax rate to be approximately 23% and the adjusted tax rate to be approximately 26%. The rates will vary quarter-to-quarter based on specific items.

With that, I'll now turn the call back to Joe for his closing remarks.

Thank you, James.

To summarize, our fiscal fourth quarter 2026 provided a strong finish to the year. We delivered record quarterly revenue and adjusted EBITDA with revenue up 34% year-over-year. This outperformance was driven by acquisitions that are outperforming our acquisition models and are also helping to support organic growth.

As previously discussed, we are proactively managing our portfolio of businesses consistent with our long-term objectives. As a result, we feel very good about the strength and positioning of the portfolio and our ability to continue delivering sustainable, above-market profitable growth over time that creates long-term shareholder value.

For the full year, we deployed approximately $1 billion of capital into acquisitions, which underscores our conviction in the long-term fundamentals of residential HVAC/R, plumbing and electrical end markets. With a strong balance sheet and disciplined capital allocation philosophy, we have invested opportunistically through market cycles. And importantly, we are doing so with a clear focus on prudent capital management, operational excellence and the good work of our fantastic team of people across CSW who deliver impressive results day in and day out.

Turning to fiscal year 2027. While the environment remains dynamic, our priorities are unchanged to deliver sustainable growth that exceeds the markets we serve, expand profitability and to allocate capital in a disciplined manner, while maintaining our strong balance sheet. We expect to deliver full year growth in revenue and adjusted EBITDA and adjusted EPS and in free cash flow.

We will continue to identify and pursue accretive acquisitions of innovative businesses and products that are synergistic with our portfolio, while maintaining our balance sheet strength and our discipline with respect to our capital allocation. As always, our expectations reflect our current view of the market conditions and are subject to the forward-looking risks and assumptions discussed in our materials.

Our most recent acquisition, Duckt-Strip is a strong strategic fit within Contractor Solutions. It adds a differentiated high-value product that aligns with our focus on innovation. Along with our minority investment in Flair, this final acquisition of fiscal 2026 reflects our continued confidence in allocating capital to the attractive HVAC/R space, including faster-growing areas like ductless, where we can leverage our distribution scale and execution capabilities.

Moving on to our people. You may have seen in a separate news release on May 12 that we announced the promotion of Jeff Underwood to Executive Vice President of CSW in recognition of his outstanding leadership and his commitment to excellence while executing on our long-term growth strategy.

Jeff has been an instrumental leader at CSW and the primary driver of growth within Contractor Solutions. His relationships in the market, his commitment to an employee-centric culture and his ability to successfully lead in the consummation and integration of acquisitions have meaningfully improved the size and scale of CSW. Please join me in congratulating Jeff on this well-deserved promotion.

CSW strives to be the partner of choice for our loyal customers with the goal of making it as easy as possible to do business with us. During the fiscal fourth quarter, our Contractor Solutions segment was recognized as Vendor of the Year by both Gensco and Standard Supply, further validating the service levels and the operational excellence our teams deliver. I want to publicly recognize the Contractor Solutions organization for these achievements.

Finally, our employee-centric culture continues to be a competitive advantage. I could not be more proud to announce that CSW Industrial (sic) [ Industrials ] has recently been certified as a Great Place to Work for the fourth year in a row. This recognition is a testament to our focus on core values such as accountability, citizenship, teamwork, respect, integrity, stewardship and excellence.

At CSW, how we succeed matters, and our success is shaped by the collaborative efforts of our team members. We remain focused on attracting and retaining great talent, offering rewarding careers and offering our team members the opportunity to earn a safe, secure and dignified retirement.

In that spirit, our Board of Directors approved a profit-sharing Employee Stock Ownership Plan contribution for fiscal 2026 equal to 6% of each U.S. employee salary as well as an additional profit-sharing 401(k) contribution of 3% for fiscal 2026 on top of our existing 6% match.

In closing, I want to thank all of our CSW Industrials team who collectively own approximately 3% of the company, which includes our ESOP for their continued performance. And I also want to thank our shareholders for your continued interest in and support of CSW Industrials.

With that, Rob, we're ready now to take questions.

[Operator Instructions] Our first question comes from Jon Tanwanteng with CJS Securities.

Congratulations on a strong quarter.

Thanks, Jon.

My first one is just could you talk about inflation in COGS, specifically where you're seeing the most pressure, number one?

And then number two, talk about the pricing strategy to offset that and the timing around it? And if you expect to offset them at a dollar level or margin percentage level over what time frame that would be helpful.

Yes, Jon, it's James. Thanks for being on. As always, I appreciate your support.

We clearly continue to see some inflation at the COGS line, primarily originally from tariffs. And obviously, we're looking back to the March quarter as we talk about things today. Tariffs and indirect impact from tariffs continue to cause some inflationary pressure. We had our normal price increase in Contractor Solutions at the beginning of the year. We've taken multiple price increases within SRS throughout the year, and we mentioned already 3 times this quarter, we've done that, the first of each month, April, May and June to offset some of that. I'll come back to that in a minute.

Within EBS, as you know, that's done as we bid projects as we go along, those that are longer-term focused. So we continue to see that inflationary pressure. I'd like to think that it slowed down, but recent geopolitical impacts in the Middle East have increased the cost of ocean freight. Shipping, of course, has gone up quite a bit since quarter end. You've certainly seen an input cost on base oils directly within SRS. The supply chain for oil-based products like plastics that affects even Contractor Solutions has been impactful in Asia. You're not going to see that piece in Contractor Solutions flow through COGS. As you know, there's a lag of several months before it works its way through. But given that started a couple of months ago, you'll start to see some of that in the coming months.

We've not taken specific pricing action in Contractor Solutions yet. Some folks have done that. We're kind of watching to see what we see in the market as well as when we need to do things, as I mentioned, because of that lag effect in COGS. We have done it in SRS because that's more real-time focus. That product turns rather quickly when those input costs come in, those pricing increases have come through from the suppliers pretty quickly.

And I mentioned on the call, the last thing I'll mention there before I get to the last part of your question is the recent 232 impact that affected inputs from Mexico and Canada didn't really impact us much. We have minimal input costs out of Mexico. Some of our recent acquisitions brought just a little bit there, no manufacturing footprint. So that didn't affect us like it affected a lot of the industry that is in Mexico. So we didn't have the impact there. Now that doesn't mean that you don't have the indirect impact, of course, but that direct tariff impact should not impact us.

In terms of protecting margin, obviously, the long-term goal is to protect margin. We've always said within Contractor Solutions that our goal is to protect the margin dollars. So we really just pass on what we need to. I think our customers appreciate that. We've been pretty forthright about that in the market. Obviously, over time, your goal is to find ways to reduce cost to get that margin percentage back. Something like ocean freight going up the last few months is impacting us. We have found some savings, in fact, in domestic. Our internal group has done a really good job with logistics, but the savings they picked up has kind of been offset by diesel costs going up.

So we've been working hard to find ways to cut costs to achieve those margin dollars and get back to the margin percentage, but there's been a bit of a headwind. But certainly, the goal would be to get back there.

Within SRS, we've, I think, done a more direct job on protecting the margins. You see that we were above 20% and have a long-term goal and plan to be above 20% with the acquisitions and the restructuring we've done. And the team has done a great job protecting margins with the pricing there.

Got it. I was also wondering if you could go a little bit more into detail on the rationalization of products within MARS, number one, and the wind down of the Greco business. Just what impact will both of those items have on the revenue going forward?

Sure. Let me address the impact, and Joe may want to talk a little more big picture on Greco specifically, Jon.

The rationalization, when we bought MARS, there was clearly some overlap with legacy products that Contractor Solutions had. As always with acquisitions, you do -- who's got the better product, the better margins, the better relationships, those kind of things. When we do it on the smaller acquisitions, it's not as impactful, but some -- and Aspen didn't have that. There was not overlap, of course. We were not in the oil and air handler business. But MARS, there were several product lines where we both carried that. We knew that going in.

So as a result, you kind of pick the best product and the legacy products more often than not was a product line that we kept. Obviously, on things like motors, capacitors, those kind of things, MARS has a great industry leadership type product. So you lean towards that. But areas like surge protection, a couple of other areas, the legacy products were there.

So as a result, you'll see some of that revenue shift from MARS over to Contractor Solutions. Overall, it's a net positive at the margin line. So it's a good thing for us. But what we tried to press us a little bit in my remarks was you may see MARS will show some revenue deterioration, but the legacy business going forward, you'll have a little more organic growth on Contractor Solutions. Once we hit the November anniversary, all that's behind us, and it's all organic, but we have a couple more quarters until we see that. So overall, it's nothing but a net positive. You'll see some revenue shift from MARS over to legacy. But again, the decision in every case is going to be where is the higher profitability opportunity to the better margins.

In terms of Greco, strategic decision that we made to wind down the Canada business, given the market there. I'll let Joe address that. We do think there's a viable business that we can sell in the South of the business we have down in Florida. It's just not core to us. So you'll see revenues come down. I kind of gave you the new numbers, kind of what the fourth quarter looked like with and without. You can kind of run the math there and see what that is.

But the net result is that was a business that simply didn't have the margins that our other businesses, Smoke Guard and Balco do. And we've always talked about we need to have a 20% plus margin in that business, given our consolidated margins are in the mid-20s, of course, and Contractor Solutions well above 30% and the hurdle just wasn't there. Probably makes sense for somebody else for that type of business. But what I gave you for the fourth quarter is a pretty good indicator.

Joe, do you want to talk about high level on Greco a little more?

Yes, Jon, the executive summary is that things have changed in Canada since we acquired the Canadian Greco business. Their economy is in a bit of a recession. Their multifamily housing industry is in a depression. And so that was a big part of our business. About 1/3 of that business when we acquired it was done south of the border in the upper Midwest of the United States. That's gotten tougher. Aluminum prices have obviously been a tough input cost for a while.

And so as James said, rationalization of that business based on all those changes, we do not see that improving meaningfully north of the border for some time. And so we have a long history of just saying, listen, you either meet our return parameters that we expect here and our expectations or that's not a business that's going to be a long-term hold for us.

So the North business, the Greco Canada business will go away. In the South, as James said, it's a good business. They will have attractive returns and attractive margins for a typical building products business. And in someone else's hands, that will be a perfectly fine business. Location in the Sunbelt in Florida, all those things work together to make that a viable business that we will sell and move away and really focus time, attention and investment in the other 2 businesses, which, as you can see, have very attractive growth and margin metrics.

Understood. If I could sneak in one more. Just with the interest guidance for the year, are you assuming any capital allocation in that? Or is that just a run rate from what you did in Q4?

Yes, John, it's pretty much going to be a run rate. We -- when we look forward, do not forecast acquisitions and don't necessarily forecast outside share repurchases. We've certainly taken advantage of what we thought was a depressed stock price, and you heard what we did in Q4 and for the full year. If the market were to have some dislocation, we're certainly not shy about share repurchases. We continue to look for acquisitions, certainly tuck-ins over the next couple of quarters, more importantly, and we have a bit of a pipeline for those. We're always looking for that. But that generally assumes minimal capital allocations of those type things, Jon.

So it's a bit of a run rate. The only hesitation I'll give is we do assume that if you don't have that capital allocation towards acquisitions and share repurchase, you're going to pay down debt. And right now, 5.5% interest rate or so is not a high interest rate in the grand scheme of things, but we will allocate cash flow towards paying down debt for lack of other capital allocation opportunities. So that kind of goes down each quarter as you go along.

Our next question comes from Tomo Sano with JPMorgan.

Congrats on the quarter and congrats, Jeff, for the promotion.

Thank you, Tomo.

Thanks, Tomo.

So on CS business, you mentioned improvement in monthly demand from March to May. How have trends in order sales and shipments evolved during this period? And I'm also curious with the MARS and Aspen acquisitions increasing your mix of repair parts, how is the current balance between repair and replacement demand evolving? And when do you expect to shift back toward replacement?

Yes. Tomo, it's James. Thanks for being on, as always. Yes, it's a great question. I think it's a little early to see if we're seeing a shift from repair to replacement. I think as existing home sales and new housing starts remain soft for now and interest rates remain where they are with no real expectation of rates going down. And as a follow-up to what Jon asked too, we assume a flat interest rate curve for the rest of the calendar year, just kind of given what the dot plot and those things look like.

I don't think you see necessarily strong replacement demand coming back. We haven't seen that necessarily yet, but it's May. As we said, we have had nice order volume in March and April as people stocked up. I think as we said last quarter, I think it's come true that the destocking seems to be behind folks at the distributor level, and we were pleased with that. We saw normal stock up returning to normal levels in March and April. As we said, the momentum has maintained in May, and we've seen stabilization. Last year was anything but stable. So the word I use stabilization was very direct in that respect.

Nice order volumes. Team has done a great job getting things out the door. Really proud of that with the distribution system that we have. We talked about what we did at the distribution center for MARS in Missouri, made a lot of changes there, and that team has done a good job. I have a lot of boots on the ground helping them there. So I think we're pleased with that.

So I'd say it's a little early to get too predictive on what the summer looks like. But so far, we have nice momentum. Certainly, things got hot rather early and then stabilized a bit. So you had nice demand early and things are starting to get warm again, certainly down here they are in the Sunbelt.

In terms of replacement versus repair, the good thing is, to your point, with the acquisitions we made, we've got balance there. Last year, we had just bought Aspen in May, didn't have MARS yet until November, so we didn't get to take advantage of that nearly as much. This year, whichever direction it goes, we've got really good momentum and the ability to meet either demand. But I'd say it's early to tell.

I think a lot of folks out there in their earnings calls for their first quarter at least, talked about, again, early to say whether it's replacement or repair. Again, we're in a good place. Repair seems to have a little more momentum probably just given the factors I mentioned at the early part of my answer. But that can only go on for so long. And so is that later this year? Is it next year? Is it a couple of years out that replacement demand comes screaming back. There's clearly a housing shortage. At some point, rates will come down, and we'll be prepared to pivot either direction.

And just one more. You talked about the MARS and Aspen synergies are tracking above the initial $10 million target. Could you talk about realized the synergies and potential upside and break down the source of the synergies, cost versus cross-selling, please?

Yes, sure. Yes. So we've always advertised when we made the acquisition and reiterated it last quarter, $10 million of synergies and an inherent 30% run rate EBITDA margin by the time we anniversary in November. We're ahead of that.

We were willing today to talk about $12 million of synergies. We've always had higher internal targets. We've already actioned $10 million, and we were ready to publicly talk about $12 million, and we'll update that again next quarter. But the team is really doing a good job.

A lot of the synergies were day 1, just overhead that was not brought over those kind of things. Some of that was some pricing that was implemented since the time of the acquisition. But we're just now starting to really see that cross-selling. Jeff and his team is really doing a good job of earning new business.

When you have a market that continues to show volumes down for the year from the peer folks that are out there, the competitors that are out there in the residential HVAC space, Tomo, we've got to do better than that. We've always been measurably above what the market says. And part of that is we are in faster-growing markets like ductless and surge protection, those kind of things.

But part of it is winning new business and cross-selling of things like MARS, winning new customers for Aspen this year. We bought them in the middle of the busy season last year, so that was hard to do. But that cross-selling impact is real. That was always part of what we talked about. But the biggest part of the synergies and the 30% was really just what we saw a week ago going into it and now we're executing very well. So we expect that business to continue to do really well. They've posted really good month after month. I'm proud of how those acquisitions are going.

Getting them integrated in our ERP system in January was really important. We now have the front end of Aspen integrated as well. So from a customer-facing standpoint, that was done literally just a few weeks ago. And then the back end will be integrated later this year. So we've really got the momentum now for Jeff and his team to cross-sell and win over new business with customers that can order anything from Contractor Solutions very easily now.

Our next question comes from Susan Maklari with Goldman Sachs.

This is Charles Perron in for Susan. First, I'd like to touch on the outlook for Contractor Solutions. I understand you're not providing guidance per se, but how do you think about your organic growth rate outlook for 2027? What are some of the puts and takes you're monitoring that could lead your performance to diverge versus the historical mid- to high single-digit cadence that you've provided in the past?

Yes, Charles, thanks for the question. This is Joe. We are not immune to the market, right? I mean last year, the OEMs were down pretty dramatically on volume, and we outperformed them meaningfully. Our expectation is we will outperform the market meaningfully. We have an assumption of a market that is flattish, but we don't have a crystal ball for the market.

Our commitment is that we will outperform the end markets we serve by a meaningful basis. You saw that this past quarter that we're reporting on, and we would expect that going forward. Beyond that, we're just unwilling to commit to a guidance range or anything like that. But we have a long track record of outperforming the markets we serve, and I would expect for you to see that again.

Got you. Okay. No, that's helpful color. And just talking about price in general, how do you approach the decision to get price in Contractor Solutions? I understand that you -- I don't think you've announced anything as you mentioned in your prepared remarks. But are you seeing any trade down in certain category? And how do you make sure you remain competitive as well against your competitors in those markets?

Yes, Charles, this is James. We certainly watch the market, of course. We act independently. And our decision to raise pricing midyear is based on input costs. And if we see cost of sales going up, and that's where it is, of course, with input costs going up, I mentioned some petroleum-related products in that business that are plastic focused. You certainly have indirect impact of tariffs here and there. So as we see our costs go up, obviously, diesel costs going up in over-the-road trucking for domestic shipments and the ocean freight has been up 25%, 30% in the last few months since the conflict started in the Middle East. We will push pricing if we need to.

As I mentioned earlier, we have a several month lag. By the time something gets on a boat overseas and gets over here and works its way through revenue, that's a few months. So while we certainly see that coming in certain areas, you don't have to react the next day in knee-jerk. We haven't found ourselves needing to do that and customers appreciate the thoughtful approach. So it's really -- if we need to push pricing, we will. We've seen some folks do that. As I mentioned, the 232 tariff impact that came out a few weeks ago, some of the folks in the industry have gone ahead and push price because they had significant Mexico input costs. We do not have that. So we did not need to react to that.

But we watch the market. We watch competitively. I don't think we've seen a trade down in products. We always say that we've got the best-in-class products. We're the highest quality product out there. And as a result, you pay a premium for that and our customers will do it because the contractors know our brand names and know our products, and we believe strongly in that. So we will very carefully and thoughtfully push pricing as we need to. But no, we have not announced anything to date.

Got you. Okay. That makes sense. And maybe lastly, can you talk about what you're seeing in terms of M&A pipeline given the macro volatility you're seeing today? And also more broadly, how do you think about using excess capital in terms of capital allocation and share repurchases?

Sure. This is Joe. We saw a very active year last year in M&A, not only for us, but also in the industry, as we have talked about in some depth, there were 7 or 8 potential transactions last year that we saw coming to market, and we were very active.

I would say we continue to be committed to digesting these large acquisitions that we have done and getting them fully integrated, fully executing on all the synergies that we've committed to, getting to the margin rates that we've committed to and making sure that our customers are well taken care of. So that's priority #1. That's the most accretive thing we can do right now.

Secondly, I would say we continue to be active. We closed on an acquisition called Duckt-Strip this last quarter, and we continue to invest. We continue to invest in our share repurchases. So capital allocation is a top priority here. We continue to be active on all fronts. I would say that the industry has not had a major M&A going on yet this year. There's been an IPO. There's been some other talk of other capital markets transactions, but no big transactions that we have passed on or anything like that.

So we're ready, willing and able to continue, especially, as James mentioned, on the smaller add-on bolt-on acquisitions. That's -- those are very accretive and easy to integrate. And so those are a top priority. But investment of the -- our excess cash will be -- all the levers are available to us. There'll be debt pay down. There will be share repurchases at appropriate levels, and you've seen that this quarter, and we continue to be open for business on the M&A front.

Good luck for next quarter.

Thank you.

Thanks, Charles.

Our next question comes from Tim Wojs with Baird.

Nice job. Maybe just the first question on kind of pricing in the Contractor business. I think just kind of back of the envelope math, you're probably up mid-single digits, maybe a little bit better in the March quarter. Is that a reasonable kind of run rate that we should think about for fiscal '27? Or do you actually see a little bit of a, I guess, step up as maybe kind of the quarterly run rate kind of annualizes into the June quarter?

Absent anything else, Tim, you're in the ballpark, yes. It's obviously a little different product to product and with the acquisitions we brought in kind of how that laps. But yes, mid-single digits is appropriate for that, absent any future action later in the year.

Okay. Okay. And then I guess just bigger picture, if we kind of step back and we think about kind of the portfolio with MARS and the portfolio with Aspen now, is there any examples that you could give us just in terms of the cross-selling opportunity or just kind of what you're hearing from customers about buying more from CSW and RectorSeal? Has there been any sort of kind of tangible improvement that you could talk about related to those conversations?

I wouldn't give specific examples, but I would certainly tell you that as Jeff and his team presented their budget for the year a couple of months ago, we assume, as Joe talked about and we talked about, the market is relatively flat this year. I think third-party folks and other folks in the industry, the bigger folks on the residential side, especially, which we have to parse out, as you well know, as well as anybody, expect the market to be flat at best, maybe. And as Joe said, we expect to do better than that. And that's not just magically done. That's done by leaning into higher growth markets like ductless and new product lines like surge protection and indoor air quality, but it's also done with new business.

And Jeff and his team have targets for new business. Some of that's the cross-selling of Aspen and MARS. Some of it is simply continuing to win over business, make it easier for our customers to do more and more with us. And they've got to deliver on that, and they already have. We've executed several -- converted several customers here before the busy season this year that were on their list last year and some that were on their list this year, of course.

Getting MARS converted over to the ERP system in January prior to the busy season, now getting Aspen converted over at the beginning of May is a big deal. Customers can now log on to the system and order any product in the portfolio.

In terms of tangibles, again, I won't mention specific customers, but we continue to win business with folks more and more. Jeff's got great stories there all the time. He and his team are really, really knocking it out of the park in that respect.

We've got a customer that a few years ago, we weren't even in their top 20. And right now, we're #1. And that's a result of bringing in these acquisitions, making it easier to do business with, making it easier for them to buy more product, implementing some AI tools so they can track their orders better. We can manage inventory better. We can collect receivables more efficiently. All these types of things that we've implemented without massive investments, we stay technologically ahead of everybody else. We've done a great job delivering what they need and continuing to give them more products they can put in their basket and get a pallet or a parcel truckload or a truckload instead of having to buy from 3 or 4 different vendors.

Yes, Tim, I think that's a really important vein that we're mining pretty successfully here, which is converting our existing customers to these new product categories that we're acquiring. That's an organic growth opportunity that is very accretive for us and works really well, both for our customer and for us. And I think you're going to be hearing more about that.

Okay. Okay. Great. And then just -- I'll sneak the last one in. Just I know there's kind of year-over-year dilution from the acquisitions in the last couple of quarters. As we anniversary Aspen and then kind of later in the year anniversary MARS, would we expect to see margins expand in the back half of the year in Contractor as that occurs?

Let me separate those. We've said all along that we've got a little bit of improvement we can do in Aspen. Some of that's obviously in the last year taken effect. But Aspen is going to be lower than your Contractor Solutions margins. That's a mid-20s business. We bought in the lower 20s, getting it to the mid-20s kind of the goal, maybe we continue over time, working on that as we put more and more through that facility. The team is doing a great job with throughput and those type of things. So I think you've got incremental opportunity with Aspen, but Aspen is going to be dilutive just kind of overall.

MARS, we talked about MARS being a mid-20s business when we bought it, getting up to 30% run rate on the anniversary. We're going to have months when it's well above that, as you can imagine, in the busy season, especially if the repair market stays really strong. You'll have months seasonally where it bumps around because it doesn't do as much in the winter months. So that's going to help.

Now does MARS at 30% become accretive at some point to the historical kind of 32%, 33%? We'll see. We're going to continue to work on that. So we wouldn't promise that. You're clearly going to have accretion to the consolidated margin. But to your point, I think you have the opportunity for the Contractor Solutions margin to come up during the year as you see that, not necessarily pocketed above where it was before. You've got so many other factors with tariffs and commodity prices and those kind of things. And if we see petroleum prices ease, obviously, there's an indirect impact there that can help us. But yes, I think we should see Contractor Solutions margins have opportunity over time, but it's going to bounce around given the nature of these acquisitions.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Joe Armes for closing comments.

Great, Rob. Thank you. We really appreciate everyone joining us for this call. Appreciate your support and look forward to reporting again relatively soon after Q1. So thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Greetings, and welcome to CSW Industrials Fiscal Third Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alexa Huerta.

Thank you. You may begin.

Thank you, Rob. Good morning, everyone, and welcome to the CSW Industrials Fiscal 2026 Third Quarter Earnings Call. Joining me today on the call is Joseph Arm, Chairman, Chief Executive Officer and President of CSW Industrials; and James Perry, Executive Vice President and Chief Financial Officer.

We issued our earnings release, updated investor relations presentation and quarterly report on Form 10-Q prior to the market's opening today, all of which are available on the Investors portion of our website at www.cswindustrials.com. This call is being webcast and information on accessing the replay is included in the earnings release.

During this call, we will make forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results could materially differ because of factors discussed today in our earnings release and the comments made during this call as well as the risk factors identified in our annual report on Form 10-K and other filings with the SEC. We do not undertake any duty to update any forward-looking statements.

I will now turn the call over to Joe.

Thank you, Alexa, and good morning, everyone. It is my pleasure to begin by reporting that our team delivered record fiscal third quarter results in both revenue and adjusted EBITDA, despite market headwinds and economic uncertainty that has been present for most of this fiscal year and which has been most pronounced in the residential HVAC/R end market.

Before commencing our regular quarterly commentary, I want to provide additional context for our strategic initiatives and financial results in the quarter. CSW is a larger and more diversified company today than it was just 3 months ago when we last spoke to you. Capitalizing on our strong balance sheet and guided by our disciplined approach to capital allocation, we continued to invest in growth opportunities in a meaningful way.

In this most recent quarter, we completed 3 acquisitions, including the acquisition of MARS Parts within our Contractor Solutions segment, our largest acquisition to date at $650 million. We also acquired Hydratec Holdings and Proaction Fluids within our Specialized Reliability Solutions segment, which amounted to $26.5 million in aggregate investment.

Considering the past 12 months to include the Aspen Manufacturing acquisition, we successfully executed 4 highly revenue, EBITDA and cash flow-accretive synergistic transactions with a total investment of approximately $1 billion. In addition, we've invested $70 million in open market share repurchases during the quarter, emphasizing our dedication to maximizing shareholder returns.

Our financial strategy is to maintain a long-term perspective and to invest opportunistically with great discipline, even amid short-term volatility. Our capital structure now reflects these investments. In November, we strategically funded these acquisitions with cash on hand and low-cost debt capital, while always maintaining a net debt-to-EBITDA ratio well within our target range of 1x to 3x.

This ensures that we maintain a resilient balance sheet with ample liquidity for future investment, as we have committed to do in writing to you, our shareholders. These dynamics, along with the magnified seasonality effects from the addition of the Aspen Manufacturing and MARS Parts businesses make year-over-year comparisons of certain performance metrics less relevant. The interest expense generated by our new capital structure certainly impacts reported and adjusted EPS comparisons, particularly when comparing to prior year periods when we were in a net cash position.

Additionally, having deployed almost $1 billion in acquisition capital in the last year, our amortization of intangible assets will increase significantly, which also challenges comparisons. These items are excluded when providing EBITDA and adjusted EBITDA results, which is why we continue to point you toward these metrics as the best multi-period comparison.

Providing an update on the MARS Parts acquisition, we will remind you that at the time of acquisition, we reported that we expected to achieve $10 million of run rate synergies and to reach a 30% EBITDA margin for this business within 12 months. We have already actioned a majority of the identified synergies, and we now expect to exceed this initial objective.

I am pleased to share that the team has done an outstanding job in accelerating the integration of MARS Parts into our Contractor Solutions segment. The conversion of this business into the Contractor Solutions ERP system was completed earlier this month and other commercial integration initiatives, including product harmonization, are well underway.

In short, we confidently maintain our expectations to achieve our operational and financial goals for this acquisition. We have experienced encouraging order volume as we exited December and moved into January as compared to the overall fiscal third quarter. Based on very recent detailed customer discussions, we have positive feedback that our customers' inventory levels are getting more in balance as their destocking plans have been or are being completed.

Since going public in 2015, we have maintained that we generally expect mid- to high single-digit organic growth through the cycle in our Contractor Solutions segment, though quarterly volatility is common. While not recession-proof, this segment has shown impressive resilience due to the essential nature of our innovative products.

While it is too early in the season to forecast what we expect in calendar 2026 and for our fiscal 2027, we are cautiously optimistic and encouraged by order patterns starting to emerge. We expect to have a better view of this outlook on our fiscal fourth quarter earnings call in May. At this time, I will turn the call over to James for a closer look at our results. And following his comments, I will return and conclude our prepared remarks.

Thank you, Joe. Good morning, everyone. As Joe mentioned, this quarter had a lot of moving parts, and I will address many of them in my remarks today. During the third fiscal quarter of 2026, we delivered a record revenue of $233 million, up 20% as compared to the prior year, driven primarily by our acquisitions over the last year. This was partially offset by a 2.9% reduction in consolidated organic revenue concentrated in our Contractor Solutions segment.

I will discuss the revenue trends by segment later in my remarks. Adjusted consolidated EBITDA grew 7%. Adjusted EPS for the fiscal third quarter was $1.42, demonstrating resilience amid challenging market conditions. Recognizing that this reflects a 21% reduction compared to the same period last year, the reduction in adjusted EPS was primarily driven by $10 million of higher interest expense, as we moved from a net cash position last year to a net debt position this year after strategically funding acquisitions and share repurchases with cash on hand and low-cost debt capital.

Adjusted EPS was impacted to a lesser extent by increased operating expenses from the acquired businesses before realizing the full effect of planned and actioned synergies as well as gross margin compression we have signaled all fiscal year, driven primarily by the margin dilution from the Aspen Manufacturing and MARS Parts acquisitions in Contractor Solutions.

More granularly on the EPS adjustments, our fiscal third quarter included $6.6 million or $0.40 per share in acquisition-related transaction and integration costs, net of tax, as well as $11.3 million or $0.68 per share of amortization of acquired intangible assets consistent with the updated adjusted EPS methodology we introduced in our fiscal first quarter.

Consolidated revenue for the fiscal third quarter of 2026 increased by $39 million or 20% when compared to the prior year period, driven mainly by the aforementioned acquisitions. Inorganic growth was partially offset by lower organic volumes in Contractor Solutions due to continued destocking by our customers in the residential HVAC/R market. Consolidated gross profit in the fiscal third quarter was $92 million, up 15% with a gross profit margin of 39.7%, down 170 basis points from 41.4% in the prior year period, with all segments experiencing some margin contraction.

Our consolidated adjusted EBITDA for the fiscal third quarter reached a record $45 million, representing a $3 million increase and 7% growth compared to the prior year period. Our adjusted EBITDA margin declined by 250 basis points to 19.2% from 21% in the prior year quarter. It was primarily driven by the margin dilution from acquired businesses prior to realizing anticipated synergies and higher input costs resulting from direct and indirect tariff impacts. We successfully mitigated a portion of these cost pressures through strategic pricing actions and reduced domestic freight expenses.

During the third quarter, Contractor Solutions generated $168 million in revenue, representing 71% of consolidated revenue and 27% growth over the prior year quarter. Growth in the quarter was driven by $42.7 million or 32.3% from acquisitions, partially offset by a $6.8 million or 5.1% organic decline due to lower volumes in a challenging market.

As a reminder, our fiscal third quarter has always been our weakest seasonally due to lower repair and replacement activity in the HVAC/R in the market and that seasonality effect on revenues and the associated absorption has been magnified with the additions of Aspen Manufacturing and MARS parts.

Third quarter organic revenue decline reflects ongoing weakness in housing activity and the reduction of distributor inventory levels heading into calendar year-end. After a strong summer, MARS Parts experienced modest year-over-year revenue growth of approximately 1% during the quarter since the time of our acquisition, while Aspen experienced a reduction of 23.7% for the quarter.

Aspen's decline was expected, and driven by the prior year's unusually high third quarter sales as distributors ramped up their inventories prior to the manufacturing deadline for products using the R410A refrigerant. Aspen's third quarter sales this year were more in line with normal yearly seasonal patterns. Since the May 1 acquisition date, Aspen's year-over-year growth has been 14%, demonstrating overall sales growing well above the market.

As a result of the MARS, Aspen and PF Waterworks' fiscal third quarter results, we had a total reduction of 7.3% in organic revenue, if we had owned these businesses last year, a metric we recently started reporting due to our large investments and acquisitions.

Adjusted EBITDA for the Contractor Solutions segment was $41 million or 24.4% of revenue compared to $37 million or 28.4% of revenue in the prior year period. EBITDA margin declined to lower gross margins from acquired business-related dilution prior to realizing anticipated synergies, partially offset by pricing actions and the lower domestic freight costs.

On November 4, we closed the MARS Parts acquisition in Contractor Solutions for $650 million in cash, utilizing a $600 million 5-year term loan A and borrowings from our renewed and extended $700 million revolving line of credit. This acquisition, as previously mentioned, expands our existing portfolio in the HVAC/R into market with the addition of motors, capacitors, other HVAC/R electrical components, equipment installation parts and other components used by the Pro trade for repairs and replacements.

This acquisition also enhanced CSW's diversification into repair parts versus replacement parts. Our Specialized Reliability Solutions segment revenue increased 10.8% to $38 million from $35 million in the prior period. Growth in the quarter included $2.3 million or 6.8% from recent acquisitions and $1.4 million or 4% from organic growth, driven by the general industrial and mining end markets, partially offset by declines in the energy and rail transportation end markets.

Organic revenue includes the realization of the price increase in this segment announced during the second fiscal quarter, partially offset by unfavorable revenue mix. The adjusted segment EBITDA of $6.5 million in the third quarter fell 1.6% from $6.6 million in the prior year period. The adjusted EBITDA margin contracted 210 basis points to 16.9% in the current period, driven by revenue mix.

As Joe mentioned, in the third fiscal quarter, CSW acquired Hydratec and Proaction Fluids for approximately $26.5 million in aggregate diversifying our specialized Reliability Solutions segment's products and end markets. The Hydratec acquisition expands our specialty oils and lubricants portfolio, and Proaction Fluids as products for horizontal directional drilling that support infrastructure build-out.

In conjunction with these acquisitions and in response to the challenges in the SRS segment's end markets and our recent margin performance, we have undertaken certain restructuring actions earlier this month, some of these were related to winding down the headquarters facility for one of the acquisitions, and the remainder of the acquisitions, at our main legacy facility as proactive initiatives to streamline the combined operations.

We do not take these actions lightly, but we expect them to enhance our margins going forward as we strive for a sustained 20% EBITDA margin in this segment. The benefits from these changes will take effect April 1 and we will report further on the onetime charges associated with these restructuring activities with our fourth quarter results in May.

Our Engineered Building Solutions segment revenue decreased 1% to $28.5 million from $28.8 million in the prior year period. Segment EBITDA decreased 5% to $3.9 million, representing a 13.7% EBITDA margin compared to $4.1 million and 14.2% in the prior year period, respectively. The slight contraction in EBITDA margin primarily reflects higher material costs linked indirectly to tariffs.

The backlog remained flat during the quarter with a trailing 8-quarter book-to-bill ratio remaining steady at 0.9:1. We're encouraged by the improved mix in the EBS backlog, which includes more higher-margin products, and we expect this to benefit future results. Pricing actions to offset increased costs are ongoing with additional increases planned on a project-by-project basis.

Transitioning to our cash flow. We reported third quarter cash flow from operations of $28.9 million, growing 165% compared to $10.9 million in the same quarter last year. The year-over-year growth was primarily attributable to a $16.8 million tax payment made in the prior year fiscal third quarter, which was deferred from the first 2 quarters of the prior year due to a temporary federal tax relief.

Our free cash flow, defined as cash flow from operations minus capital expenditures, was $22.7 million in the fiscal third quarter compared to $7.8 million in the same period a year ago. The third quarter free cash flow increase of $15 million or 193.1% was primarily driven by the aforementioned tax payment deferral, partially offset by higher capital expenditures in the current quarter and was otherwise relatively flat year-over-year.

Our free cash flow per share was $1.37 in the fiscal third quarter compared to $0.46 in the same period a year ago. Excluding the tax payment deferral, our free cash flow per share in this year's third quarter decreased by $0.09 or 6.2% from $1.46. Our effective tax rate for the fiscal third quarter was a negative 34.2% on a GAAP basis due to a benefit from the $6.4 million release of uncertain tax position reserves upon exploration from the acquisitions of TRUAire and Falcon several years ago.

Our adjusted tax rate was 28.3%, slightly higher than our normal range due to several items that vary quarter-to-quarter and due to the lower seasonal profitability in this quarter. We currently forecast our fiscal year 2026 GAAP tax rate to be approximately 23% or 26% adjusted, which varies quarter-to-quarter due to specific items.

Year-to-date, these rates have been 21.4% and 25.8%, respectively. As Joe mentioned, our amortization of intangible assets will increase significantly due to the recent acquisitions, particularly MARS Parts. Based on preliminary purchase price allocation accounting, we expect that annualized amortization of intangible assets will be approximately $63 million moving forward.

As I mentioned, we funded this year's acquisitions using cash on hand from the September 2024 follow-on equity offering, revolver borrowings and our new term loan A. At quarter end, we had $200 million outstanding on our revolver borrowings and the $600 million term loan A. As a result of this debt, our third quarter fiscal 2026 had interest of $78 million as compared to interest income of $2 million in the same quarter last year.

Including cash on hand, our net debt for covenant calculation purposes was $764 million, resulting in a net debt-to-EBITDA leverage ratio of 2.3x. This results in an interest rate of SOFR plus 200 basis points. As a reminder, we executed an interest rate swap of SOFR at a rate of 3.416% for 3 years to hedge a portion of our Term Loan A debt.

We maintain a strong balance sheet with a net debt-to-EBITDA ratio well within our target range of 1x to 3x, ensuring ample liquidity to continue to support growth initiatives and all other elements of our capital allocation strategy. Underscoring this point and with the support of our robust free cash flow and healthy balance sheet, during the quarter, we opportunistically repurchased approximately $70 million of our stock in the open market representing 283,000 shares at an average price of $246 per share, reiterating our confidence in our ability to create long-term shareholder value.

We continue to monitor tariff developments and their impact on our businesses. While our Specialized Solutions in Engineered Building Solutions segments face minimal direct exposure both have experienced indirect effects from broader economic consequences of tariff policies. Each of these segments sources a limited number of inputs internationally, but even certain U.S. sourced materials have seen significant cost increases.

The SRS segment has negligible sales in high tariff markets, though those could be at risk due to geopolitical volatility. Within EBS, we factor higher cost in the bids for new projects. Within Contractor Solutions, we're continuing to reduce third-party manufacturing in China, a strategy that's been underway for several years. By the end of fiscal 2026, we expect China to represent 10% of the segment's cost of goods sold.

Vietnam, primarily through our owned facility, will be in the low 30s as a percentage of Contractor Solutions cost of goods sold. Other Asian markets will contribute about 15% within the segment, while the remaining cost of goods sold is primarily in the United States. After product harmonization is complete, the MARS Parts acquisition is not expected to significantly alter this geographic mix.

With that, I'll now turn the call back to Joe for his closing remarks.

Thank you, James. In the fiscal third quarter of 2026, we delivered record third quarter revenue and adjusted EBITDA, propelled by 20% revenue growth from recent acquisitions that have significantly outperformed our acquisition models. We remain highly confident in our business and our ability to deliver above-market profitable growth, thereby enhancing long-term shareholder value.

We invested approximately $1 billion in acquisitions over the last year demonstrating our confidence in the long-term strength of the residential HVAC/R, plumbing and electrical end markets. Our strong balance sheet will allow our outstanding team to continue to execute on all elements of our capital allocation strategy across market cycles, guided by our disciplined risk-adjusted returns analysis.

We are proud of our demonstrated 10-year track record of creating sustainable shareholder value through prudent capital management and operational excellence. One of our guiding principles is to treat our team members well, and we remain committed to prioritizing the safety and health of our employees. I'm very pleased to report that in calendar year 2025, we achieved a total reportable incident rate, or TRIR, of 1.1, an improvement from 1.2 in 2024, even as we acquired new businesses and integrated them into our environmental, health and safety programs.

This accomplishment reflects our ongoing dedication to maintaining a consistently safe work environment in our legacy businesses and enhancing the work environment of the companies we acquire. And I want to thank all of the CSW team members for their role in achieving this important milestone. We recently completed our biannual employee engagement survey. This is a very broad-based survey that we believe provides instructive data, and we are pleased to report that we had an impressive participation rate of 90% compared to 85% two years ago.

We invest significant time analyzing these results and applying our learnings to enhance our employee value proposition. Having such a high level of employee participation is encouraging and it speaks to the strong employee-centric culture that we have at CSW.

As always, to close my prepared remarks, I want to thank the CSW Industrials team who collectively own approximately 4% of the company through our employee stock ownership plan as well as all of our shareholders for your continued interest in and support of CSW Industrials.

With that, Rob, we're ready to take questions.

[Operator Instructions] Our first question comes from Jon Tanwanteng with CJS Securities.

My first one is, I think you mentioned you saw encouraging orders in January, especially relative to Q3. I was wondering if you could maybe quantify in terms of orders and organic growth so far? And I know it's early, not your biggest month, but maybe a little more color just on the improvement degree from the last quarter would be helpful?

Yes, Jon, thanks for being on as always. It's James. Appreciate that. Yes, we exited December with a good order rate. October and November stayed relatively soft as we expected and kind of previewed as we saw destocking continue with our customers. We were encouraged by December, the exit rate was good.

Hard to quantify January yet, but Jeff certainly tells us that orders had been very good. We're pleased with that. We also referenced, Joe did in his prepared remarks, very detailed conversations with all of our top customers, very thorough report, real-time even this week on their destocking plans. We're encouraged by that. And obviously, that shows up in orders.

Some are still working through it this quarter. I think a couple of the OEMs that have already reported said that they see this quarter, people still working through it. So hard to quantify that from an organic growth rate. I don't think we'd get ahead of ourselves yet. But Jeff would certainly tell you that we're very encouraged by the order rates in January. We mentioned it very intentionally.

I'll say we saw the same in the Solutions segment. Mark has seen similar order pace as we enter the beginning of the calendar year. So we'll report fully on the quarter, things will really get going in February and March, of course, but very pleased with what we're seeing so far and it gives us encouragement and as Joe said, cautious optimism leading into the busy season.

Got it. That's helpful. And then if you could give us a little more color on your recent acquisitions and what their expected seasonality is, I think that would be helpful just because I think it's been a little bit increased just in terms of seasonality basis with all the new businesses you've put in there.

Maybe more specific, what are you expecting from the contribution in fiscal Q4 from acquisitions? You mentioned $47 million or $45 million in Q3. What does that turn into just based on historical parameters?

Yes, Jon, great question. We've had for just a couple of months now. So we're getting our arms around that fully. Aspen now will have it since May 1, so we're -- this will be our first January, February, March quarter. We talked about Aspen was down a bit year-over-year just because last year was such a buildup like the OEM saw with the equipment change.

We've said generally that our legacy Contractor Solutions business is kind of a 50% to 55% stronger 2 fiscal quarters, 45%, 50% in the others. Aspen and MARS are probably more like 60-40. Breaking down quarter-by-quarter is still a little early for us to get to and especially going through the first year with them, going through the disruption we've had in the market the last few quarters, of course, with the destocking.

So I think as we get through this quarter, we'll have a better sense. But they do exaggerate the seasonality, magnify that a little bit more because they're more repair focused. And obviously, folks are not turning their air conditioners on, certainly not with the cold snap we've had lately. But folks aren't turning their air conditioners on in December, January, February in most places.

So you don't know that you have a repair. If someone buys a new house, they may go ahead and replace the system. So that's why that business tends to hold up a little better through the seasonality. But they're going to exaggerate things somewhat. But I would ask that you kind of give us this quarter to get a better sense of what that looks like under our ownership. And as we go along throughout the fiscal year, we'll get a better and better look each quarter and how each of those perform.

Our next question comes from Susan Maklari with Goldman Sachs.

This is [ Charles Grom ] for Susan. I guess, first, I would love to ask about understanding your optimism for more normalized order rates coming through in HVAC? Can you maybe help us understand what the organic growth for this business could look like in calendar '26 over the next few quarters? If the housing market remains weak, what is the confidence in your ability to return to your targeted mid- to high single-digit growth over time?

Yes, Charles, this is James. I wish we had a real precise answer. As we said, it's a little early. I'll say a couple of things. We've historically had a mid- to high single-digit organic growth rate within Contractor Solutions and that's through the cycles. Obviously, this last year, we did not have that.

We certainly had years when that exceeds 10%, and you get back to that average. So I think as we go through the next couple of years, we expect that type of average to return. What quarter we start seeing that? We're not sure yet. We're certainly, as we said, encouraged by the order volume we've seen in December and January. We're most encouraged by the anecdotal evidence we have in talking directly to our customers and where their inventory levels are in terms of parts and accessories, which could be different from OEM inventory.

So we're encouraged by that. I would also say, as we go through the year, we're going to have easier comps. Last year's fiscal fourth quarter was up about 8%. And you kind of had a makeup over the fiscal third quarter. So the quarter we just started January, February, March was pretty good last year because people waited to stock up because they were buying the OEM equipment in the November, December months and then they stocked up on parts and accessories down in March last year.

So this quarter's comps are a little harder. But as we go through the year, obviously, the comps get a little bit easier. So I think when we talk to you in May, we'll have a much better sense than with a couple of months behind us of order order volume, you'll obviously hear a lot more from our customers, those public and the ones that we talk to that we're happy to talk about in terms of what their inventory levels look like.

So when we return to that, we'll see, but we've got a long history in this end market and in this business that tells us that a mid- to high single-digit organic growth rate is what we expect in the long term.

Okay. That's very helpful color. Second, I'd just like to touch on pricing. Can you provide the latest on what you're seeing on the Contractor Solutions side? And considering the moving pieces in terms of tariffs and other input costs, how do you approach the decision to maybe get more pricing over time in this business this year?

We've been reactionary in terms of tariffs, obviously. The last couple of years, we've taken our annual price increase in January, and that's worked its way through the system and been well received. I think as we always say, that gets passed all the way through the system, where we are in the value chain is very important. People pass that through as well. .

As you know, we took a bit of a midyear price increase to cover our tariffs, and that's really starting to get fully impacted now. The quarter we just started. It takes a little while to get through the system. So as long as tariffs remain steady for the most part, we think we've covered that now. You've seen some -- obviously, some price increases on the metals side. Some of that starts to impact this.

Aluminum affects us in EBS, even something like silver can have a bit of an impact for us. We're watching that closely. It's not a big impact yet, but we're watching things like that as commodity prices continue to go up. But we think what we've done in terms of pricing is what we need, but we have never been shy about taking price increases and pushing those through if we see the costs moving up and we're very transparent with that with our customers, that gets passed through the system, like I said.

We don't do that early or until we need to. Last year, as you recall, tariffs kind of spiked, came back down, we waited, and I think our patience was rewarded with customer response on how we handle that in terms of the industry. And so we will not be hesitant to take pricing as we need to.

Last fall, we took price increases within Specialized Reliability Solutions and pass that through the system. Within EBS, that's a project-by-project basis. So we're not going to let the shareholders bear the brunt of cost increases. We will continue to pass that through as warranted.

No, that makes sense. And if I can squeeze one last question in, maybe for James. Can you provide an update on your capital allocation priorities from here? Obviously, you're sitting near the midpoint of your targeted leverage range -- and are you willing to do more acquisition in the near term? And what is the pipeline for M&A that you're seeing today?

Yes. I'll pass some of this over to Joe, Charles, if you don't mind, but we will certainly work to pay down our debt, but we're sitting at a 2.3x on the covenant. We've been there before after the TRUaire acquisition. We were right on that same number, in fact, and work that down over time. We've got strong cash flow.

As we get into the next couple of quarters, these acquisitions, the power is really going to show the cash flow that they generate similar to our legacy business. So we're going to have the opportunity to do that. That leverage ratio obviously moved up from the acquisitions, but we also repurchased $70 million of stock in the quarter. We've got certain levels at which we do that, and that got triggered, and we did that. And we think having an average share price of $246 in that repurchase program last quarter is going to look very attractive long term and create a lot of value for the shareholders.

So we made a very intentional decision to take on a little more leverage to do that. But we're very comfortable at 2.3. We see that coming down over time from the results of our cash flow. And I'll let Joe talk about kind of our thoughts on M&A right now.

Thank you, James. I think as James said, I mean our free cash flow and our cash flow is going to be very impressive as we move through the year with these acquisitions. We do have a period of digestion here. I've been asked about future acquisitions and how long will it take to be able to be in a position to do another acquisition. And I've said that will be quarters, not years.

The integration is going exceedingly well. We are very, very pleased with the team's performance on that. And therefore, we're hitting all of our targets or exceeding. And so we're very pleased with that. And so again, that would be quarters of digestion, not years. And -- but that also gives us quarters to pay down debt. And we will do that with our capital in the meantime. And we are disciplined. We are very rigorous in our analysis and our thinking about returns on those investments.

And so -- but we're in a bit of an execution mode right this moment. But again, that will last quarters, not years. And I think all levers are available to us, and we're just going to be very mindful of how we move forward. and continue our track record of carefully allocating capital to the highest risk-adjusted return opportunity, and that's paid off for us so far.

Our next question comes from Natalia Bak with Citi.

I lost connection for a bit, so I'm not sure if this was asked, but I'll just ask it anyway. Just curious that given the colder weather and snow we've recently seen, have you observed any like near-term pickup in replacement activity or pull forward within the Contractor Solutions segment in this quarter?

Yes, I don't think we see much impact there necessarily. We've got less exposure on the heating side, so to speak. Obviously, there's some there, but it's more on the air conditioning side. You tend to have something like this every year or 2, so it's not terribly unusual in terms of changing patterns.

I think Natalia all I would say so far, obviously, a look back will be valuable, a few weeks or a couple of months from now. But we talked about the order volume has been at a very encouraging pace as we exited December and January seeing very nice orders in the Contractor Solutions business as well.

The only direct impact we've seen so far is we lost a couple of shipping days at some of our facilities, we'll make that up in the quarter. So we're not concerned about that. So we don't see any negative impact. In terms of tailwind, I think Tom will tell. But we see more of that in the summer when it gets exceptionally hot on the air conditioning side than in the winter when you get it exceptionally cold.

Got it. That's helpful color. And then just on the acquisition front. I think earlier you mentioned that you expect to exceed the initial cost synergies that you outlined. So I'm just curious like what inning are you in or the margin maturity curve today versus when you initially close on acquisitions? And how much additional cost synergies do you expect to now realize from them?

Yes. This is James, Natalia. Thanks for that. Yes, Joe did mention that, and we're really pleased that we see in excess of $10 million. Just a couple of months in, I don't think we're ready to quantify that quite yet. We've got some internal goals. We always had internal goals that exceeded $10 million, but now we feel comfortable saying that we're going to exceed them.

In terms of innings, I'd say on the margin side, you're in the first couple of innings. We said that's a 12-month target, we're 2.5 months into the acquisitions and they'd be in the second or third inning, and it's a seasonally low quarter. So you can only do so much from a margin perspective. But we remain on track and are very comfortable with continuing to talk about a 30% margin.

I'll say this, margins has been fully integrated. So being able to directly pick out a margin is going to get difficult for us, but we're tracking it awfully well. In terms of the synergies, I'd say we're more in the middle innings because we've actioned these synergies. A lot of it was folks that didn't come with the acquisition day 1, we've wound down a facility, we have another -- the rent coming off of that facility as we go along.

So we have actioned the vast majority of the $10 million and now even beyond $10 million of synergies but it takes the 12 months to really see that roll through. Obviously, that's an annualized type number. So I think we're in the middle innings in terms of actioning, but you're still similarly in the first couple of innings in terms of pro rata and what we're seeing so far given that's a 12-month goal.

Okay. That's helpful. And then just 1 last quick question. Just switching over to SRS. Adjusted EBITDA margin contracted in SRS. And I believe last quarter, you mentioned that you implemented a price increase. So how much of the margin pressure is due to the timing lag in pricing versus structurally higher material costs? And when do you expect pricing to fully offset the material inflation in the segment?

Yes. I think that we've seen the price increase come through now, Natalia. So that offset the tariffs. I think were there. That was done prior to last quarter end. So I feel comfortable with that part. The biggest change this quarter was mix. When the energy markets are some of our more attractive products, and they were down, you obviously see less drilling activity and some of those things.

So as the energy markets are softer and our product mix shifts away from that, you're going to see potentially lower margins. I'll reiterate, though, that we mentioned in my remarks that the acquisitions are going to be favorable to us, as we kind of get through a year of having those. We've got synergy and margin goals with the acquisitions. While small, they're going to be important to us.

They also to continue to diversify our end markets, more in the food and beverage market, for example, which is attractive; more in the horizontal drilling market, infrastructure continues to be attractive, so we feel good about their contributions. And then we mentioned we took the opportunity, and we really give Mark a lot of credit for the proactivity here. We took some restructuring activity earlier this month, both with shutting down the headquarters facility the acquisitions, which was part of the plan, but we also saw some administrative and other roles that we could reduce and combine and give others more responsibility at our legacy facility here just outside of Dallas.

We'll have some charges here in the fourth quarter that we'll quantify on the earnings call. Those will all then be a tailwind for us as we enter the new fiscal year, April 1. So when we look at a margin in the mid-teens the last couple of quarters with the goal of 20% sustainable, Mark, in working with the team looked at that and said, we've got to get to the and taking these acquisitions into effect with these restructuring activities gives us better sight to that goal.

Our next question comes from Tomo Sano with JPMorgan.

Congrats on TRIR by the way. And my first question is regarding margins. How persistent do you expect the one-off costs such as integration, inventory write-downs recognized in this quarter to be going forward? Like when do you anticipate margin recovery once these costs subside, please?

Yes, Tomo, this is James. Thanks. I really appreciate you mentioned the TRIR. We know how important it is to you, and it's the highest important to us. So seeing that come down this year. was really an exciting achievement to be able to report.

In terms of margins on Contractor Solutions, we'll continue to have some integration expenses. Transaction expenses will be behind us. Those were kind of because of the acquisitions of MARS, Hydratec and Proaction during the quarter. So those were specific expenses related to that.

Not only the acquisition expenses themselves, the pro formas that we put out a couple of weeks ago were at the corporate level. So we have those costs. I think those are for the most part behind us. We'll continue to have some integration expenses. The ERP integration just went live 2.5 weeks ago at MARS. So we'll still have some integration expenses. We will quantify and adjust that out. But I think as we get through this quarter, most of that should be behind us.

We still have to do the ERP implementation for Aspen; however, that will be coming as we go throughout the year. So we'll have some integration expenses, but we'll be sure to identify that for you, so that's why we continue to point to an adjusted EBITDA margin as being the best comparative tool, and we feel good about using that.

Was there another part to the question? Sorry if I missed that. The other thing you mentioned, I apologize, the inventory write-off that we had, that was onetime in nature, that was related to a specific distribution relationship that terminated. We've since replaced that product in our product line. The customers have received that very well in the last few weeks since we were able to start marketing that. But that specific call out was onetime in nature.

And my follow-up is EBS business. We didn't touch that much in the Q&A session. So could you update the color of the market outlook as well as your growth strategies, margin improvement initiatives for EBS business, please? Because you got the $1 billion M&A on basically CS business, SRS business, but not for EBS business. So could you talk about organic and inorganic strategies and margins for this business, please?

Sure, Tomo. This is Joe. I would say EBS has always been our most cyclical business and the commercial construction market continues to be really pretty tough out there. We've been very pleased with the performance of our team in bucking that trend and showing some growth various quarters and continuing to serve our customers really, really well.

I would say that the opportunity for organic growth is still out there. One of the great things about this business is it's small, and you win a project or 2, and it really makes a difference. And we are very pleased with the reception in the marketplace of some of our new product development work, especially in EBS, where we have brought some new products to market that are being spec-ed into projects.

And we would say that, that is a really good opportunity for us to see organic growth. But the market is tough. We continue to point to the Toronto market that really blew up over the last couple of years, added significant chunk to our backlog, that is now being revenued. It's not being replaced in the backlog. The new starts for high-rise residential in Canada has changed dramatically, but we're not seeing cancellations out of the backlog, we're not losing any business there.

And so those projects are revenuing, and so we're benefiting from that as well. So new product developments probably our best opportunity for organic growth in this tough market. But I think one of the things that we see with EBS is we are really well positioned for when the market does come back. We are serving multiple property types.

We have focused highly on institutional, hospitals, things like that, that are high end and kind of set the standard for other types of construction within that market. And so we think there is organic growth opportunity there for us. If the market would come back, I think you'd really see a nice uptick there.

Our next question comes from John Tanwanteng with CJS Securities.

I was wondering if you could just give your high-level thoughts on what you think housing demand and home improvement demand looks like heading into calendar '26? And beyond that, if there's any specific puts and takes that we should be applying on top of that like lapping the refrigerant change or others like that?

Yes, Jon, it's James. We're all hopeful, of course, that housing activity picks up. New housing activity continues to stay pretty soft. It looks like if you look at permit numbers, it stayed soft. Existing home sales, we've seen some green shoots there, it looks. Like Mortgage rates have dipped now and then and you've seen the pickup on that. And as we talked about on the last quarterly call, a good number of existing home sales come with replacement of units, so that would be a good thing. .

I think we'll see in the first couple of months here, if mortgage rates start to move, what consumer confidence does in terms of mortgage rates, and there's a lot of pent-up inventory it sure seems, so people willing to give up the lower mortgage rates to move has been challenging.

We would say that, obviously, the order rates we've seen this quarter so far could give us a little bit of positive signs there. It's probably a little bit early. Another thing I would mention is someone else mentioned on the call earlier this week in the industry that there's been a lot of repair business last year, and we think that continues this year. We're not sure when that shifts back obviously.

And obviously, now with the diversification of MARS and Aspen, we've got good exposure, a much better balance between our repair and replace, but eventually those repair jobs turn into a replacement. They may have buy you a couple of years or a few years, but eventually, those units do need to be replaced. But there's no doubt that housing activity is key and I think you've hit right on it.

And when Charles asked earlier about organic growth rates, if you can tell us what housing is going to do, we'll have a much better sense of that. And as our teams right now are going through the budget process. Our fiscal year being April 1. We're going through the intense budget process right now. obviously, housing activities to be key to that.

So we're watching the same that you are. We watch the weekly permits. We watch the weekly inventory numbers, the weekly mortgage rates, and that informs us on what we think we could expect and we hope to see some continued optimism in the next couple of months.

Got it. And then 2 quick timing questions. You mentioned higher margin backlog flowing through in EBS. When do you expect that to hit, number one? And then number two, you mentioned trying to achieve the 20% margin consistently in SRS. What's the time line or your expected schedule to arrive there?

Yes. On EBS, the better backlog is coming over the last couple of quarters, and those usually have anywhere from 16 to 18 months turn around. So I think we'll start seeing that. We still have some of the lower margin projects in the backlog. So that offsets that. So John, I think we'd like to tell you that as we exit the fiscal year next year, you're really getting a lot closer to that goal that we've put out there. But again, we're going through the budget as we speak, so if you can let me kind of put a pin in that till May, we'll give you a little better sense of expectations as we go through the budgeting process I just mentioned. .

In terms of SRS, I kind of give you the same answer, but they're in that 16%, 17% range a little more consistently recently and with the acquisitions coming in and with the restructuring that we've taken once we adjust that out during the fourth quarter, I think you're closer to seeing that 20% sustainably in the next few quarters.

Great. And then final one for me. Just a little more detail on the 2 smaller tuck-ins you did. Any mention on revenue and kind of what the margin was there as well as the growth potential?

Yes, Jon, I would say both should be accretive to the margin profile of that segment. It's one of the reasons we did it. It gave us the benefit of both diversifying end markets and being accretive to our margin profile. So that's good. Growth, we expect to be able, again, to take their momentum and also add our sales force to that, our distribution channels.

They've opened up a couple of new end markets for us, namely would be food, beverage where we've seen really nice growth already and then also agriculture, which is something we have not done any of. And so we've got high hopes for that. That's a GDP-plus business. And so growth of mid-single digits organically would be a good rate for that business.

And we think we can do that and more with these acquisitions, providing some tailwind. But the margin accretion is also really important to us on that to show over the next few quarters.

And Jon, in terms of revenue pacing, we said we had $2.3 million of contribution in the quarter from those. That was just a couple of months' worth. It's also for something like horizontal drilling, especially a bit of the slow season. So I think that kind of run rate, $1 million a month-or-so is what you were seeing, that's a little on the lowering because of seasonality.

So I think you could see 15ish-percent-or-so revenue opportunity accretion from that. But we'll give you a little more detail as we get to a full quarter of owning these businesses and what that looks like. But the team is really excited and Mark's already reported some good opportunities in those businesses now that we own them in terms of sales.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Joe Armes for closing comments.

Thank you, Rob, and thank you, everyone, for joining us for this quarterly report, and we appreciate your support and interest, and we look forward to talking to you again in May. Thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Greetings, and welcome to the CSW Industrials Fiscal 2026 Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alexa Huerta, VP of Investor Relations and Treasurer. Thank you, Alexa. You may begin.

Thank you, Alicia. Good morning, everyone, and welcome to the CSW Industrials Fiscal 2026 Second Quarter Earnings Call. Joining me today on the call is Joseph Armes, Chairman, Chief Executive Officer and President of CSW Industrials; and James Perry, Executive Vice President and Chief Financial Officer.

We issued our earnings release, updated Investor Relations presentation and quarterly report on Form 10-Q prior to the markets opening today, all of which are available on the Investors portion of our website at www.cswindustrials.com. This call is being webcast and information on accessing the replay is included in the earnings release.

During this call, we will make forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results could materially differ because of factors discussed today in our earnings release, in the comments made during this call as well as the risk factors identified in our annual report on Form 10-K and other filings with the SEC. We do not undertake any duty to update any forward-looking statements. I will now turn the call over to Joe.

Thank you, Alexa, and good morning, everyone. It is my pleasure to report that once again, our team has delivered record quarterly results for revenue, adjusted EBITDA, adjusted net income and adjusted earnings per diluted share. Before I turn the call over to James to provide further details on our results and the performance of each of our business segments, I'd like to brag on and thank the entire CSW team for working so well together to build what has become a truly great company.

Diligence and perseverance have defined our 10 years as an independent public company and the financial results we have delivered, the value we have created during that time has been impressive. Our success is directly attributable to our disciplined deployment of capital into innovative businesses and product lines that when combined with operational excellence under our ownership, grow faster than the overall end market. Despite headwinds and broad economic uncertainty during the quarter, especially in the residential HVAC/R end market, the CSW team delivered strong financial results.

Our resilient balance sheet, access to capital and disciplined approach to allocating capital have continued to fuel growth opportunities, most recently evidenced by our definitive agreement to acquire Mars Parts as previously announced. Despite short-term demand fluctuations and market volatility, we have been willing and able to execute on 2 highly accretive synergistic acquisitions in the last 12 months. We expect to close on Mars Parts, our largest acquisition to date very soon as we continue to maintain a long-term perspective, investing in growth opportunities for the future.

In light of the compelling growth and value creation opportunity ahead of us in our second decade, I have communicated to our Board my intentions to continue serving as the company's CEO for the next several years. I remain passionate about the business itself and about the opportunity that we can provide for all of our team members to participate in the success that they help create. I firmly believe that we have a partnership between capital and labor that meaningfully enhances the likelihood of sustainable long-term success, and I'm honored to continue serving our company in this role, and I eagerly look forward to the success that we can achieve together in the decade ahead. At this time, I'll turn the call over to James for a closer look at our results. And after that, I will return and conclude our prepared remarks.

Thank you, Joe. Good morning, everyone. As Joe mentioned, during the second fiscal quarter of 2026, we delivered record revenue of $277 million, representing growth of 22% and in line with Street expectations. The revenue growth was primarily inorganic, resulting from the acquisitions of Aspen Manufacturing, PSP Products and PF Waterworks, all of which we completed since August of 2024. This acquisition growth was offset by a 5.6% reduction in consolidated organic revenue. The organic decline was concentrated in our Contractor Solutions segment, as I will discuss in more detail later in my remarks.

We experienced 20% growth in adjusted consolidated EBITDA with a slight contraction in EBITDA margin. Adjusted EPS in the fiscal first quarter of $2.96 was ahead of Street expectations and was 15.2% higher than the same quarter a year ago and was driven by revenue growth and came despite the current quarter having a higher average share count resulting from last fall's follow-on equity offering as well as some compression in the margins. The second quarter adjustment to EPS included acquisition transaction expenses of $1.8 million or $0.08 per share as well as the amortization of assets from acquisitions, the new adjusted EPS methodology we introduced last quarter.

Our consolidated revenue during the fiscal second quarter of 2026 increased by a net of $49 million or 22% when compared to the prior year period. Our revenue growth totaling $62 million was primarily attributed to the aforementioned acquisitions. This inorganic growth was somewhat offset by a reduction in organic volumes in Contractor Solutions, which was impacted by the broader market disruptions seen across the U.S. residential, HVACR end market this summer. Consolidated gross profit in the fiscal second quarter was $119 million, representing 15% growth over the prior year period. Our gross profit margin experienced a 260 basis point reduction to 43% compared to 45.6% in the prior year period as all 3 segments had margin contraction.

Our consolidated adjusted EBITDA during the fiscal second quarter increased by $12 million to a quarterly record of $73 million or 20% growth when compared to the prior year period and ahead of Street expectations. Our adjusted EBITDA margin declined by 40 basis points to 26.3% compared to 26.7% in the prior year quarter. The slight decrease was a result of the integration of the Aspen manufacturing acquisition into our results for the full quarter as well as input cost increases arising from the direct and indirect impact of tariffs. We were able to offset most of these cost impacts with pricing actions, lower ocean freight expenses and leveraging our operating expenses. Adjusted net income attributable to CSW in the quarter was a quarterly record of $50 million with $2.96 of adjusted earnings per diluted share compared to $41 million or $2.57, respectively, in the prior year period, representing 21.8% growth in adjusted net income and 15.2% growth in adjusted EPS.

During the second quarter, our Contractor Solutions segment with $208 million in revenue, accounted for 74% of our consolidated revenue and delivered $49.6 million or 31.2% growth when compared to the prior quarter. Of the revenue growth in the quarter, $61.9 million or 39% came from our recent acquisitions, which was offset by a decline of $12.3 million or 7.7% in organic revenue in the quarter from lower volume in the challenging market environment.

The organic revenue decline in the second quarter was due in part to continued soft housing activity in the quarter and the shift to repair from replacement of HVAC units by many consumers, which is being primarily driven by the higher cost of new units with the new refrigerant standards as well as the impact from tariffs. We saw another quarter with lower GRD sales, specifically for the residential end market as these products are more heavily tied to new residential construction than the rest of our product offering. Several of our customers reported destocking of their HVAC/R inventory in the second fiscal quarter. When that dynamic occurs, we see lower order volumes, which can lead to unfavorable comparisons to certain sales metrics in the industry. As they restock, our growth rate could be higher than our customers report due to timing differences.

Growth through acquisitions comprises an increasingly meaningful part of our Contractor Solutions business. Aspen Manufacturing benefits from the trend of consumers shifting to the repair of HVAC units from replacement of their units this summer. In part as a result of this, our organic growth rate, including the pre-acquisition revenue effect from recent acquisitions, increased by 2.8% in the quarter, which is a strong accomplishment in the face of the aforementioned major residential HVACR market headwinds. The pending acquisition of Mars Parks will further enhance our product offering to satisfy HVACR repair demand. We remain focused on the pre-acquisition revenue effect because it assumes recent acquisitions were owned by CSW during the same period in the prior year and highlights the organic growth potential and performance of our acquisitions under our ownership.

Our two most recent acquisitions, which make up most of the pre-acquisition revenue effect on organic revenue in the quarter, Aspen Manufacturing and PF Waterworks, have delivered impressive performance under our ownership and had a weighted average growth rate of over 40% during the quarter. PF Waterworks becomes organic in November and Aspen will not be organic until May of 2026. The PSP acquisition was considered as organic beginning in August of this year. We generally expect mid- to high single-digit organic growth through the cycle in our Contractor Solutions segment, but we always say that we will see volatility in this figure from quarter-to-quarter. We are not recession-proof, but we have been recession-resistant over time due to the essential nature of the products we sell. Because of the current volatility and uncertainty in the HVACR end market, we are not able to give an updated view of organic growth for the rest of this fiscal year.

As we enter calendar 2026, we expect to have a better view of next year's growth potential and plan to provide our perspective on our next quarter's earnings call. Adjusted EBITDA for the Contractor Solutions segment was $68 million or 32.4% of revenue compared to $54 million or 33.8% of revenue in the prior year period. The decline in EBITDA margin came from lower gross margins due to the expected and previously reported dilutive impact from the Aspen acquisition, unfavorable volume leverage and sales mix, partially offset by pricing actions and lower ocean freight costs.

Our Specialized Reliability Solutions segment revenue increased slightly to $39 million as compared to revenue reported in the prior period. Revenue increased in the general industrial and mining end markets and declined in the energy and rail transportation end markets. The segment EBITDA of $6.4 million in the second quarter represented a decline of 9.7% from $7.1 million in the prior year period. The EBITDA margin contracted 190 basis points to 16.5% in the current period. driven by a decrease in gross margins due to an escalation in material costs to tariffs and higher freight costs to support international shipment growth.

As we mentioned on our last earnings call, we announced a price increase in this segment during the second fiscal quarter that went into effect late in the quarter to protect our margin dollars from recent cost increases in certain commodities. We remain committed to passing along cost increases as warranted.

Our Engineered Building Solutions segment decreased by 2% to $31.9 million compared to $32.7 million in the prior year period. Segment EBITDA was 20% lower than the prior year period at $5.2 million or a 16.4% EBITDA margin compared to $6.6 million and 20.1% in the prior year period, respectively. The contraction in EBITDA margin in the current period was primarily due to materials cost increases indirectly related to tariffs and strategic pricing to address competitive pressures. Our book-to-bill ratio for the trailing 8 quarters dipped slightly below 1:1 and is now 0.9:1. We were pleased with the trend and quality of the mix in the EBS backlog, which has continued to add more business from our higher-margin products within the segment, and we expect to recognize this benefit in future quarters. We have been increasing our pricing on products and projects to offset impacts from tariffs as appropriate and further price increases are forthcoming.

Transitioning to our cash flow. We reported second quarter cash flow from operations of $61.8 million, down 8% compared to $67.4 million in the same quarter last year. However, the year-over-year variance was primarily attributable to a $16.8 million tax payment deferral in the prior year period under a temporary federal tax relief. Excluding the $16.8 million tax payment deferral, the second quarter adjusted cash flows from operations increased by $11.2 million or 22.2%. Our free cash flow, defined as cash flow from operations minus capital expenditures, was $58.7 million in the fiscal second quarter as compared to $61.9 million in the same period a year ago. The free cash flow decrease from the prior year period was also impacted by the $16.8 million tax payment deferral in the second quarter of fiscal 2025. Excluding this tax payment deferral, the second quarter free cash flow increased by $13.6 million or 30.2%, primarily driven by increased profitability and lower capital expenditures.

Our free cash flow per share of $3.49 in the fiscal second quarter compared to $3.88 in the same period a year ago, lower also due to the aforementioned tax payment deferral from the prior year period as well as the higher share count in this year's quarter resulting from the follow-on equity offering last September. Excluding the tax payment deferral, our free cash flow per share in this year's second quarter increased by $0.66 or 23.2% from $2.83, primarily driven by increased profit and lower capital expenditures, partially offset by the higher share count. Our effective tax rate for the fiscal second quarter was 26.4% on a GAAP basis within our normal range.

As a reminder, the third quarter GAAP tax rate may be lower than average due to a potential $6.3 million release of uncertain tax position reserves upon statute expiration of several pre-acquisition tax returns for the acquisitions of TRUaire and Falcon several years ago. We expect Aspen Manufacturing's fiscal 2026 revenue to grow mid-teens of their trailing 12-month revenue of $125 million through our fiscal 2025 fiscal year-end. This is a bit higher than our guidance on last quarter's call due to the strong performance since the acquisition, but we expect that the growth will begin to normalize in the second half of 2026 as the refrigerant transition comes to a close. As a reminder, Aspen will only be included in our results for the 11 months during fiscal year 2026 due to the May 1 acquisition date. As a reminder, we funded the Aspen acquisition on May 1 by borrowing $135 million from our revolving line of credit and using the remainder of our cash on hand from last September's follow-on equity offering.

By the end of the second quarter, we had already paid down $75 million of borrowings and ended the quarter with $60 million outstanding on our revolver due to strong operating cash flows. Combined with our cash on hand at quarter end, our net debt for revolving credit agreement covenant purposes was just $32 million, resulting in a net debt-to-EBITDA leverage ratio of 0.12x. We remain proud of our strong balance sheet with this low net debt-to-EBITDA ratio, providing us with ample liquidity to pursue growth initiatives, including the pending Mars Parts acquisition. During the quarter, we repurchased over $18 million of our stock in the open market, reflecting our belief in the long-term value creation that our growth initiatives will have. We will continue to consider share repurchases with our strong free cash flow and balance sheet.

As we've discussed, on October 1, we announced a definitive agreement to acquire Mars Parts for $650 million in cash at closing with an additional $20 million of potential consideration based on revenue growth over the 12-month period after closing. This acquisition, which we expect to close in November of 2025, will expand our existing portfolio in the HVACR end market with the addition of motors, capacitors, other HVACR electrical components, equipment installation parts and other components used by the Pro trade for repairs and replacements. We anticipate funding the transaction with a combination of a syndicated Term Loan A and borrowings under our $700 million revolving credit facility. We expect our net leverage ratio as defined by our credit agreement to be approximately 2x at the time of closing. Following the closing of the acquisition, we will provide updated information pertaining to the final capital structure and this year's fiscal year's interest expense expectations.

We currently forecast our fiscal year 2026 GAAP tax rate to be approximately 23% or 26% adjusted, which may vary from quarter-to-quarter due to specific items. We continue to closely monitor the tariff environment and impact on our businesses. Our Specialized Reliability Solutions and Engineered Building Solutions segments have minimal direct impact from tariffs, but have been impacted indirectly as the follow-on economic impacts of aggressive tariff policy materialize. Each has a small number of inputs that are sourced overseas, but even U.S. sourced materials have seen related cost increases. The SRS segment has minimal sales in the countries with high tariffs, so those sales, while immaterial, could be at risk. Within EBS, we consider the increased expenses as we are bidding on new projects.

Within Contractor Solutions and excluding the impact of the pending Mars acquisition, we continue to move third-party manufacturing out of China. We've been doing this for a number of years, and we now expect that as we exit fiscal 2026, our cost of goods sold exposure to China within Contractor Solutions will be around 10% as these moves take time. Our exposure to Vietnam, which comes primarily through our owned facility there, will be in the low 30s as a percentage of Contractor Solutions cost of goods sold. Other Asian exposure is about 15% within the segment, and the rest of our cost of goods sold is primarily in the United States. The Mars Parts acquisition is not expected to materially change the geographic mix, especially once product harmonization between Mars Parts and our existing Contractor Solutions segment is complete. We undertook a number of pricing actions to offset the direct and impact -- indirect impact of tariffs.

In Contractor Solutions, most of the pricing actions had an effective date in June of 2025, which we believe covers most of the current tariff exposure, adjusting for changes in manufacturing location and pricing support from contract manufacturers. In SRS, we communicated our pricing actions to customers in mid-August that went into effect late in our second fiscal quarter. Within EBS, these pricing actions are taken on a project-by-project basis through bids and rebids.

As we've said before, our goal is to protect margin dollars. And as a result, these tariffs will cause margin compression in the near term. We will also assess the need to make further price adjustments as tariffs continue to remain somewhat fluid in certain countries. With that, I'll now turn the call back to Joe for his closing remarks.

Thank you, James. To summarize, during the fiscal second quarter of 2026, we delivered record quarterly results for revenue, adjusted EBITDA, adjusted net income and adjusted EPS. Our impressive 22% revenue growth was driven by our recent acquisitions, which have performed exceptionally well under our ownership, generating revenue growth well in excess of our acquisition models. Looking ahead to the fiscal full year of 2026, we will continue to focus on delivering sustainable growth that outpaces the end markets we serve regardless of short-term market fluctuations. We expect to experience consolidated revenue and adjusted EBITDA growth this fiscal year, along with consolidated EPS growth and stronger operating cash flow, recognizing the timing and end market conditions can create quarterly fluctuations.

I would like to briefly comment on the Mars Parts acquisition that we expect to close next month. This synergistic acquisition will expand our existing HVAC/R product portfolio with highly complementary offerings and enhance our customer value proposition in the HVAC/R end market. CSW is uniquely positioned to accelerate the growth of these products through our market knowledge, customer focus and investment in people, systems and processes. We believe that this important acquisition fits perfectly within our strategy to drive above-market profitable growth and enhance long-term shareholder value. Importantly, we remain fully committed to maintaining a strong balance sheet.

Mars Parts is also expected to meaningfully grow CSW's already strong free cash flow, which will allow us to continue to pursue growth opportunities while paying down the debt incurred to consummate this transaction. With the significant investment in recent acquisitions, including the pending Marks Parts transaction, we continue to demonstrate our full confidence in the long-term positive fundamentals of the residential HVAC/R, plumbing and electrical end markets. We have consistently and strategically positioned our balance sheet and our team to execute on all elements of our enduring capital allocation strategy through all market cycles, guided by our rigorous risk-adjusted returns analysis. Our recent actions serve to underscore this commitment as well as our long-term perspective on enhancing shareholder value.

On October 1, we celebrated our 10th anniversary as an independent public company. CSW Industrials now boasts a decade-long track record of demonstrated success, rooted in the strength of our culture, sound principles of capital allocation, the resilience of our end markets and the essential nature of our innovative products. While I am immensely proud of the results CSW has delivered and the value we have created for our shareholders over the last decade, I'm equally optimistic as I look forward to what we can accomplish in the years to come. I consider an honor and a privilege to continue in my role, providing continuity of leadership to our organization as we embark upon a new season of accelerated growth and capital stewardship.

As always, I want to close my prepared remarks by thanking the CSW Industrials team who collectively own 4% of our company through our employee stock ownership plan as well as to all of our shareholders for your continued interest in and support of CSW Industrials. With that, Alicia, we are now ready to take questions.

[Operator Instructions] Our first question comes from the line of John Tanwanteng with CJS Securities.

Congrats on a nice quarter, especially on the inorganic front. And Joe, I'm glad to hear he's going to be staying with us for a couple more years. My first question, if you could, was just help us understand the trailing revenue trends at Mars and if you saw a similar impact there. Was it more in line with the organic performance you saw in the quarter? Or is this more similar to Aspen? I think you called out in your comments that it was more of a repair business. I was wondering if you could help us understand how that business performed in the most recent data you have relative to the market trends we've been seeing.

Sure, John. I appreciate it. This is James. Thanks for being on, as always. Appreciate your support and good questions. Yes, Mars has seen general trends. I'd say it's a little more like our organic, but it's kind of between the two. Yes, they are a little more weighted towards repair. Aspen is primarily repair. Mars is weighted more towards repair, but it also goes into the replacement market. So it's kind of a blend. So it would really kind of be between our two numbers is what we've seen in the last few months, I'd say, as cleanly as anything.

Okay. Could you speak to the growth rate that they've seen over the last -- the trailing 12 months?

I don't want to get that specific quite yet. I'll say until they get into our system and we kind of conform things in the same way to report, I couldn't say much, but they have seen a bit of a tailwind from the repair business. We will say that year-over-year. But until we report things quite the same way, it'd be hard to get too specific yet. Once we get the transaction closed, we'll be able to provide a little more information as we conform everything to our system.

Okay. Fair enough. And then as we look forward, what are your expectations on the business from a growth and accretion perspective? And especially as you add your synergies, what are you expecting from that front? I think you had a target of getting that business to above 30% EBITDA margins. Help us understand what it takes to get there.

Yes, you're right. And we've said that Mars is a little over $200 million of revenue. Its margins right now are in the mid-20s. The synergies alone that we highlighted of $10 million, most of which will be front-end loaded in the first couple of quarters will get us right on top of that 30% number. So that will get us up into the $60-plus million of EBITDA, that kind of ballpark on a trailing 12 when we look back. And that 30%, keep in mind, is going to kind of be a run rate a year from now. It's not necessarily going to be a trailing number this time next year, but that will be the run rate. And then we've got opportunity above and beyond that.

The team is working hard on finding other cost opportunities, things like freight, those kind of things. Obviously, as we get it in our system, we fully expect to have some revenue upside as more and more of our customers, the feedback we've gotten has been very positive with our ownership of Mars Parts and their likelihood to move more business over to us. That's not factored into that $10 million of synergies. So our first goal is to get to 30% run rate kind of this time next year, right after we -- on the anniversary of closing. And then I think we have opportunity to get it even closer to our historical Contractor Solutions margins as we bring it under our umbrella, John.

And John, this is Joe. Just to reiterate what James said. In my script, I said this acquisition fits nicely into our kind of strategy to grow faster than the markets we serve. Mars will be consistent with that. There will be mid- to high single-digit organic growth rates, as we've said all along in our business, Mars will fit into that once they're in our system. There is top line growth opportunity there. And that top line growth opportunity is not part of our $10 million in synergies.

Got it. And then last one for me. Could you just speak to the organic growth expectation for the rest of the year in each of your segments? Are you seeing a continuation of what you saw in Contractor Solutions as we head into the third quarter here? And then just on the other 2 businesses, I think you mentioned your EBS bookings fell below 1:1 on a book-to-bill. Just any thoughts on the other 3 businesses organic growth?

Yes, John, I mentioned in my script that we really can't speak to organic growth right now. This is the slower season in Contractor Solutions and certainly for Aspen, especially. So it's just hard to comment on that. On the next call, I think we'll have a better look at what the next fiscal year looks like as we start getting some good channel checks and people start ordering for the busy season next spring. So we're not able to do that. And it's really hard in SRS to do that. It's like Contractor Solutions doesn't really carry a backlog, so it's hard to get. They've been relatively flat the last couple of quarters. SRS, it's got some energy exposure. So when that's been a little bit softer, and that's kind of kept our revenues flat. And that's also hurt the margin a little bit because that's a higher-margin industry for us. So from a mix standpoint, that's hurt. But nothing dramatically we would think would be different in SRS.

Within EBS, we did talk about that the book-to-bill came down a little bit. And a lot of that is concentrated around that Toronto market that was so strong for us for a while. We talked over the last couple of years, that's kind of wound down, and there's not a lot going on there now. We are filling up the backlog more with our smoke Garden VACO businesses, which are higher margin, higher quality backlog for us. As you know, that takes a few quarters to turn. So we're probably looking at that impact more into kind of next spring and summer. But yes, we're just not able to give organic outlook for the rest of the fiscal year right now, given the uncertainty in the market.

And I think we've seen other industry participants say the same thing. We clearly thought we would see organic growth in the middle of the summer. And we and others have said that we missed that. Things did not pick up the back part of the summer. There's been some destocking at the distributor level. Once we see them starting to restock, we'll get a sense of what that looks like and what kind of tailwind we expect to have going into next year. I heard someone else say on our earnings call, we would say the same thing. We're going to be very strong. We're going to give the product offering, and we're going to have the product availability. So we're ready as this market bounces back, hopefully, next busy season to meet that demand.

Our next question comes from the line of Sam Reid with Wells Fargo.

Just wanted to quickly quantify the destock impact that you saw in Contractor Solutions. I realize there can be some variability there between subcategories. And then the add-on question to that would be, can you just talk through where inventory levels in the channel sit today? I think we've heard from some of the carriers that they're pretty frothy, but I'd just love to hear kind of the perspective on where your products sit from a channel inventory standpoint.

Sure, Sam. It's James. Thanks for being on today. It's hard to break out the different things. But at the end of the day, destocking is really what it is. The demand was not there for the back part of the summer given the housing activity, given some of the cost headwinds we have on replacement of systems. As we mentioned, Aspen and PF Waterworks had a weighted average growth of 40% in the quarter. So we had positive growth if everything had been organic, and that's really what we focus on, the acquisitions being more and more important to us. But the legacy business that's a little more focused on replacement of systems and then the GRD business, which is one of our larger product categories, of course, is even more focused on new housing starts.

With that softness, you just didn't see the restock. You had decent sales back in our fiscal fourth quarter, had good 8% or so organic growth as they were stocking up. We just didn't see the restock. And I think as you pointed out, as you listen to the OEMs and distributors' calls over the last few days and a couple of weeks, they've talked about destocking. And as I mentioned in my comments, when they destock, we're not going to get orders. And so order volume was down. We were still well ahead of the end market. We still held up pretty well for the most part, all things considered with that positive 2.8% growth, including our acquisitions. So we were generally pleased with that performance vis-a-vis the market. But most of it is they're not destocking. When contractors are not installing units, they don't need to backfill with inventory.

As far as inventory itself, I think we would say that our inventory out in distributors is probably in pretty good shape. Those are channel checks we've had. We know we haven't -- or from what we've heard, haven't lost market share or anything like that. They just didn't order as much. We've heard from some of the OEMs and distributors specifically out there with their public comments in the last few days, as I alluded to, is that several of them feel that the destocking will kind of run its course through the end of this calendar year. And as we enter next spring, things should theoretically be normal. I think, but everybody has got a little bit of hedge on that until we really get a sense of that over the next couple of months. All helpful context does great.

And then switching gears to Mars. So first of all, congratulations on that. But then also, I would love to just get a sense for some of the ticket dynamics, and I'm specifically thinking about per unit ticket just across some of the key subcategories, capacitors, motors, just the products that Mars sells. And then maybe give me a sense as to sort of what those price gaps look like to some of Mars competitors? Are these priced at a premium? Would just love to get a sense for that price gap dynamic, too.

Yes. Yes, Sam. It's going to be roughly in line with what we have now. We have such a spread now. Aspen obviously took the overall weighted average price of the product up quite a bit. Historically, our products have been in the sub-$100 range, and most of Mars products are in that same ballpark. They've got some products that are higher, of course, but it's not going to change our overall weighted price dynamic a heck of a lot. In terms of their pricing vis-a-vis the competitors, again, nothing dramatic there. We think Mars has the best products in the business as we think that our Contractor Solutions segment has the best products in the business. Otherwise, we wouldn't have been interested.

We're always looking at premium products at a bit of a premium price. So there may be a little bit of pricing ahead of the competition, but they've done a good job with their market share given where their margins are and where we think we can take it in line with our Contractor Solutions that tell you that there's price opportunity there, and we think that their products are priced appropriately. But we'll as they're under our umbrella, we can't really do much of that until we make the acquisition, of course. But as they get under our umbrella, we'll take a look at the broad product portfolio and how everything is priced in general as part of our Contractor Solutions family of products.

Our next question comes from the line of Jamie Cook with Truist Securities.

I guess just a couple of questions. Given the lack of visibility in CS in terms of organic growth or lack of organic growth, how are you thinking about the ability to hold margins in that business as organic growth declines. I think last time you sort of talked about holding margins in the low 30s, but that was under an environment where you thought organic growth would bounce back. I guess the same question, any color you can give on margins, like SRS, you thought margins should improve sequentially. Just given the weaker market, how do we think about margins across segments?

Yes, Jamie, this is James. Thank you. Yes, I think we would tell you that we still feel good about kind of low 30s margins in Contractor Solutions for the full year. And keep in mind, I know you know this with us now, but our winter months, the margins are going to be a little bit lower. Obviously, volumes are down in the winter months. So our margins tend to be more like high 20s in the winter months. But we would still expect to see those margins in the low 30s as we go through a full fiscal year. And organic growth being up or down a little bit as it is, shouldn't affect that too much. We put up with the legacy organic decline this quarter, we still put up really nice margins. You're going to have a little bit of a headwind from Aspen and the tariff impact is there, but I think that's generally behind us.

We'll have a price increase in Contractor Solutions as we always do as we enter the busy season. We're working through that. So that will help continue to maintain that. So I think we feel good about nothing different in the margins. As we talked about with Mars coming on next month in November, you're going to see a little bit of margin headwind that, that will impact us because they're more like mid-20s. So you'll have that impact again but then we'll get them up to 30% in the -- about a year from now. So you're not going to have much there. But there's going to be some noise, and we'll try to walk folks through each quarter the impact there. But the legacy business, nothing fundamentally has changed. We still feel good about that and organic growth being down a few points just doesn't affect that dramatically. The team has done a really good job on managing cost.

As far as SRS and EBS, they bounced around. We've always said that we've got a goal of 20% margins there. A little bit of the indirect tariff impact, even though we've raised prices to cover that has a bit of a headwind. And then the mix, as I mentioned, with our lower-margin business and EBS carrying a little bit of the weight the last couple of quarters, that brings margins down. And in SRS with energy being down a little bit, that brings margins down. But we still have and those 2 leaders would tell you that they still maintain a goal of reaching 20% margins. So we've been above 20% in both businesses a couple of quarters. Right now, we're a few points below that, but we feel still good about that in the longer term.

Our next question comes from the line of Susan Maklari with Goldman Sachs.

My first question is appreciating the commentary on the call around both the pricing that is going through the business or that's planned to come in and some of the moves that you're seeing around the input cost. But I guess, generally, when you think across the 3 different segments, how are you thinking about where you are in terms of price cost? And how that will move as we go through the winter? And then any thoughts on how that -- you approach that as you think about pricing for next season?

Sure. Great question. We're going through the process right now in our Contractor Solutions business as we did this time last year. of looking at what that price increase needs to be. There's an annual price increase in the industry that's normal. As tariffs feel like they've settled down a bit, maybe we got a little whisper of good news this morning, in fact, coming out of China, that helps a little, even though it's only 10% of our cost of goods sold, every little bit helps. So we're fine-tuning what that price increase needs to be going into the season here in the next couple of months within Contractor Solutions. So we'll push that out with our customers before too long. But we think we're in a pretty good place.

We're always looking at that carefully. But I think, generally speaking, we've maintained our dollar coverage on tariffs, what we've done. And assuming no other moves up, then we're going to have a pretty normal price increase that we would in any given year just to cover your normal inflation, wage costs, those types of things. So we feel good about that. Others in the industry have said roughly the same thing, even though we haven't seen any announcements quite yet. SRS just put forth their price increase that went into effect late September.

We announced that on our last earnings call. That was a 7% price increase. We felt good about that covering the indirect impact of tariffs, but we watch that very carefully. We've -- I think an unintended consequence of some of the tariffs is, as I mentioned, U.S. sourced commodities have gone up as well, things like copper, things like aluminum, and those are input costs in our different businesses. And so as those come through, if we see further increases, we'll need to take pricing action again. Others in the industry have done it. That SRS price increase, in fact, was as well received as you could expect and passed all the way through. Others did the same thing, some even higher. So there's opportunity there.

Within EBS, that's a project-driven business for the most part. So project by project, those projects that have more aluminum in them, for example, or other commodities that have been impacted, then we're bidding higher prices. And these projects that are coming in for rebid, projects that didn't quite get done the first time around, they're looking for refresh bids, we're able to update that pricing. And we've got kind of an expiration date on that. So as commodities move around, then that gets refreshed from time to time. So we're always looking to cover our costs because as we've said, our shareholders shouldn't bear the brunt of that. It gets passed through the system. So I think we feel that our leaders have done a really good job of that of covering the dollar cost, but it's a daily, weekly and monthly activity that we're watching very closely all the different dynamics, and we're not going to be shy about pushing through price to be sure we cover those costs.

Yes. Okay. That's helpful. And then maybe turning to the balance sheet and capital allocation. You obviously have done 2 large deals in the last several months with Aspen and Mars. As you think about the pipeline of M&A, can you talk about the kind of deals that you'll consider from here, especially as you do integrate the 2 larger ones? And then it was nice to see you buying back some stock this quarter as well. Just any thoughts on how you're thinking about shareholder returns in this kind of an environment?

Yes. Great question. Thank you, Susan. This is Joe. We absolutely continue to believe that all components of our capital allocation policy are available to us. We've shown that during the last quarter by buying back shares, announcing acquisitions, paying down debt, all of the above. Now we're doing this, again, on a returns analysis basis. And so we're looking for what provides the highest risk-adjusted returns for us. From an acquisition standpoint, you should expect us to continue to be active over the next year. I would say smaller bolt-on acquisitions that require less integration work would be more likely in the next 6 months or so, while we digest the $1 billion in acquisitions that we've acquired over the last 12 months.

But given our balance sheet, given our access to capital and given our team bandwidth, we're able to continue to be acquisitive. And so no stop there, maybe a bit of a digestion pause, but certainly no change in our long-term strategy. Buying back shares is, again, a function of return. When we calculate the returns on these acquisitions, we find them to be compellingly attractive, and that's to whomever is buying the stock, whether it's us or somebody else. And so that's an attractive option for us, and you should continue to see that occur as we move forward.

Our next question comes from the line of Natalia Bak with City.

Maybe I'll ask about the order cadence within Contractor Solutions. Just given the current environment, have you seen any sequential improvement or weakening in weekly order patterns exiting this quarter? Do you expect continued softness in the second half, just given that you have an easier organic comp next quarter?

Yes, it's a great question, Natalia. It's James. Yes, our fiscal third quarter last year was a little softer. It's good to remember that given the dynamic with all the refrigerant change. So the comp is a little bit easier. As we said, it's hard to predict organic growth given where we are in the quarter. We're going to get out of that business for a little while, I think. But in general, our order cadence has been fine. Things do start softening in October. Certainly, the Aspen business is coming out of their busy season in the repair market. We'll have Mars coming on in November is the plan, and we'll watch that. But absent that, nothing unusual about the order pattern. Things are clearly softer in general than we would expect. But our team has done a really nice job in October, getting orders in where they can. Again, like we said, there's some destocking going on in the industry, but nothing extraordinary we would point out positive or negative with the order pattern here a few weeks into the quarter.

Got it. That's helpful color. Maybe just switching over to SRS. Just curious if you're seeing any early traction from your new sales channels or customer diversification initiatives? And when should we expect that to show up meaningfully in revenue?

Yes, Natalia, we just went through midyear reviews around here with all 3 of our business segments, and we are very pleased with the progress being made at SRS, both in some new product development that is directly attributable to conversations with customers about how can we continue to be a valued supplier for them and new markets. So stay tuned. Yes, I think you're going to hear more.

Our next question comes from the line of Tomo Sano with JP Morgan.

This is Ethan on for Tomo. On organic growth for the quarter, can you give a little bit of color around how much of that was volumes versus pricing? And then on end market trends, are you seeing any other key end markets? What are you seeing in other key end markets? And are there any pockets of strength or new areas of weakness?

Yes, Ethan, it's James. Thanks. Great question. Yes, the volume price mix on that legacy business of down about 7.7%. The pricing positive tailwind on that was mid-single digits and the volume was down low double digits, kind of low teens to break that out a little bit. Obviously, when you look at the positive organic growth, including the acquisitions, then that would suggest volume was down just a couple of points and price was up that mid-single digits. So that kind of gives you that breakdown.

In terms of end markets, I think it's -- as we said, anything that's been more repair focused, obviously, the Aspen business with the coils and air handlers, some of our things that go into the repair business, that's where you've seen strength, obviously, with 40% weighted average growth. But in general, I think it's pretty broad-based. As we said, when new systems aren't being installed in new homes and replacement systems aren't being done in existing homes with existing home sales down and people just in general, opting for repair versus replacement, it's those types of products specifically, but nothing else we'd call out too granular.

There are no further questions at this time. I'd like to pass the floor back to management for any closing remarks.

Thank you, Alicia. Thank you, everyone, for joining us. We report on a quarterly basis, so we understand the questions on a kind of quarter-by-quarter basis. But just know that we are absolutely very bullish on the long-term health and opportunity ahead of us for meaningful growth for compelling value creation here, especially given the two new acquisitions, there is a lot of good things ahead of us here, and we look forward to reporting to you again next quarter. So thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Ladies and gentlemen, greetings, and welcome to the CSW Industrials Fiscal 2026 First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Alexa Huerta, Vice President of Investor Relations. Please go ahead.

Thank you, Ziko. Good morning, everyone, and welcome to the CSW Industrials Fiscal 2026 First Quarter Earnings Call. Joining me today on the call is Joseph Armes, Chairman, Chief Executive Officer and President of CSW Industrials; and James Perry, Executive Vice President and Chief Financial Officer.

We issued our earnings release, updated Investor Relations presentation and quarterly report in Form 10-Q prior to the markets opening today, all of which are available on the Investors portion of our website at www.cswindustrials.com. This call is being webcast and information on accessing the replay is included in the earnings release.

During this call, we will make forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results could materially differ because of factors discussed today in our earnings release and the comments made during this call as well as the risk factors identified in our annual report on Form 10-K and other filings with the SEC. We do not undertake any duty to update any forward-looking statements.

I will now turn the call over to Joe.

Thank you, Alexa. Good morning, everyone. It is my pleasure to report that once again our team has delivered record results for revenue, for EBITDA, for net income and for adjusted earnings per diluted share for the first quarter of this fiscal year. This morning, we reported fiscal first quarter revenue of $264 million as well as fiscal first quarter EBITDA of $69 million, net income of $41 million and adjusted earnings per diluted share of $2.85. We are adjusting EPS beginning this quarter and going forward to exclude the amortization of acquisition-related assets.

Before I turn the call over to James to provide further details on our results and the performance in each of our business segments for the full -- for the first quarter of fiscal 2026, I would like to thank our team for its sharp focus on serving our customers well and on operational excellence. This continued focus delivered impressive results during a quarter marked by the integration of 3 recently acquired businesses and significant economic uncertainty and industry disruption, including the direct and indirect impacts of tariffs and trade policies, which have had near-term effects on global demand and consumer spending.

Our strong balance sheet, access to capital and disciplined capital allocation have continued to fuel growth opportunities, position us to navigate short-term demand fluctuations and market volatility and execute on growth initiatives. The theme of our recently released annual report to shareholders is a decade of demonstrated success. And while I am pleased with the results that we have delivered and the value that we have created for our shareholders over the past decade, I am equally optimistic as I look forward to what we can accomplish over the next 10 years.

Our commitment is to always do the right thing for the right reason, and both employee safety and environmental stewardship fully align with this focus. While we have been publishing safety metrics for some time, in recent weeks, we published for the first time a company-wide inventory of key environmental performance metrics, which can be found on our corporate sustainability web page. Over the last year, internal teams have worked diligently to commence reporting our energy and water usage as well as our greenhouse gas emissions, which will complement our robust social and employee safety disclosures.

At this time, I will turn the call over to James for a closer look at our results, and following his comments, I will return and conclude our prepared remarks.

Thank you, Joe. Good morning, everyone. As Joe mentioned, during the first quarter of fiscal 2026, we delivered record revenue of $264 million, representing growth of 17%. The revenue growth was primarily inorganic, resulting from the acquisitions of Aspen Manufacturing, PSP Products and PF Waterworks that we completed since August of 2024. This growth was slightly offset with a 2.8% reduction in organic revenue. The organic volume decline was concentrated in our Contractor Solutions segment, and I will discuss this in more detail later in my remarks.

We experienced 5% growth in EBITDA with a 280 basis point contraction in EBITDA margin due to the expected and previously discussed margin compression resulting primarily from the Aspen acquisition as well as input cost increases arising from the direct and indirect impact of tariffs.

We are introducing a new performance metric this quarter, adjusted earnings per share, which excludes the amortization of certain assets that come from our acquisitions. Adjusted EPS in the fiscal first quarter was $2.85 or 2.5% higher than the same quarter a year ago and was driven by revenue growth and came despite the current quarter having a higher average share count resulting from last fall's follow-on equity offering as well as some compression in the margins as discussed.

We have now crossed the $1 billion mark in terms of our cumulative investment in M&A since spinning off as a public company almost 10 years ago. Given the significant impact of the amortization of results, feedback from investors led us to start providing adjusted EPS each quarter adding this quarterly expense back to base EPS to provide a better measurement of our operating growth and profitability. The first quarter adjustment to EPS did not include any items other than the aforementioned amortization of assets from acquisitions.

Our consolidated revenue during the fiscal first quarter of 2026 was a record $264 million, a $37 million or 17% increase when compared to the prior year period. This revenue growth was primarily attributed to the aforementioned acquisitions totaling $44 million. This inorganic growth was somewhat offset by a reduction in organic volumes in Contractor Solutions, which was seen across the U.S. residential HVAC end market. Consolidated gross profit in the fiscal first quarter was $115 million, representing 7% growth over the prior year period. Our gross profit margin experienced a 370 basis point reduction to 43.8% compared to 47.5% in the prior year period as all 3 segments saw margin contraction.

Our consolidated EBITDA during the fiscal first quarter increased by $3 million to a fiscal first quarter record of $69 million or 5% growth when compared to the prior year period. Our EBITDA margin declined by 280 basis points to 26.1% compared to 28.9% in the prior year quarter. As we previously indicated on our fourth quarter earnings call, the recently acquired Aspen Manufacturing has lower margins than our legacy Contractor Solutions segment, and this impacts both our consolidated and Contractor Solutions segment margins. Additionally, the quarter experienced unfavorable sales mix and an escalation of input costs, including some resulting from trade policy.

Net income attributable to CSW in the quarter was a fiscal first quarter record of $41 million with $2.43 of unadjusted earnings per share compared to $39 million or $2.47, respectively, in the prior year period, representing 6% growth in net income and a 2% contraction in EPS. The contraction in EPS was due to the higher share count resulting from the successful follow-on equity offering last fall.

As we have mentioned on prior earnings calls, we believe that year-over-year and long-term comparison of CSW's performance are best reflected in our EBITDA and cash flow results and now our adjusted EPS metric, especially given the growing levels of amortization that come from our accretive acquisitions. I will provide more details on the components of EBITDA later in my remarks.

During the first quarter, our Contractor Solutions segment with $197 million in revenue accounted for 74% of our consolidated revenue and delivered $36.3 million or 22.6% growth when compared to the prior year quarter. Of the revenue growth in the quarter, $43.7 million or 27.2% came from our recent acquisitions, which was offset by a decline of $7.4 million or 4.6% in organic revenue in the quarter from lower volume in the challenging market environment.

The organic revenue decline in the first quarter is due in part to soft housing activity in the quarter, the nonrepeating stocking of a distribution center network for one of our larger customers in the prior year's first quarter, product volume being pulled into our fiscal fourth quarter as some of our customers made purchases in March to stock up for the season and the shift to repair from replacement of HVAC units by consumers, in part due to the higher cost of new units with the new refrigerant standards and some impact from tariffs.

During the quarter, our GRD sales, specifically for the residential end market, were down significantly due to being more heavily tied to new residential construction than the rest of our product offering. We generally expect mid- to high single-digit organic growth through the cycle, but we will see volatility in this figure from quarter-to-quarter. Our current view is that we will have mid-single-digit to high single-digit organic growth in each of the remaining 3 quarters of this fiscal year.

As a reminder, we consider growth to be organic after the 1-year anniversary of an acquisition. However, with growth through acquisition comprising an increasingly meaningful part of our story, our policy to categorize our 3 recent acquisitions, Aspen, PSP Products and PF Waterworks, as inorganic revenue should not detract from their recent performance under our ownership. All 3 acquisitions had very impressive year-over-year revenue growth percentages, ranging from the high teens to the mid-30s.

Our organic growth rate on a pro forma basis to include all recent acquisitions was positive for the quarter. Looking forward, PSP Products will be considered organic beginning in August and PF Waterworks becomes organic in November. Aspen will be considered organic throughout this fiscal year. Our organic growth rate over the next few quarters is expected to reflect the strong growth trends of these businesses.

EBITDA for the Contractor Solutions segment was $65 million or 33% of revenue compared to $58 million or 36.3% of revenue in the prior year period. The decrease in EBITDA margin came from lower gross margins due to the expected dilutive impact from the Aspen acquisition, unfavorable volume leverage and sales mix, combined with an increase in operating expenses as a percent of revenue, primarily resulting from incremental amortization related to recent acquisitions.

Our Specialized Reliability Solutions segment revenue was $37 million, equivalent to revenue reported in the prior period. Revenue increased in the mining and energy end markets but declined in the general industrial and rail transportation end markets. The segment EBITDA of $6.5 million in the first quarter represented a decline of 23.6% from $8.5 million in the prior year period. The EBITDA margin contracted 540 basis points to 17.7% in the current period, driven by a decrease in gross margins due to sales mix favoring lower-margin products and escalation in commodity pricing and onetime additional expenses with the consolidation of a sealants manufacturing facility into our primary facility in Texas. The decline in gross margins was partially offset by a slight decrease in operating expenses as a percentage of revenue.

Our Engineered Building Solutions segment revenue increased by 3% to $31.9 million compared to $30.9 million in the prior year period, driven by the timing of projects converting to revenue from a stronger backlog. Segment EBITDA was 29% lower than the prior year period at $4.4 million or a 13.9% EBITDA margin compared to $6.2 million and 20.1% in the prior year period, respectively. The contraction in EBITDA margin in the current period was primarily due to material cost increases indirectly related to tariffs, warranty claims and growth investments in the sales team and R&D to pursue new projects that will drive future revenue.

Our book-to-bill ratio for the trailing 8 quarters remained at 1:1. The backlog quality continues to improve with projects that will deliver favorable margin mix in future quarters as they convert to revenue. We are pleased with the trend of the mix in EBS backlog, which has continued to add more business from our higher-margin products within the segment.

Transitioning to our cash flow, we reported strong first quarter cash flow from operations of $60.6 million, down $2 million compared to $62.7 million in the same quarter last year. The year-over-year variance was primarily attributable to routine fluctuations in working capital. Our free cash flow, defined as cash flow from operations minus capital expenditures, was $57.7 million in the fiscal first quarter compared to $59.6 million in the same period a year ago. Our free cash flow per share of $3.44 in the fiscal first quarter compared to $3.82 in the same period a year ago, lower due to the slight decrease in our free cash flow as well as additional shares included in this year's quarter resulting from the follow-on equity offering.

Our effective tax rate for the fiscal first quarter was 24.3% on a GAAP basis. As we look to the balance of fiscal 2026, we continue to anticipate delivering full fiscal year growth in revenue and adjusted EBITDA for each segment as well as consolidated EPS growth and even stronger operating cash flow than in fiscal 2025. We expect Aspen's fiscal 2026 revenue to grow low double digits off their trailing 12-month revenue of $125 million through our fiscal 2025 year-end. This is a bit higher than our guidance on last quarter's call.

Note that Aspen's quarterly revenue sequencing is weighted more heavily to the first half of our fiscal year due to the nature of their products. As a result, we expect that Contractor Solutions go-forward quarterly revenue seasonality will be more pronounced than we've experienced in the past. We still expect Aspen's EBITDA margin to be 24% for the full fiscal year 2026 despite headwinds from cost increases due to trade policy. The Aspen margin will vary from this full year level from quarter-to-quarter due to the seasonality of the business. As a reminder, Aspen will only be included in our results for 11 months during fiscal year 2026, including only 2 months in our fiscal first quarter due to the May 1st acquisition date.

As we mentioned on our last earnings call, the company funded the Aspen acquisition on May 1st by borrowing $135 million from our revolving line of credit and using the remainder of our cash on hand from last September's follow-on equity offering. By the end of the first quarter, we had already paid down $40 million in borrowings and ended the quarter with $95 million outstanding on our revolver due to strong cash flows. Combined with our cash on hand at quarter end of $38 million, our net debt was just $57 million, resulting in a net debt-to-EBITDA leverage ratio of 0.2x per our revolving credit agreement. We will continue to repay this debt during the fiscal year, absent other acquisitions, which we do continue to pursue.

With that context, we currently anticipate approximately $4.4 million in net interest expense for the full fiscal year, with the second fiscal quarter being the highest level. Our amortization of intangible assets will increase significantly over the prior year due to our acquisitions, most prominently from the Aspen acquisition. We've completed our first pass of our purchase price allocation accounting and now expect that the Aspen acquisition will add approximately $11.6 million of amortization expense in fiscal year 2026, which is a bit higher than we estimated last quarter.

Note that we will only own Aspen for 11 months in fiscal 2026. This addition of amortization leads to a consolidated fiscal year 2026 forecasted amortization figure of $39 million. Similarly, we now project Aspen to record $1.7 million of depreciation in fiscal 2026, and we expect total depreciation of $16.3 million for the company in fiscal 2026.

We currently forecast our fiscal 2026 GAAP tax rate to be 23% or 26% adjusted, which may vary from quarter-to-quarter due to specific items. Note that this forward-looking outlook was included in the quarterly Investor Presentation that we posted to our website this morning.

As I mentioned earlier, we expect to deliver impressive organic growth rates for Contractor Solutions in the remaining 3 quarters of fiscal 2026, with the segment adjusted EBITDA margin for the full year fiscal 2026 to be in the low 30s compared to the recent margins closer to the mid-30s as we layer in our acquisitions and the expected impact of tariffs. I will address tariffs in more detail at the end of my remarks. We remain highly focused on cost discipline and consistent execution across the company, especially in the current economic environment.

During fiscal year 2026, Specialized Reliability Solutions and Engineered Building Solutions are each expected to have higher full year revenue and EBITDA, with revenue growth and EBITDA growth in line with each other compared to the prior year. We expect to see EPS growth in fiscal 2026, although the company does not anticipate base EPS to grow as much as a percentage as revenue and EBITDA due to additional shares outstanding from the follow-on equity offering, increased interest expense and the increased depreciation and amortization from recent acquisitions.

Let me now spend some time on the current tariff environment, which we are watching very closely. This is obviously a very fluid situation. Our Specialized Reliability Solutions and Engineered Building Solutions segments have minimal direct impact from tariffs, but have been impacted indirectly as the follow-on economic impacts of aggressive tariffs policy materialize. Each has a small number of inputs that are sourced overseas, but even U.S.-sourced products have seen some unanticipated cost increases. The SRS segment has minimal sales in countries with high tariffs, so those sales, though immaterial, could be at risk. Within EBS, we take into account the increased expenses as we bid on new projects. In SRS, we are soon announcing a price increase to cover the higher input costs.

As we mentioned on the last earnings call, within Contractor Solutions, we continue to move third-party manufacturing out of China. We've been doing this for a number of years and now expect that in fiscal 2026, our cost of goods sold exposure to China within Contractor Solutions will be around 10%. Our exposure to Vietnam, which comes primarily through our owned facility there, will be in the low 30s as a percentage of Contractor Solutions cost of goods sold this fiscal year. Other Asian exposure is about 15% within the segment, and the rest of our cost of goods sold is primarily in the United States.

I'll remind you that all of recently acquired Aspen's production is done in the Houston, Texas area with minimal foreign sourcing. Given that it takes a number of months for the impact of tariffs to roll through the cost of goods sold, we were thoughtful in rolling out pricing actions related to trade policy. We undertook a number of pricing actions with most having effective dates over the course of June that we believe cover the current tariff exposure, adjusting for changes in manufacturing location and pricing support from contract manufacturers. As we have said before, our goal is to protect margin dollars, and as a result, these tariffs will cause margin compression in the near term. We will also assess the need to make further price adjustments as tariffs are finalized.

With that, I'll now turn the call back to Joe for his closing remarks.

Thank you, James. To summarize, during the fiscal first quarter of 2026, we posted record quarterly results for revenue, for EBITDA, for net income and for adjusted EPS. Our impressive 17% revenue growth included both inorganic growth from our recent acquisitions and organic growth volume in our Engineered Building Solutions segment. Looking ahead to the fiscal full year of 2026, we will continue to focus on delivering sustainable growth that exceeds the markets we serve. We will continue to identify and pursue accretive acquisitions of innovative companies and products that are synergistic to our existing portfolio.

I would like to reiterate that we continue to anticipate delivering full year organic growth in revenue and adjusted EBITDA for each segment, along with consolidated EPS growth and stronger operating cash flow. However, timing can create quarterly fluctuations.

On our last earnings call, we discussed the successful acquisition of Aspen Manufacturing, a leading supplier of aftermarket HVAC evaporator coils and air handlers. We have been pleased with the performance of this business since the consummation of that acquisition on May 1. The acquisition closed at the beginning of Aspen's busy season, so the integration into CSW will begin to accelerate later this year. Our integration focus thus far has been on enhancing the safety of our new team members.

On June 9, we commenced trading on the New York Stock Exchange and celebrated with the Board of Directors and the executive management team by ringing the closing bell at the NYSE. This completes our strategic transfer to the world's largest stock exchange, and we believe this move will benefit all shareholders over the long term, including the dedicated team members here at CSW Industrials who collectively own approximately 4% of the company through our employee stock ownership plan.

On October 1st, we will celebrate our 10th anniversary as an independent public company. We have a decade of demonstrated success and capital stewardship to be proud of. I'm gratified by the results the team at CSW has delivered and the value we have created for our shareholders over the last decade, but I'm equally optimistic as I look forward to what CSW Industrials can accomplish over the next 10 years.

So as always, to close my prepared remarks, I want to thank the CSW Industrials team as well as all of our shareholders for your continued interest in and support of CSW Industrials.

Ziko, we are now ready for questions.

[Operator Instructions] Our first question comes from Jon Tanwanteng with CJS Securities.

I was wondering if you could talk a little bit more about the organic growth decline in Contractor Solutions. Maybe talk about true end demand versus distributor demand and the uncertainty with tariffs that are going on, if that contributed at all, number one? And how much maybe do you think was just low organic demand, whether it was due to weather or pricing that may have gone higher? Any clarity there or a breakdown of what you think contributed to that would be helpful.

Yes, Jon. It's James. Thanks for being on as always, and we appreciate being at your conference a few weeks ago. Yes, I think you've hit on a lot of the points. I think we saw as we looked across other public company comps in the HVAC space, and obviously, we do a lot of channel checks, Jeff and his team, with the distributors out there. It was a slow sell-through in the fiscal first quarter. You had some stock up in March. That was pre-liberation day, so folks didn't know what to expect there, so we won't necessarily point there, but there was some stock up in March, and you didn't really need the restocking because demand was a bit soft.

As you pointed out, there were some slow starts to the summer in a lot of parts of the country. The cooling degree days data wasn't too far off, but it was really slower. We certainly saw things relatively slow in April, got a little better in May, got a little better in June. So things tended to pick up as we went through the quarter. But overall, I think demand was soft. We don't normally talk about our dependence on new housing starts or existing home sales that much, especially new housing starts, but the GRD market is more dependent on that. When people build a new home, they put in 30, 40, 50 GRDs as opposed to a renovation project, it may be a few. And given GRDs is one of our absolute top product lines, we saw declines there. We've seen that pick up a bit again in July. We've seen some restocking in July of the GRDs. So that was something that we called out specifically.

We also have seen, and others have mentioned this as well, a shift towards repair from replacement. And as you know, Jon, we have a little better -- a little lower ticket in repair jobs than we do replacements or new units. Now, the Aspen Manufacturing acquisition helps us there. That's a repair product. So that helps us, but we only had Aspen for 2 months in the quarter. And as things started to pick up, their business picked up. And you may have noticed that we moved my guidance from high single to low double digits to clearly low double digits because we've seen really nice order pickup there as the repair volume has picked up.

So I think as we looked across the market, we saw others report kind of high single to low double-digit organic volume declines. A lot of folks in the space had a bigger price impact because of the OEM side of things with the refrigeration cost leading to much higher tickets. So price kind of covered some of that up. Our pricing adjustment, which we just took in June, will now flow through the rest of the fiscal year. So we only had a few weeks of that. But that was just kind of to cover the tariff impact. We don't get that same pickup that fully covers the organic volume.

So we saw the 4.5% decline in organic revenue overall. We also had –- last thing I'll mention, you recall a stock up last year, one of our big customers was opening up and standing up some new distribution centers. That was kind of a onetime thing that helped last year, so the comp was a bit tough. But to repeat something I said in my script, we do expect mid- to high single-digit organic growth in Contractor Solutions each of the next 3 quarters. So things will move around quarter-to-quarter. We saw that in the fiscal third and fourth quarter last year. It will bounce around. But that would lead to mid -- kind of mid-single-digit organic growth for the year, which is what we tend to expect through the cycle.

Got it. So just a normalization in the coming quarters, and you think that this is more of a 1 quarter blip just with all the moving bits and pieces that are going on?

It feels like it. I think demand is still soft. And when you look at something like new housing starts, existing home sales, we don't expect that to turn around in the fiscal second quarter. But some of the other things -- you don't have those onetime year-over-year tough comps like we did last year. It has gotten hot in most parts of the country. Here, in Dallas, we just had our first 100-degree day. So it did get hot slower here and later here, but some parts of the country have seen it. So we've certainly seen some things starting to pick up as we went through June and into July.

Okay. Great. And then just with the mid- to high single-digit organic growth for the remainder of the year, how much of that is from the pricing increases you're implementing to offset the tariffs?

Yes, there's certainly a part of that. That price increase was kind of low to mid-single digits across the different product lines. We tried to be as specific as we could there. So you're certainly seeing some pickup, which is important. If you get volume back to relatively normal and have that price increase year-over-year, that's -- both of those come into play, yes.

Okay. And for the margin in Contractor Solutions, I think you mentioned low 30% for EBITDA margins for the full year. How much different is that from what you're expecting maybe last quarter?

Really no difference. We haven't seen a difference. Aspen is performing as we expected. Margins for Aspen are a little higher in the fiscal first and second quarter because of the seasonality. But through the full year, we said we expect a 24% margin. We're going to start working on that, and we expect that margin to be better next fiscal year. But for now, we really haven't changed our expectations of the low 30s on EBITDA. Now that's facing some headwinds. The tariff headwind is there. We think that the pricing increase will cover that. As we always talk about the dollars, you got a little pressure there.

We've seen some input costs come down a little bit, Jon. Ocean freight rates have come down some. But as a percent of COGS, that's a couple of percent, so it doesn't move the needle a lot, but it helps. So Jeff and the team are finding every way to cut cost and be as efficient as they possibly can and doing a good job of that. But the expectations haven't really changed from last quarter.

Okay. Great. And then just on the EBS segment, just given the long lead times of the projects there, the new steel and aluminum tariffs are the increased ones. How much do those affect you? I know you mentioned higher margins in the backlog, higher quality backlog, but I was wondering if projects that were priced a long time ago are going to face some impact from the higher prices either directly or indirectly.

We're seeing some impact, and you saw some of that coming through in the quarter, Jon, with the margins lower. We do think margins will improve as the year goes along. As we bid new projects, we have that opportunity. We talked last quarter a little bit, rebidding activity is the highest that Scott and his team have seen it in a long, long time. So we're kind of bidding a lot of projects now that we thought were up a couple of years ago, they didn't quite come to fruition in the backlog, now we're rebidding. So we're seeing a lot of activity right now.

So as you know, that takes a couple of quarters to run through the system. The team has done a really good job finding alternative sources for aluminum especially and those type of input costs that they have. But those are those indirect impact of tariffs that we're seeing. We may not have a direct impact in importing some of that. A lot of that sourced domestically. But we're bringing in aluminum where we can from different markets that have less tariff impact and less indirect impact so far. But again, as we bid each project new, we're making sure to account for that.

Got it. And then finally, just on capital allocation. What are your thoughts today, just M&A environment and the attractiveness of opportunities versus buybacks? Your stock price is indicating lower today. Or any other investments that you might have in the pipeline?

Yes. No, this is Joe, Jon. It's a great question and certainly something that's top of mind for us. We have seen some of the M&A prospects that came -- what we thought were going to come early in the year. There's been a pause on some of those. There is a pipeline, and we are pleased with our ability to participate in that and to hear about those and to be really one of the top choices of a potential buyer. So we're hearing about all the opportunities, I believe. Our hurdle rate has gone up. Cost of capital and the risk premium associated has been a little higher in this environment. But we're still open for business and looking for the right opportunity to put capital to work.

I'll remind everybody we did the TRUaire acquisition, which was wildly successful for us, in the middle of the pandemic. And we've got to be very, very thoughtful about potential returns and the risk associated with that, but there are opportunities in times like this that we can take advantage of. Having the capital kind of base that we have and the strong balance sheet really gives us an advantage.

Our next question comes from Susan Maklari with Goldman Sachs.

My first question is going back to the comment on -- or the shift in repair versus replace within Contractor Solutions. When you think about the macro and the housing backdrop and the state of the consumer, what do you think would need to happen in order to see that shift back? And how are you thinking about the mix going forward and what the implications of that specifically will be as we think about fiscal 2026?

Susan, I think one thing -- this is James. I think one thing as we see some easing in interest rates down the road, that will certainly unlock some of that. I think the -- we've certainly seen the consumer sentiment is just tough right now. People willing to make that $15,000, $17,000 investment in a replacement unit when they could do it through repair. So it's hard to know exactly what will unlock it. We certainly read a lot of your research about housing and see where that's heading.

As the new housing market picks up, then that helps new units, of course. Existing home sales will impact replacement units. I don't think the cost is necessarily coming down. I think more than anything, it's certainty in those type things. It getting hot later in the year this year doesn't give us quite as much data to work from. But as we've said, as things shift, at least for now from replacement to repair, Aspen gives us a great entree there. So we have a bit of a mitigating effect with Aspen. We'll have the full quarter of Aspen here in the second quarter and going forward.

And Susan, this is Joe. It may be obvious, but I mean, obviously, interest rates matter to new residential construction to home kind of sales, existing home sales as well, to home equity lines of credit for improvements. And so as your firm is predicting some interest rate relief later in the year, that would be helpful as well.

Yes. Okay. That's helpful. And then maybe turning to the acquisitions. Can you talk a bit of how the integration of all 3 of the recent deals is progressing, the ability to realize some share gains as you're getting those fully into the channel? And then as well with share, can you talk about the ability to perhaps gain a bit as you think about the tariff situation and your domestic footprint?

Yes, absolutely. The integrations have gone really, really well for Dust Free, for PSP, for PF Waterworks. Each deal is different. But with PF Waterworks and with PSP, not a huge amount of employee kind of add or facilities. I mean, those are relatively smaller operations. And really, it's getting them into our distribution channels and getting them into our sales channels. And so those have gone really, really well, and that's reflected in the results. I mean the growth rates have been phenomenal for those. So we're very, very pleased with that.

Yes, Aspen has been a little bit different. It is a larger operation with a lot of employees and a larger facility. We have elected to not overburden that team right now with a lot of integration. We've been highly, highly focused on safety initiatives there in the early days. And once they get through their busy season -- we've talked about the -- James talked about the seasonality there. They have a real busy season and they have a slow season. And so a lot of our integration work to date has been either safety related that's been done directly or planning for when the slower season comes, and we can do other integration initiatives there.

So stay tuned on that one, but we're very pleased with the business results. And there has been lots of opportunity, as you mentioned, for share gain, working -- kind of like we show in our Investor Presentation, additional points of sale, additional distribution partners that we can bring those products to. We have this national footprint and size and scale in the distribution channels and have done a great job with our partners there. And so that opportunity to gain share of wallet with our customer and then market share as a result of that we think is very, very favorable. We're seeing that. Our team is executing well, and we think there's lots of upside.

I would note we were talking about earlier this week, we are still winning over distribution even with our TRUaire product that's been in place for 5 years now, we've owned for 5 years. There is still ongoing share of wallet gains with customers even now. So it's a ground game. It takes a lot of work. But our team does a great job at it, and we've proven -- we've got a proven track record on that to really be able to meaningfully grow these lines of business, these product offerings once they're under our ownership.

Our next question comes from Stephen Farkouh with Truist Securities.

Here on for Jamie Cook. Just a few questions. It seems like in your release, mining, energy and markets were kind of turning a corner for you guys, but general industrial and rail are still seeing some softness. Were there any changes as we exited June and kind of into July in those end markets that can kind of give us confidence in the growth outlook?

Nothing dramatic. Stephen, this is James. Appreciate you being on. Nothing dramatic. And we kind of gave you the what was up, what was down. I'd say in all those cases, it was kind of a little bit on either side of positive or negative, obviously, given that the revenues were flat in SRS for the quarter. You had -- a couple of those were a little bit up, a couple were a little bit down, that kind of product categorization of which customers are buying the product. We wouldn't say that through the first few weeks of the quarter there was anything significant or any different type of momentum we saw. Those can flip each quarter. So nothing dramatic there.

I think the team is doing a good job going after the right sales, both domestically and internationally. Proud of the work that they're doing, introducing new products, in fact, and those kind of things to really give the customers what they need, but nothing dramatic in terms of momentum or acceleration of any of those categories.

Got it. And then kind of switching gears here. On the Big Beautiful Bill, can you guys quantify like any direct benefit to you from the tax provisions? And then is there any expected upside to demand from the bill?

Yes, good question. I would say, first of all, on the rate, our first take is that we don't see much change to our tax rate going forward from the tax bill. We would say that we've got some cash tax pickup on bonus depreciation, especially. There's some international tax benefits that we see picking up that starts in 2027. So there's a little bit of pickup there. But where we see things is really on cash taxes. So it will help our operating cash flow and free cash flow, which is most important. As we often say, you can't reinvest tax rate, but you can reinvest tax dollars. And so we had a bit of a pickup there.

In terms of demand, I don't think we really see anything yet. It's so early. That got signed July 4. So there's a lot of interpretation still to be had, but we wouldn't point to anything yet from a demand perspective from the bill.

If we do have any, it would be likely seen in our EBS business and then some of the architecturally specified building products that show up both in EBS and in Contractor Solutions. I mean to the extent people are taking advantage of this bonus depreciation and building out capital expenditures, those would be the segments that you'd likely see.

Got it. And are you guys quantifying the cash flow benefit?

We're not. But one thing I'll remind you, our CapEx is pretty low. Our CapEx is usually a couple of percent of revenue. So the impact, without quantifying, it's a few million dollars, it's not tens of millions of dollars, Stephen, just to help you out. So we would expect to start seeing that in the coming quarters. But our CapEx dollars aren't that big, and some of our CapEx dollars are on ERP implementation, those kind of things. So we've got to really even within CapEx parse out which projects qualify for the bonus depreciation. So it's not something that we would highlight as material, but it's a benefit.

Our next question comes from Tomo Sano with JPMorgan.

My first question is, I'd like to understand the -- what was the EBITDA margins in the first quarter compared to from your -- I mean, like initial internal like plan 3 months ago, especially on EBS and SRS? So despite the fact I see the sales flat or plus 3%, I see EBITDA margin is actually declining. And how do you see -- like any changes from the 3 months ago? And then how should we think about the next quarters for margin, please?

Yes, Tomo, this is James. I'll remind everybody that we've put a 20% EBITDA margin target on both of those segments in kind of the intermediate to long term, and we think that both are going to get there. We would expect that margins would improve the rest of the year overall as a fiscal year versus where they were. There were some things in the quarter that we certainly saw coming. We knew that, for example, we were moving our sealants facility, shutting down the facility in Pennsylvania, consolidating that into our Texas facility, which will give us long-term benefits, but there were some expenses associated with that. That impacted margin a little bit. Those kind of things.

But you can't really predict product mix within SRS, and sometimes you just sell products that have a little more favorable margin than others. And so I would say that with flat revenues in SRS, the margin was a little softer than we anticipated, but we would expect that to recover in the coming quarters and get closer back to that 20% level that we've set as the target.

Within EBS, you certainly know which projects are in the backlog and coming. So I think we had expectations. Some of those had lower margin. You don't always know exactly which ones are going to close out in a quarter versus carryover. We would say that our backlog continues to improve. We're selling more product out of our 2 businesses, Smoke Guard and Balco specifically that are historically at higher margins. Those have really seen a pickup in backlog and a pickup in bidding and rebidding as we talked about. That's favorable for us going forward. So that lends more confidence to getting closer to that 20% number as we look forward in the coming quarters and in the next couple of fiscal years.

We had a couple of things within EBS. One thing I mentioned in my comments, there were some warranty claims. We would consider those pretty onetime. We literally kind of changed the input supplier on one product and it didn't work out real well. We had to take some warranty claims. We've moved back. So we don't intend for that to recur. So I would say both, we were a little surprised, but nothing dramatic.

And Tomo, this is Joe. I would point in each of those 2 segments. In SRS, closing down the facility in Pennsylvania and moving that into our Rockwell facility is intended to drive higher margins in the longer term. So we're taking a long-term view there. That's the right thing to do, and we'll all be rewarded for that. EBS, same thing on the investments in R&D and sales. Investment expenses, those are going to drive sales. And so those are investments. That doesn't cover all of the margin decline, but those particular instances are absolutely investments in our future and we're all going to be rewarded for that.

And just a follow-up on the supply chain management. Thanks, James, to update us with the recent commentary about the tariffs. But could you talk about -- a little bit about -- more color on the recent -- a lot of the complex situations versus your medium- and long-term supply chain management? And how you see decision make actually happened with some KPIs? And if you see -- if I could touch on like some kind of like a measurement that you did in the past like 3 months, that would be great.

I don't think we have a KPI that we're sharing publicly, but Jeff and the team have really done a good job of continuing to move things out of China. Some of that's into our own Vietnam facility, some of it is -- companies that had operations in China that we contract with are standing up operations in Vietnam and other Asian countries. Obviously, this is very fluid given the tariff environment and where you prefer to be. And as that slows down, we'll continue to refine that. I'd say the team is ahead of schedule in that respect.

This is something, as we've mentioned a couple of times, Tomo, that we've been doing for years. We have seen just from geopolitical reasons the desire to move away from China into our own Vietnam facility and other parts of Asia and here domestically in the U.S. where things are appropriate. And Aspen being fully U.S. manufacturing helps that even more as a percent of cost of goods sold. So that helps minimize that impact to some degree.

So we certainly internally are tracking things very carefully on which products we're able to move out. As I said, we're ahead of schedule. Our contractor partners have helped with that. They're doing a good job. We've brought some extra product into our inventory. We're in the process of doing that right now for 2 reasons. Number one, to get ahead of some of the tariffs that could go into a place as soon as tomorrow. And also, as these facilities are transitioning, let's be sure we have plenty of inventory for our customers so as that transition happens, we don't run out of anything. So you could see working capital pop a little bit on inventory this quarter, and then we'll work it down. Nothing terribly unusual, but you might see that.

So we're tracking those inventory levels carefully. We have something we call weeks in stock. We know how much inventory we need for the demand we expect, and our teams are doing a great job with that. And then again, Jeff and his supply management team are doing a really good job of tracking product by product, contractor by contractor, when things are supposed to move and where we are in terms of schedule. And so nothing numerically or a KPI to publicly release, but there's a lot of internal charts and graphs and tables and those kind of things that our team is working on 24/7.

Congrats on many milestones.

Our next question comes from Natalia Bak with Citigroup.

Maybe just sticking to EBS first, but you called out prospective revenue opportunities supported by growth investments in R&D and sales force. Can you just elaborate on where you're seeing these prospective revenue opportunities? Is it data center related? And can you maybe also size that pipeline as well?

Yes, there are a number of them, Natalia. I would say, for instance, just to back up one step, some of the R&D would be like in testing. A lot of the products that EBS produces are life safety products. They're subject to very significant scrutiny by UL or other testing agencies for kind of performance-related thresholds and standards. And so that testing is expensive and it's very rigorous, but it's also a really nice barrier to entry, right? Once you get certified, then that gives you a product that has that listing and others would have to invest to get that.

So we like those types of products. There are new product developments going on that relate to data centers. We don't talk about it a lot. It's relatively small today. But yes, that's one of the projects that we have spoken about with -- internally with our team recently and beginning to get some traction there that we're very pleased with, and that would be in the fire stopping type of or fire control materials and products that they produce at EBS.

Got it. Helpful. And then switching over to SRS. This was asked earlier, but maybe asking it another way. Can you just elaborate on the magnitude of impact from like lower margin product mix versus commodity inflation versus consolidation costs? Like should we expect margins to rebound sequentially as these onetime consolidation costs subside? And also with the Texas facility consolidation now complete, do you expect any like volume or customer churn impacts in the near term?

Yes, this is James, Natalia. In terms of the margin impact of the few hundred basis points, I'd say 1 to 2 points of that, 100 to 200 basis points of that was the move. It was a few hundred thousand dollars. So out of the $30-plus million of revenue, you had a point or 2 of impact from the move, and that's onetime in nature. And as Joe said, that should flip the other direction because that's going to be efficient for us going forward. That helps us get closer and back to that 20% margin level.

The other piece is there were certainly some headwinds on the input cost. It's hard to parse all of it down. I'd say kind of across the board. The sales mix was probably the biggest factor of what's left in that margin percentage. That can move around quarter-to-quarter. And we've just got some really high-end margin products and some lower-margin products. And sales mix was probably the biggest thing that we would mention there in that respect.

In terms of the consolidation itself, we do think that we're going to see some impact from that. Part of it is certainly cost savings. But we would certainly tell you that having our team running that segment based here in Texas at that facility, our sales team, our operations team, supply management, all those type of folks, having oversight of those products -- and those are the high-margin products, by the way, among the highest margin products that we have in the business. Having oversight of that, being able to see what they're doing, R&D, those type of things, having that locally here, we would say that we do expect an uptick in sales opportunities there.

Is that near term? It's probably more intermediate term. That takes a little bit of time. They've just gotten moved down here in the last couple of months. But I appreciate you picking up on that. We see that as a benefit as well.

But we do not see any real sales churn. We've had no customer issues on the transition. We're shipping product now that's been produced in Rockwell, and we've seen no concerns there from a transition standpoint for our customers.

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Joseph Armes, CEO, for closing comments.

Thank you, Ziko. We really appreciate everyone joining us for the call today and look forward to speaking to you again next quarter. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.