CSW Industrials, Inc. Aktie

Greetings. Welcome to the CSW Industrials Fiscal 2027 Second Quarter Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to Alexa Huerta. Thank you. Alexa, you may begin.

Thank you, Jasmina. Good morning, everyone, and thank you for joining CSW Industrials Fiscal 2027 Second Quarter Earnings Call. Joining me today on the call is Joseph Armes, our Chairman, Chief Executive Officer and President of CSW Industrials; and James Perry, our Executive Vice President and Chief Financial Officer.

Earlier today, we issued our earnings release, updated Investor Relations presentation and quarterly report on Form 10-Q. Each is available on the Investors section of our website at www.ir.csw.com. Today's call is also being webcast, and replay information is included in the earnings release.

Before we begin, I would like to remind everyone that today's discussion will include forward-looking statements. These statements reflect our current expectations and assumptions and are subject to various risks and uncertainties that could cause actual results to differ materially.

Additional information about these risks is included in our earnings release, our comments on today's call, our annual report on Form 10-K and our other filings with the SEC. Except as required by law, we do not undertake any obligation to update any forward-looking statements.

I will now turn the call over to Joe.

Thank you, Alexa, and good morning, everyone. Today, we reported all-time record results in several metrics, including revenue, adjusted EBITDA, adjusted EPS and cash flow for the first half of fiscal 2027, underscoring the wisdom of our strategy, the excellence of our execution and the resilience of our business. Recent acquisitions have strategically expanded our product portfolio and enhanced our growth trajectory.

Consistent with our enduring capital allocation strategy, we prioritized debt reduction during the quarter, paying down $91 million in outstanding debt and further deleveraging the company. CSW also returned a total of $10.7 million in cash to shareholders, including $5.8 million in open market share repurchases and $4.9 million in dividends.

Our net debt-to-EBITDA ratio declined from 2.37x at the end of fiscal first quarter of 2027 to 2.1x at the end of the fiscal second quarter, driven by lower net debt and EBITDA growth. Our strong balance sheet continues to -- our strong balance sheet and record cash flow continues to give us the flexibility to pursue investment opportunities as they arise.

End market activity followed a more typical seasonal pattern during the quarter despite continued macroeconomic uncertainty. All 3 of our business segments delivered impressive top line results when excluding the Greco business from EBS, and we achieved consolidated EBITDA margin expansion.

Our Contractor Solutions segment delivered strong organic revenue growth of 13%, accompanied by 31.5% adjusted EBITDA growth. The addition of MARS and Aspen has broadened our product portfolio, expanded the repair solutions we offer and increased our scale.

Together, these capabilities position us to continue to serve customers more effectively and capture additional share of wallet growth through cross-selling. We continue to expect this segment to outgrow within markets served and deliver healthy mid- to high single-digit organic growth through the cycle.

Our Specialized Reliability Solutions segment delivered record results across the board, including EBITDA margin above our 20% target for this segment. The integration of the 2 recent acquisitions continue to drive accretion. Adjusted EBITDA margin expanded 490 basis points, and we expect margin performance to remain strong for the full fiscal year. Strong organic revenue growth of 12.7% was a result of pricing discipline, volume growth and strategic product placement and availability.

We continue to advance the planned exit of the Greco businesses within our Engineered Building Solutions segment. Excluding the Greco businesses, the segment delivered organic revenue growth, a solid EBITDA margin, and exited the quarter with a healthy order backlog and increasing book-to-bill ratio. We remain confident in this segment's outlook, differentiated product offering and margin trajectory.

At this time, I will turn the call over to James for a detailed review of our financial performance. And following his update, I will return with some closing comments.

Thank you, Joe, and good morning, everyone. As Joe noted, CSW delivered another outstanding quarter, highlighted by record results and continued progress integrating our recent acquisitions. I will review our consolidated performance, segment results, cash flows and balance sheet.

For the second quarter of fiscal 2027, consolidated revenue increased $84 million or 31% year-over-year to a record $361 million. Growth was driven by strong organic performance and contribution from recent acquisitions. Consolidated organic revenue growth was 10.2%, reflecting impressive double-digit growth in the Contractor Solutions and Specialized Reliability Solutions segments as well as growth in the Engineered Building Solutions businesses that we will retain following the planned exit of the Greco businesses.

Adjusted gross margin was 42.1% compared with 43% in the prior year period, a decline of 90 basis points, primarily attributable to increased ocean and domestic freight expense as well as rising raw materials costs. Although we were impacted by this inflation as well as ongoing tariffs, planned pricing actions across our businesses offset most of the dollar increases.

Consolidated adjusted EBITDA for the fiscal second quarter rose to a record $97 million, an increase of $24 million or 33% from the prior year period. reflecting stronger market demand and the earnings power of our expanded product platform. Adjusted EBITDA margin expanded 50 basis points to 26.8%, supported by the contribution from recent acquisitions, strategic pricing actions, synergy and restructuring realization and disciplined cost controls as we grow. These results highlight the scalability of our business model and the margin opportunity embedded in our product portfolio.

Adjusted EPS for the fiscal second quarter was $3.66, an increase of 24% from the prior year period. As previously communicated, EPS growth trailed EBITDA growth primarily due to net interest expense, which increased by $11.1 million, reflecting the higher debt balance associated with significant acquisition activity and share repurchases over the past year.

Turning to items excluded from adjusted EPS. The fiscal second quarter included, on an after-tax basis, $11.5 million or $0.70 per share of acquired intangible amortization and $0.9 million or $0.05 per share of acquisition-related integration costs.

In Contractor Solutions, fiscal second quarter revenue was $286 million, accounting for 78% of our consolidated revenue and representing growth of more than 37% from the prior year quarter. Acquisitions contributed $51 million or 24% of growth, while our organic growth contributed $26.8 million or an impressive 13%.

Contractor Solutions delivered its third consecutive quarter of organic growth, supported by both pricing and volume. Of note, we now estimate that approximately 75% of this segment's revenues are tied to replacement and repair demand. Our revenues tied to new housing comprises only about 25%, positioning us very well in various economic cycles.

Contractor Solutions generated adjusted EBITDA of $89 million, representing a margin of 31% compared with $68 million and a margin of 32% in the prior year period. The year-over-year margin decline primarily reflected higher freight and raw materials costs, partially offset by pricing actions.

Of note, looking ahead, we announced a mid-single-digit price increase in this segment just this week to offset the rising costs. It will go into effect later this calendar year. As costs have risen quickly in recent months, there's a bit of a timing mismatch before pricing takes effect to offset cost.

I would like to provide one final update on the MARS synergies. We are approaching a total of $15 million in synergies related to the acquired MARS business, surpassing our originally stated target of $10 million. All of the synergies have been actioned and most have been realized as our first year of ownership comes to a close.

Specialized Reliability Solutions revenue increased 28% to $50 million. Acquisitions contributed $5.8 million or 15%, while organic growth contributed $4.9 million or 13%, driven by volume growth, pricing actions and our continued focus on product availability and customer service.

Adjusted segment EBITDA in the second quarter was $11 million, an increase of 66% and adjusted EBITDA margin expanded 490 basis points to 21.5%. The improvement reflects restructuring savings from actions taken earlier this calendar year, multiple strategic pricing actions, favorable product mix and contribution from the higher-margin acquisitions. Integration of the 2 businesses acquired in the fiscal third quarter of 2026 is now substantially complete.

In response to rising costs for certain petroleum-based inputs in the Specialized Reliability Solutions segment, we have announced 4 separate price increases during fiscal 2027, including the most recent increase earlier this month. We continue to monitor input costs closely, and we'll take additional pricing as appropriate. Demand has remained resilient to date in this segment. And in fact, we recorded our highest ever incoming order day in early October.

Within Engineered Building Solutions, we previously announced our plan to sell the Greco U.S. business and strategically exit the Greco Canada business. The Greco U.S. business was classified as held for sale as of March 31, 2026. We will continue to update our progress on this as warranted on future earnings calls.

Excluding the Greco businesses, Engineered Building Solutions segment revenue was $22.7 million, an increase of 2.4% from the prior year period. Adjusted EBITDA was $4.4 million with an adjusted EBITDA margin of 19% compared with 22% in the prior year. The remaining EBS businesses continue to perform well, supported by a trailing 4-quarter book-to-bill ratio of 1.05:1 and a healthy backlog despite a shorter historical book-to-bill cycle, reducing the amount of revenue captured in the reported backlog. We have raised our prices as materials and freight costs have risen and expect to have another round of price increases in the near future across all of our product lines.

Turning to consolidated cash flow. Operating cash inflow reached a record $95 million in the fiscal second quarter compared with $62 million in the prior year quarter. This 54% year-over-year increase primarily reflected contributions from increased organic sales and acquisitions completed during fiscal 2026, partially offset by higher interest expense associated with increased borrowings.

Free cash flow, defined as cash flow from operations less capital expenditures, was an inflow of $92 million in the fiscal second quarter compared with an inflow of $59 million in the prior year period. As Joe mentioned, this allowed us to repay a significant amount of debt during the quarter, which led to a lower pricing tier for our revolver and term loan, essentially offsetting the most recent increase in rates by the Federal Reserve.

Our effective tax rate for the fiscal second quarter was 24.1% on a GAAP basis. We expect amortization of intangible assets to be approximately $61 million for fiscal 2027. At quarter end, we had $767 million of debt outstanding under our revolving credit facility and Term Loan A.

Reflecting the higher debt balance as compared to last year, fiscal second quarter interest expense was $12.5 million compared with $1.3 million in the prior year quarter. We currently expect fiscal 2027 interest expense of approximately $49 million, assuming no additional M&A or outsized share repurchase activity.

At quarter end, our net debt for covenant purposes was $734 million, resulting in a net debt-to-EBITDA leverage ratio of 2.1x. Accordingly, the interest rate on both debt instruments will now be SOFR plus 175 basis points, a 25 basis point reduction. As a reminder, in the third quarter of fiscal 2026, we entered into an interest rate swap that fixed SOFR at 3.42% for 3 years on $300 million of our Term Loan A balance. That fixed rate remains well below the current SOFR level and continues to generate meaningful interest expense savings.

We continue to maintain a strong balance sheet with a net debt-to-EBITDA well within our target range of 1x to 3x. This provides ample liquidity to support growth initiatives and broader capital allocation priorities. During the quarter, we repurchased approximately $5.8 million of our common stock in the open market at an average price of $298 per share. These repurchases reflect our confidence in CSW's long-term value creation opportunity and our disciplined approach to capital allocation.

Our outlook for fiscal 2027 remains positive, supported by buying patterns that are closer to historical norms. Excluding the Greco businesses within Engineered Building Solutions, we expect each segment to deliver year-over-year organic revenue growth and EBITDA growth, driven by resilient demand, acquisition contributions, cost management and continued strong execution.

At the consolidated level, we expect significant growth in adjusted EBITDA and EPS in fiscal 2027. GAAP EPS will reflect the full year impact of higher interest expense and increased intangible amortization from our recent acquisitions. As a result, adjusted EBITDA remains the clearest measure of our underlying profitability growth and the expanding earnings power of the business.

We also expect to generate strong free cash flow in fiscal 2027, a significant growth from the fiscal 2026 level. Finally, we still expect our fiscal year 2027 GAAP tax rate to be approximately 22% to 23% and the adjusted tax rate to be approximately 25% to 26%. Quarterly rates will vary based on specific items.

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

Thank you, James. CSW delivered an impressive fiscal second quarter 2027 with revenue growth of 31% and margin expansion, supported by volume leverage, acquisition integration and synergy realization. Recent acquisitions are filling in previous product portfolio gaps, strengthening our wallet share through new business with legacy customers through cross-selling and accelerating our growth trajectory.

All teams are executing with discipline while delivering strong above-market profitable growth. Our planned exit of the Greco businesses further demonstrates our commitment to active portfolio management and long-term shareholder value creation.

Our execution strategy for the year remains consistent. We will prioritize driving long-term shareholder value, allocating capital efficiently on a risk-adjusted returns basis, maintaining balance sheet resilience, outgrowing all of the end markets we serve, rigorous cost management and accelerating profitability.

We still expect full year organic revenue growth in excess of our end markets, along with significant growth in adjusted EBITDA, adjusted EPS and free cash flow. At the same time, we will continue to pursue accretive acquisitions that enhance our portfolio and strengthen our ability to serve our customers. CSW takes considerable pride in being a trusted partner to our customers and in making it as easy as possible to do business with us.

Our Contractor Solutions segment was just recently named Home Depot's 2025 Plumbing Partner of the Year, which is an important recognition from a valued retail and distribution customer. This award reflects the team's outstanding customer service and operational excellence, and I want to congratulate the entire Contractor Solutions team, including its leader, Jeff Underwood, on this outstanding achievement.

In closing, I want to thank our CSW Industrials team who collectively own approximately 4% of the company, including our ESOP, for their continued performance and commitment. And I also want to thank our shareholders for your continued interest in and support of CSW Industrials.

So now, Jasmina, we are now ready to open the line for questions.

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

It's actually [ Jeremy ] on for Jon. Can you break out the organic volume growth versus price in the Contractor Solutions business and what you're expecting there for the remainder of the year?

Yes, [ Jeremy ], it's James. Thanks for being on for Jon this morning. Good to hear from you. I'll say this, in both Contractor Solutions and Specialized Reliability Solutions, which each had about 13% organic growth, really, really proud of Jeff and Mark and their teams in those businesses for that type of growth in this environment. Price and volume both contributed. Volume was a little more than price in each, but both were significant contributors.

In terms of going forward, other than forecasting, we expect organic growth for the rest of the year, we're not able to get that much detail looking for the remaining quarters of the fiscal year. But as Joe said, we expect organic growth above the end markets in both segments as well as EBS, and we do expect to have positive momentum.

And then you mentioned that you may see some near-term margin percentage headwinds from inflation. Having said that, you've historically had really good pricing pass-through power. So are there any changes to your profit dollar expectations going forward versus last quarter?

No, that's a good distinction, [ Jeremy ]. This is James again. When we push pricing through, our first priority is to cover the dollar impact from cost increases. We've done that in SRS, as we said 4 times already this fiscal year. Contractor Solutions had a price increase mid-summer and just this week announced another price increase, a little earlier than we normally do. That will go into effect, a mid-single-digit price increase, later this calendar year. Normally, that's a January, February type event.

As we look at the last couple of months and the next couple of months, when we put in place the July price increase, we tried to cover what costs had come through, but didn't necessarily and weren't able to anticipate diesel continuing to go up, some commodity prices continuing to go up and ocean freight continuing to rise. So this price increase we're putting in December covers that and what we anticipate going forward.

But you've got a little bit of a timing mismatch. We always try to stay ahead of that. Some of those costs, as you know, take a few months to come through the system in inventory, like ocean freight and the overseas commodity costs. But things like over-the-road trucking with the diesel spike we've seen in the last few months, certainly since the spring, that that's continued with record diesel prices. Those are pretty real-time commodity prices here in the U.S., but inventory turns faster.

So the team has done a great job managing that as well as they can. We're playing a bit of catch-up on this new price increase. So you're going to have a little timing mismatch and a little margin headwind. The goal is always, as I said, and you emphasized, to cover margin dollars across the board and then continue to work back towards the same margin percentages as we go through the next fiscal year.

Super helpful. That makes sense. And if I could just squeeze one more in. What are you guys seeing in terms of the M&A pipeline? Are you seeing opportunities increase or decrease in the current environment, especially against the backdrop of rising rates?

You bet, [ Jeremy ]. This is Joe. Yes, we've been very, very pleased with the pipeline. A number of opportunities that we have seen and continue to see, analyze and diligence, so we have not seen any decrease at all. In fact, I'm pleased with a little bit of an uptick in activity there, and I think that bodes really well for the future. And we view ourselves as financially strong on a relative basis compared to others. And so a little bit of softness in the market sometimes can be helpful to us on valuation and just our relative ability to transact. So we're pretty bullish on that and feel good about the robust pipeline that we see.

Our next question is from Tim Wojs with Baird.

I think I know the answer to this question, but I'm going to ask it anyway. A couple of the HVAC OEMs, the equipment OEMs, just over the last couple of months, have had trouble putting pricing into the market. I think it's kind of related to the size of the tariffs, and it's mostly on the equipment side. But is that anything that kind of you've heard in terms of your pricing increases and your ability to pass through price, acknowledging that's not always easy? But has there been any change in kind of the customer acceptance of price in your eyes?

Tim, we hear about the affordability and the price increases that have been harder for the OEMs. I would just remind you and you know well, but I mean, our products are so much lower priced, low cost, high value, a very small portion of the total kind of cost of a replacement of a new system. And so we don't seem to have the same dynamics that the OEMs have on price increases. So it's not a material issue for us at this point. And so it's always easier from my office to pass along the price increase than it is from Jeff's. But no, we don't see that as a concern at this point.

Okay. Okay. And then I mean, this is kind of in the weeds, but like the side discharge units have gotten a lot more kind of -- have become more prominent, I think, in the industry. Does that -- do you have any sort of differences in content as you think about those types of units versus kind of a standard vertical discharge unit?

Tim, I'll let Jeff chat with you later on about specifics there. We haven't seen anything dramatically different, but I think Joe and I might get over our skis if we get too detailed on that. I know you asked that with some of the OEMs this week, and I learned a little bit from that as well. But why don't we let Jeff address that with you offline as well.

Okay. Okay. I'll sneak another one in then. Just the acceleration in kind of double digit, the acceleration, it looks like in volume, how much of that would you guys ascribe to just the industry getting a little bit better sequentially versus your initiatives kind of incrementally gaining some steam?

Yes, I'll say a few things, Tim. Yes, I think we saw things were healthier this year. As we pointed out in our remarks, 75% of our business is replace and repair, and I think that's remained pretty healthy. Only 25% is new housing-focused right now. And so we're able to lean into what people are buying. People are repairing their units. They're replacing when they need to, not as much on the new construction, obviously, as you well know.

So I think the market is in a healthy place. I'll remind you, last year, organic growth was negative, so it doesn't hurt that the comp gets a little bit easier. And then as Joe pointed out in his remarks, these acquisitions have given us a lot of cross-selling opportunities and how important that is, our legacy customers want to buy more product from us. So adding Aspen, adding MARS, those type things -- MARS wasn't quite organic yet, but it will be here in 4 more days. But those type products, we did a lot of product rationalization and moved some of the MARS product line over to RectorSeal, the legacy business, which is organic.

So a lot of that cross-selling is important, and that really supercharges our growth opportunity, which is why we have confidence in maintaining our return to organic growth.

Yes. I would just add, yes, I think our team is doing an outstanding job, and I would absolutely give them credit for really outperforming and that cross-selling and wallet share growth gains, really, really impressive and just a great job by the team.

Our next question is from Tomo Sano with JPMorgan.

Maybe just on Specialized Reliability Solutions, SRS, margins reached 21.5% this quarter, already above your long-term target of 20%. How should we think about the sustainability of that margin level? Is there further upside as you realize synergies? Or was there some unusual favorable mix this quarter?

Yes, Tomo, this is James. Thanks for being on. As always, I appreciate your coverage. Nothing unusual this quarter. The team is doing a great job. We had some restructuring back in our fiscal fourth quarter, calendar first quarter, that's fully embedded now. Both acquisitions are just about fully integrated. We've got everything in our facility out here east of Dallas on the Rockwall plant that you've seen before, Tomo. And we're picking up those synergies, picking up the benefit of the integrations.

Team is doing a great job. They've got good demand in their business. We talked about earlier this month that we had our biggest ever order quarter, but orders remain solid. Pricing has come through now with those price increases we had. We'll remind you there's some seasonality. This next quarter tends to soften just a little on the top line and bottom line, not too dramatic, but softens just a little bit in both SRS, really across the board. All 3 segments have a little bit of a winter seasonality.

But overall, we're very confident in the long-term 20-plus percent margins. Now you're at 21.5% this quarter. And we would tell you that, overall, yes, there's upside here. Mark and his team are doing a great job running that business. The customers really rely on them around the globe for product, which is, with the supply chain issues, a key factor right now, and our ability to push through price, push through freight costs as we need to, those type things. So yes, we would tell you that there's room to continue to grow that margin line.

And on EBS, excluding Greco, the backlog sounds healthy, and you've talked about the improving backlog quality, but margins were still 19.3% this quarter. What needs to happen to get margins back into the low 20s? And when should we start to see the benefit from higher-margin products in the backlog?

Sure, Tomo, James again. Great question. Yes, the team is doing a great job. The commercial construction market, you look at ABI and any kind of metric, and it remains pretty soft. So the team is doing a great job keeping that book-to-bill above 1 at 1.05 on a trailing 4-quarter basis. The backlog is doing well. Scott and his team are really putting forth good efforts getting things in.

You're still working through some projects that weren't priced quite as strongly necessarily and with some rising commodity prices that hit you a little bit. We've said the long-term goal there is for 20%. Last year, you were a little above 20% this quarter. Last quarter, you were a little above. That's a relatively small business, and you've got a few projects that can make a big difference in the margin. You put out a couple of million dollar project in the quarter or a $1 million project in the quarter with really good margins or a little weaker margins, that can move the needle quite a bit.

So you're hovering around that 20% consistently now, which was our goal. And we would tell you we still have all the confidence that, medium and long term, you're going to be above 20% and growing from there as the business continues to pick up good projects. And as the commercial construction market does come back at some point, you'll really have a nice tailwind.

Great. Congrats on the quarter.

Thank you, Tomo.

Our next question is from Susan Maklari with Goldman Sachs.

This is Charles Perron in for Susan. I guess my first question, I just want to talk a little bit more about what you're seeing in terms of Contractor Solutions. Are you seeing maybe a little bit more shift to repair versus replacement, given the macro environment that we're in today? And what does that mean for your business if you're seeing some of that?

Well, yes, I mean, I think we've been seeing that for some time now. Several quarters, we have commented that our acquisitions, which increased our exposure to the repair market were really well timed. And the increased focus on repair, folks wanting to repair versus replace because of the cost increase, as we mentioned, it was discussed earlier, of the OEM equipment. We're really well positioned in that regard, as James quoted, at 75% repair and replace versus new residential construction.

So we like the portfolio where it is right now. It provides resilience through the cycles, and there will be another cycle. And so we do want some exposure to the replacement and to the new resi construction. And so -- but I think what you're seeing here is really, really resilience in a portfolio that's well balanced and allows us to thrive through kind of any cycle.

And Charles, I'll remind you, Jeff said this before and reminds us, if you can repair, you're going to repair. If you can get away with a $100 repair or $1,000 repair, you're going to do that over replace. So yes, that shift is real, but you're almost always going to pick that option in that scenario. But that's why, as Joe said, we lump together repair and replace at 75% because that can move back and forth.

Got it. That's very good color. I guess my follow-up is, in your prepared remarks, you talked about your continued effort to drive productivity across the business to further expand your margins over time. Can you provide a little bit more details about some of the initiatives that are going on right now? And how do you think about the potential upside that it could provide to margin?

One thing I would say, and Joe says this a lot, and we really subscribe to this with last year's $1 billion of acquisitions, just because we grow at the top line doesn't mean we need to add overhead or anything like that within the facility or the corporate or kind of business segment type level. So I think we're doing a great job with cost discipline. The team is always looking to get more efficient.

The team in Vietnam does a tremendous job with their efficiency goals every year. We get readouts all the time on their initiatives there, how they're getting more efficient in that facility, working with the labor pool that they have, getting more through that plant. The dozens of containers a week we bring over here is a testament to that and what a good job they're doing in that facility. We have freed up a lot of capacity since we bought that company almost 6 years ago now.

But I'd say, across the board, every business right now, all 3 of our business leaders are challenging themselves and their team to find ways to get more productive. As I said, when you grow organically or through acquisition, not necessarily adding the overhead that you might need there, doing more with the same amount of folks you have. And as we grow that top line, $1.3 billion and beyond on a run rate-type basis, I think you'll see margin opportunity continue to be there for us.

Our next question is from Sam Reid with Wells Fargo.

This is Eric on for Sam. Just want to ask about -- you've got volume growth in CS and SRS. I'm just curious if you're seeing anyone take preloading ahead of the price increases that you've already taken. It sounds like there's more coming, so people are just trying to get ahead of that, and sort of what you're seeing from the channel inventory levels?

Yes, Eric, thanks for being on. This is James. Appreciate that. Yes, I'd say this, I'll separate the 2. In SRS, you've had 4 price increases this year. You had 3 in a row, back in the spring and early summer, and then we just put one forth a couple of weeks ago. And we haven't seen that. I talked about we had our biggest order day ever earlier this month. That was a couple of weeks ahead of the price increase. But Mark and the team tell us that they don't really see that. People either need the product or they don't. And so it's not that big a thing.

Contractor Solutions, we just put -- we had our price increase back in July. We just announced this week another price increase for later this calendar year. Like I said, that's a little earlier than normal to cover the cost that we've had, that we've gotten hit with on the freight, both domestic and ocean as well as commodity costs and ongoing tariffs. But that's normal. Normally, that might have been maybe January, we're doing a little bit earlier this year, but people aren't buying product months ahead of time, that would have gone through this last quarter for that. So you occasionally, the week before, may see people take a little product, but you didn't see an impact of that in the quarter, no.

Great. That's good color. And just on -- you talked about the cross-selling opportunities and some of the acquisitions expand market wallet share opportunities. I wonder if you can just dive in a little more of what you're seeing from the increase in wallet share. And on MARS, you also raised the synergy target. I believe this is the fourth time now you've done it. Can you just talk about where you're getting the incremental upside from? And is there any further upside from here?

Yes, I'll talk about MARS. I think we'll always say that we're looking for efficiencies and synergies. We won't report that anymore now that we're at the 1-year anniversary. We will tell you that our internal goal was always well ahead of $10 million, but we were proud to announce $15 million. And I'll say we didn't necessarily intend to talk about it this quarter, but the team kept finding synergies. So we wanted to update that for you from last quarter.

Yes. So they'll become organic here in a few days as we hit the 1-year anniversary. So what becomes the synergies just versus productivity efficiencies gets pretty blended at that point. But really proud of the work the team has done there to get those synergies, some of those ahead of schedule. We said we thought $10 million in the first year. We've already hit $15 million. I don't think we thought we'd hit $15 million in the first year. That was a little further out. So really proud of that.

In terms of cross-selling and wallet share, that's just an ongoing piece we have. We just had midyear reviews with all the teams and Jeff and the team at Contractor Solutions talked about new business opportunities we had with existing customers, wins we had in the first half, wins that are coming in the second half that have been committed. Joe talked about winning the Plumbing Partner of the Year with Home Depot. That's a part of that, too. We bought a small plumbing company a couple of years ago, and the team that came with that really knows how to sell to the retail channel, found more and more legacy products that they could sell into the retail channel, and that went into that award that we received.

And so folks like Home Depot, folks like our distribution customers want to continue to buy more of our products, we've got to figure out the best fit for them, be sure they understand where the distribution centers are and build those relationships. Those are often years long sales cycles because we're displacing somebody else. But we continue to see win after win from that team and really proud of the work they've put in.

We have reached the end of the question-and-answer session. I would like to turn the floor back over to Joe Armes for closing comments.

Yes. Thank you, Jasmina. I just want to thank everybody for joining us. Really, really proud of the outstanding quarter and the financial results that we reported today and look forward to our next time to do this next quarter. So thank you for your support.

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

Greetings and welcome to CSW Industrial Equipment. Incorporated fiscal 2027 first quarter earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to Alexa Huerta.

Thank you. You may begin.

Thank you, Julian. Good morning, everyone, and thank you for joining CSW Industrials' fiscal 2027 first-quarter earnings call. Joining me today on the call is Joseph Arms, our chairman, chief executive officer, and W. Industrials, and James Perry, our Executive Vice President and Chief Financial Officer. Earlier today, we issued our earnings release, updated investor relations presentation, and quarterly report on Form 10-Q, each of which is available on the Investor section of our website. at www.ir.csw.com. Today's call is also being webcast and replay information is included in the earnings release. Thank you. Before we begin, I would like to remind everyone that today's discussion will include forward-looking statements. These statements reflect our current expectations and assumptions and are subject to various risks and uncertainties that could cause actual results to differ materially.

Additional information regarding these risks is included in our earnings release, our comments on today's call, our annual report on Form 10-K, and our other filings with the SEC. We do not undertake any obligation to update any forward-looking statements except as required by law. With that, I will now.

I'll turn the call over to Joe. Thank you, Alexa. And good morning, everyone. The exceptional fiscal first quarter results we reported today demonstrate the power of a disciplined capital allocation strategy laser focused on growing shareholder value through market cycles. We are reporting all time record revenue, adjusted EBITDA, adjusted earnings per diluted share and operating cash flows due to the resilience of our businesses, the efficiency of our operations and the successful integration of our recently completed acquisitions. Guided by our enduring capital allocation strategy, since May 1 of 2025, we have invested approximately $1 billion to consummate five highly accretive and synergistic acquisitions, including the transformative additions of Mars Park parts, and Aspen Manufacturing, plus three smaller but still immediately accretive acquisitions across our contractor solutions and our specialized reliability solutions segments. Aspen Manufacturing As I mentioned earlier, the integration of each of these businesses has gone very well. Simultaneously, we have continued to return meaningful capital to shareholders.

During the quarter, CSW returned a total of $28.4 million in cash to shareholders through $23.5 million of open market share repurchases and $4.9 million in dividends. Our continued investment in our own shares demonstrates our strong belief that our equity has been undervalued relative to our growth and profitability and cash flows, thus representing a compelling investment opportunity. Concurrently with our share repurchases, we also delevered during the quarter, reducing our net debt-to-EBITDA ratio from 2.55 times at fiscal 2026 year end to 2.37 times at the end of the fiscal first quarter. through the reduction of net debt plus growth in our EBITDA. Our balance sheet strength gives us the flexibility to exploit all capital allocation alternatives open to us. End market momentum remained constructive despite the various dynamics in the macroeconomic environment during the quarter. All three of our business segments generated strong top-line results accompanied by margin expansion. Our contractor solutions segment is growing and expanding margins.

Benefiting greatly from the comprehensive product offering created by the addition of Mars and Aspen, we are positioned to serve our customers well as we move through peak cooling season. We continue to expect this segment to outgrow the end market served, which would would result in mid to high single-digit organic growth through the cycle. Our specialized reliability solutions segment delivered robust, organic revenue growth with an EBITDA margin in excess of the 20% target that we have for this segment. The integration of the two recent acquisitions continues to provide accretion, and we expect to show continued margin strength for the full fiscal year. We continue to work toward the exit of the GRECO business in our engineered building solutions segment. Excluding the GRECO business, the segment generated organic revenue growth, a strong EBITDA margin, and we exited the quarter with record order backlog, reinforcing our confidence in the segment's outlook and margin trajectory. At this time, I will turn the call over to James for a detailed review of our financial performance, and then I will return afterward with a few closing comments.

Thank you. Thank you, Joe, and good morning, everyone. As Joe said, this was a strong quarter for CSW, highlighted by record results and significant progress integrating our recent acquisitions. I will cover our consolidated performance, segment results, cash flows, and our balance sheet. For the first quarter of fiscal 2027, Consolidated Revenue increased $87 million and reached a record $351 million, up 33% year-over-year. Growth was primarily driven by the recent acquisitions with additional contribution from organic revenue growth. We are pleased to report consolidated organic revenue growth of 5.3%, coming from the contractor solutions and specialized reliability solution segments, as well as the businesses that will continue in and engineer building solutions following the exit of the Greco businesses. Adjusted gross margin was 45.1%, up 130 basis points from 43.8% in the prior year period. primarily due to favorable product mix, as well as cost savings resulting from certain restructuring actions and synergies from our acquisitions.

While there has been cost inflation in multiple raw material inputs, as well as in both ocean and domestic freight, we have been successful in offsetting these increases and continued tariff costs through recent price increases across our businesses. Consolidated adjusted EBITDA for the fiscal first quarter was a record $102 million, up $33 million, or 48% from the prior year period. demonstrating the earnings power of our expanded product platform and improving market demand. Adjusted EBITDA margin expanded 290 points to 29%, supported by the contribution from recent acquisitions, strategic pricing actions, synergy and restructuring realization, and discipline cost controls as we grow. These results highlight the scalability of our operating model and the margin opportunity embedded in our product portfolio. Adjusted EPS for the fiscal first quarter was $3.84, up 35% from the same period last year. As we've communicated, EPS growth trailed EBITDA growth primarily due to higher interest expense, up $11.7 million, as we have a higher debt balance following the significant acquisition activity and share repurchases over the last year. Turning to items excluded from adjusted EPS, the fiscal first quarter included net of tax, $11.8 million or 72 cents per share of amortization of acquired intangible assets, and $1 million or 6 cents per share of acquisition-related integration costs.

In contractor solutions, fiscal first quarter revenue was $276 million, representing 78% of our consolidated revenues. Segment revenues increased by over 40% as compared to the prior year quarter. Acquisitions contributed $68 million, or 34.4%, while organic growth contributed $11.6 million, or 5.9%. We are pleased to have delivered a second consecutive quarter of organic growth in contractor solutions, with contribution from both increased pricing and volumes. Organic growth in the quarter includes two months of Aspen sales due to last year's acquisition on May 1st. Contractor Solutions adjusted EBITDA was $94 million with a 34.2% margin compared with $65 million or a 33% margin in the prior year period. The year-over-year margin accretion primarily reflects favorable product mix, pricing actions, and partial synergy realization offset by raw materials and freight inflation.

We are pleased to announce that our expectation for Mars Parts' run rate cost synergies is now $13 million, exceeding our earlier estimates, and we have already achieved our 30% EBITDA margin goal for Mars in the last two quarters. Specialized Reliability Solutions revenue increased 30.9% to $48 million, including $5.3 million, or 14.5% from acquisitions, and $6.1 million, or 16.5% from organic growth. Adjusted segment EBITDA in the first quarter was $10 million, up 54%. An adjusted EBITDA margin expanded 320 basis points to 20.8%, driven by higher margin acquisitions, strategic pricing actions, and a favorable product mix. The integration of the two businesses acquired in the fiscal third quarter of 2026 continues to progress successfully. In response to rising costs for certain petroleum-based inputs in the Specialized Reliability Solutions segment, we announced three separate price increases during the fiscal first quarter to offset the impact. We continue to monitor the situation very closely, and we will continue to take appropriate pricing action as needed.

We continue to see solid demand momentum and resiliency to date, and the team has done an excellent job integrating the acquired businesses. Within the Engineer Building Solutions segment, we previously announced our plan to sell the Greco-US business and strategically exit the Greco-Canada business. The Greco-US business was classified as held for sale as of March 31, 2026. We will continue to update our progress on these transactions as warranted on future earnings calls. Excluding the Greco businesses, engineer building solution segment revenue was $23.4 million, up 7% over the prior year period. Segment adjusted EBITDA was $6.1 million, and adjusted EBITDA margin was 26.2%, compared with 17.5% in the prior year. The remaining EBS businesses are performing well, with a trailing four-quarter book-to-bill ratio of 1.04 to 1, along with a record backlog. supporting our confidence in solid margins going forward.

We have transitioned to a four-quarter metric due to the nature of the remaining businesses in this segment. Turning to consolidated cash flows, we had an operating cash inflow of $76 million in the fiscal first quarter, compared with $61 million in the prior year quarter. The year-over-year increase primarily reflects the contribution from the acquisitions completed during fiscal 2026, despite the higher interest expense from increased outstanding borrowings. Pre-cash flows, defined as cash flows from operations less capital expenditures, was an inflow of $70 million in the fiscal first quarter, compared with an inflow of $58 million in the prior year period. Our effective tax rate for the fiscal first quarter was 25.6% on a gap basis. We expect amortization of intangible assets to be approximately $61 million for fiscal 2027. At quarter end, we had $858 million of debt outstanding across our revolving credit facility in the term loan A.

Reflecting the higher debt balance compared to the prior year, interest expense during the fiscal first quarter of 2027 was $12.7 million, compared with $1 million in the prior year quarter. We currently estimate fiscal year 2027 interest expense of approximately $48 million. This assumes no M&A or outsized share repurchase activity. At quarter end, our net debt for covenant calculation purposes was $815 million, resulting in a net debt to EBITDA leverage ratio of 2.37 times. This results in an interest rate of SOFR plus 200 basis points for both of our debt instruments. As a reminder, in the third quarter of fiscal 2026, we executed an interest rate swap to fix SOFR at 3.42% for three years to hedge $300 million of our term loan A balance. This swapped interest rate remains well below the current SOFR rate, generating interest expense savings.

We continue to maintain a strong balance sheet, with the net debt to EBITDA well within our target range of one to three times. This provides ample liquidity to support growth initiatives and our other capital allocation priorities. Consistent with that philosophy, during the quarter, we repurchased approximately $23.5 million of our stock in the open market, representing 88,000 shares at an average price of $267 per share, which reiterates our confidence in our ability to create long-term shareholder value through disciplined capital allocation. Overall, our outlook for fiscal 2027 remains positive. We expect all segments to show organic revenue growth and EBITDA growth versus the prior year, excluding the GRECO businesses within the EBS segment. Supported by resilient demand, acquisition contribution, synergy realization, and continued execution. execution across all segments. At a consolidated level, we expect to see significant adjusted EBITDA and EPS growth in fiscal 2027.

Because GAAP EPS will reflect the full-year impact of higher interest expense and increased intangible amortization from our recent acquisitions, adjusted EBITDA remains the best measure of our underlying profitability growth and expanding earnings power of the business. We continue to expect to deliver strong free cash flows generation in fiscal 2027, with significant growth from the fiscal 2026 level. Finally, we still expect our fiscal year 2027 gap tax rate to be approximately 23 to 24% and the adjusted tax rate to be approximately 26%. Quarterly rates will vary based on specific items. With that, I'll now turn the call back to Joe for closing remarks. Thank you, James. Summarize, CSW delivered an outstanding fiscal first quarter 2027 with revenue growth of 33%, expanding margins due to volume leverage, acquisition integration, and synergy realization. Our acquisitions are strengthening the overall business.

Our teams are executing with discipline. And our portfolio is positioned to deliver sustainable, above-market, profitable growth. Our upcoming exit of the GRECO business demonstrates our commitment to stewarding our portfolio efficiently and and to the long-term value creation benefit of our shareholders. As we move through fiscal 2027, our priorities are clear. Allocate capital with discipline, preserve balance sheet flexibility, deliver growth above the markets we serve, expand our profitability, and realize acquisition synergies. reiterate, we expect full-year growth in organic revenue and significant growth in adjusted EBITDA, adjusted EPS, and free cash flows. Simultaneously, we will pursue accretive acquisitions that enhance our portfolio and strengthen our ability to serve our customers. CSW takes great pride in being the partner of choice for our loyal customers, with the goal of making it as easy as possible to do business with us.

Our specialized reliability solutions segment was recently awarded the 2025 Lifecycle Business Unit Partner Supplier of the Year by Vermeer, who is an important customer. further exemplifying the outstanding customer service and operational execution of our team. And I want to recognize the Specialized Reliability Solutions team and its leader, Mark Bass, for this accomplishment. As we often say at CSW, how we succeed matters, so we continue to focus on our most important asset, which is our people. And I'm pleased to report that CSW reported the safest calendar year first half since we began tracking safety metrics. Our prioritization is to ensure that of keeping team members safe on a daily basis has allowed us to achieve this milestone, and I want to thank every team member at CSW for contributing to our continued success and safety and reaching this meaningful win for the company. Our employee-centric culture continues to be a competitive advantage for CSW. Not only do we offer our team members the opportunity to earn a safe, secure, and dignified retirement, but we also encourage the children of CSW employees to pursue educational opportunities, such as college degrees and trade school certification.

Since 2018, CSW has awarded 57 grants worth $500,000 in the aggregate to the dependents of CSW employees. The scholarship program has historically supported first-generation college and vocational students and is named for the person who established it, who is our former Vice President of Human Resources, Mary Burns. ASW Industrials recently granted seven new scholarships for the upcoming academic year. We are proud to invest in the families of our employees. We hope these students feel affirmed in their ambitions, and will be inspired to do great things. In closing, I want to thank our CSW Industrials team who collectively own approximately 3% of the company, including our ESOP, for their continued performance and commitment. I also want to thank you, our shareholders, for your continued interest and support of CSW Industrials.

Now, Julian, we're ready to open the line for questions. Thank you.

We will now be conducting a question and answer session. If you would like to ask a question, please press star one or your telephone keypad. The confirmation tone will indicate that your line is in question Q. You might press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. And our first question comes from the line of John Tanwatang with CJS Securities.

Please receive your question.

There's actually Jeremy on for John. Congrats on a great quarter, guys. Thank you. Of course. Can you just talk about how your recent acquisitions have been performing versus expectations, especially Mars and Aspen, given the exposure to more repair activity?.

Yes, I'll start, Jeremy. This is Joe. We're very pleased with both of those acquisitions. I think that the integrations have gone very well. Our team has done a great job. a great job working through that. We're extremely pleased with the customer reaction that we've received of our addition of those lines of business, those product lines, into our systems and making, again, making it easy for our wholesale distribution customers to do business with us to get these products on time. orders in full when they need it so that they don't miss sales during the busy season here. So overall, really very, very pleased with the way those have gone and especially with the customer reaction. Yes, we just had both have gone through very successful ERP conversions, Mars back in January, Aspen during this last fiscal quarter. in my remarks, Jeremy, that we've got 13 million of synergies we've talked about publicly now up from the original 10 that we put in the original M&A press release.

We've also hit the 30% EBITDA number two quarters in a row. So we've kind of already hit the targets that we put out there for later this year. So that's behind us. And we can just continue to work on serving our customers well. But yes, back to you.

Both have gone very well. Great, and then could you just talk a little bit more to how trends are looking heading into fiscal quarter two in terms of demand and channel inventory?.

Had good results, at least from one of the industry sources that just came out in recent days. That was positive, so that's good to see. I'm sure most folks on the call would know it's gotten hot most places around the country. And when it gets hot everywhere and stays consistently hot a lot of places, air conditioners are working a lot harder. People are turning them on. Number one can lead to repair, obviously, and we have exposure to that now that we didn't really have before the Aspen and Mars acquisitions. Now we touch that part of the market. And then that leads to replacement at some point.

And obviously, we have a big place in replacement, as we always have. So I think from that perspective, we continue to see nice demand from our customers and the ultimate customer. customer, the homeowner. In terms of channel inventories, I think the general sense we have, not just in one-off conversations, but the metrics we've seen out there, the channel inventories, as we said, last year's overhang, the back part of the year, got kind of resolved through the regular buying season this year, and things are in a good place. We feel good about where that is vis-a-vis our customers and their inventory. and what their expectations for needs the rest of the season are. Great. Thank you, guys, and congrats again.

Thank you, Jeremy. Thank you. And our next question comes from the line of Tomo Osano with J.P. Morgan.

proceed with your question. Good morning. This is Ethan on for Tomo and congrats on the safest calendar year and first half history. Congratulations. Thank you very much. I appreciate that. I'm proud of that. And it's encouraging to see volume growth returning this quarter in CS. Did CSW happen to see any pre-buying within the quarter? And how do you see the end markets performing, specifically like breaking out like new construction, repair, and then like replacement as well?.

Yes, Ethan, it's James. Thanks for your safety comments. That's very important to us, and I know it is to you guys as well, so thank you for that. I don't think we saw unusual pre-buying. We've had some price increases off and on throughout the year across the board, but it hasn't led to anything unusual. So I don't think you saw anything accelerated into the June quarter in any of our business segments that would take away from pre-buying. from now our July, August, September quarter. So nothing unusual there. And again, as we said, demand across the board, we feel good about that. Order rates have been good. We're well into July now and we feel good about that.

Across the board, we mentioned a record backlog in EBS exiting the June quarter. So we've found the right pockets of that market, which can be pretty volatile. Although, of course, commercial construction is still soft with ABI and Dodge Momentum and those type of indices, but our team's done a great job finding the right jobs. Mark Bass's group, Joe called him out specifically, well deserved, that group, with an over 20% margin, continues to perform very well. And they're order-taking and meeting customer demand, doing a great job there with some good momentum there. You know, the energy markets tend to create demand with these kind of prices. You see more of that, and that's been a tailwind to them.

But they've done a great job overall in integrating the acquisitions as well and finding new customers and those type things. And then, as I mentioned earlier, within contractuals. tractor solutions. I think with the hot weather we see, with inventory levels getting back in in a good place earlier this year, we're seeing nice momentum there as well.

Thank you. And then on EBS, the margin profile excluding Greco was up like 180 basis points year over year. Is it? assume that this kind of level of mid-20s percent margin is achievable for the rest of the year and into potentially in the future? Yes.

Yes, Ethan, yes, I appreciate you noticing that. Yes, you know, you had some good projects closing the quarter, and that margin was a little higher than normal. We've talked about a 20% kind of margin going forward. It's going to bounce around as we go through the backlog. You're obviously still delivering some things in the backlog with better margins than others, given some of the commodity costs. Yes, so you had a really good margin. quarter up quite a bit over last year, 17.5% last year, 26.5% this year. But I think for us to continue to keep that kind of 20-plus percent margin, target in this tough market for the full fiscal year still appropriate.

It's going to bounce around a little. Again, longer term, I think the opportunity to be well within the 20s is there. But again, in this market right now, the team's doing a good job finding projects they can to fill the facilities and delivering those projects. You know, we'll have a little bit faster turn of projects in the two remaining businesses. That's why we're doing a little bit of a slowdown. while we moved to a four-quarter book-to-bill type ratio. That was above one-to-one, so that's very positive. So they're seeing some nice momentum, but I wouldn't model mid-20s yet.

We're probably a ways from being able to commit to something like that. Thank you so much. Thanks, Ethan.

Thank you. And our next question comes from the line of Tim Loutz with Baird. Please receive your question. Hey guys, good morning. Nice job. Good morning, thanks.

Maybe just the first question. I hopped on late, unfortunately, so I'm sorry if this is a repeat. Is there any kind of color you can give us on just some of the top line? you know, if there's been any top line contribution, you know, from bringing Mars and Aspen into this organization and kind of cross selling, you know, that that broader portfolio or is that still, you know, kind of, you know, subdued here in the near term and still kind of an opportunity to go forward?.

basis. Just trying to understand if you're already seeing some benefits from that on the top line. Yes, I would say yes and yes, Tim. I think we've certainly seen some contribution. This is now our second full season with Aspen. There wasn't a lot of that conversion last year, but the team's doing a good job cross-selling to our existing customers now that we're in kind of season two of owning the Aspen business. Mars, we got converted over. to the ERP in January, as you know, to better serve our existing customers. I think we're seeing a little bit of that.

Jeff's team has done a great job with that. But we would certainly tell you that there's opportunity for that to continue to grow. You know, as you well know, you know, you try to convert what you can year one and year two, but you see conversions year three, four, and five. You know, we've got so many product categories. It takes a while for some of our customers, the turnover inventory they may have of a competitor's product. So we're getting some nice wins. Our growth includes wins of new business, obviously, having that acquisition growth and organic growth both.

So we're going to continue to see that as a tailwind, I think, going forward. But yes, you've got some contribution, but more to come.

Okay, okay, great. And then when we think about just kind of the timing of input cost inflation, I think is kind of Q1 kind of representative of kind of the price cost cadence you'd expect this year? Or do you see some, you know, kind of higher inflation kind of creeping up through, you know, the rest of the year, at least the rest of the calendar year?.

Yes, good question, Tim. It's bounced around, obviously. You know, we clearly know that our ocean freight, you know, was up quite a bit, came down quite a bit, up quite a bit since the issues in the Middle East, of course. That's made shipping rates quite a bit elevated. You've seen a little relief there the last couple of weeks, so that's encouraging, but we'll wait and see if that's a trend. our team's done a great job within Contractor Solutions with the trucking business, bringing the logistics side of that in-house, not owning the assets, but managing the shipping lanes and so forth. They found some nice savings, but that's been eaten up by higher diesel costs. So that's in there. And as you know, it takes a little while for that to flow through the system, just given how things flow through the company. cost of goods sold. You know, obviously trucking is a little quicker than things like, you know, inflation of steel, aluminum, plastic costs have obviously gone up.

Yes, but those started to spike, as you said, back in the spring. So you're seeing that coming through now already. Our contractor solutions team raised prices, ranging from about 3% to 5%, depending on the product, back at the beginning of July. So you didn't have the price impact of that in the June quarter. We had our normal price increase back in January, so you had that tailwind. But we really just put the price increase in place in July to cover some of those other costs that were elevated. As we often say, we don't raise prices the minimum. that we see costs go up, we're patient to watch what it is, but we don't wait to the last minute either.

We make sure that it's a disciplined approach. We give our customers plenty of notice. We make sure that we get ahead of it, running through costs to get sold where we can. And the team's done a great disciplined job of that, of balancing what we need to pass through from an inflationary standpoint. So what we're going to see going forward, we can't predict what some of those costs are, but we have a good sense at least what's in cost to get sold, and most of it's been relatively steady now the last few weeks and couple months that we kind of see what's in the inventory.

Okay, okay, great. And then this is kind of a nuanced question, but I think it's a little bit important. If I remember, I think Aspen had a really good quarter last year in kind of the September quarter. You know, that was kind of inorganic growth, and now it's going to get folded into organic growth. So is that, should we be mindful of that? Is that going to potentially be an organic kind of growth headwind in the second quarter, just kind of giving those.

you know, I'd guess, you know, kind of accounting dynamics? Yes, it could be, Tim. I think it's a great point. You know, you've got Mars as well now, you know, from the overall base, so you have a bigger base, but that's not going to be organic until November. Yes, Aspirin had a great year last year, so the comps are a little bit tough. You know, the selling season, you know, came a little bit earlier last year because of the refrigeration change and the canister issues and some of those things. So they had a tough June comp as well. So June, the June and September quarters for us when we were really good last year.

Part of that was price-based just because the cost of that refrigerant had gone up, and that's kind of come back to normal for the most part now that the industry's over that hump. So, yes, you've got a little bit of a headwind there. I think that's good, but I think we still feel good. As Joe said, we still feel good about organic growth across all segments for the year. But, yes, it It's good for you to remember that, and we'll remind people of that. It's a little early in the quarter to give specific feedback there. But, yes, Aspen had a really good year last year, but pleased with how they're performing this year as well.

Okay, great. Well, nice job. I'll hop back in queue. Thanks. Thank you. Thank you.

And our next question comes from the line of Sam Reed with Wells Fargo.

to proceed with your question. Hi, this is Eric, I'm for Sam. Let me have my congrats on a good quarter. I want to ask about SRS. You had really strong organic growth, highest in, looks like, a few years, and really strong acceleration. Just curious if there's anything, sort of outsized impact in Q1 that is sustainable going forward, or if there's any pull forward into Q1 from the later quarters? Yes.

I would say, Eric, this is James. Thanks for being on. Nothing unusual. Team's doing a great job. I mean, they're really finding the demand out there, really praise the team out there and doing a good job. As I mentioned earlier, when energy prices are elevated, you get a bit of a tailwind there because there's more of that going on and there's a segment of our business that's in decline. to that, that gets a favorable tailwind from that perspective. You know, we talk about energy being a bit of a natural hedge. When inflation costs some of our input costs to go up, we push that through in pricing, but it also creates a tailwind in demand because people are producing more energy and so forth globally. So that's a good thing. You know, things were, as you said, a little softer last year.

So the comp helped a little bit, but overall, I wouldn't say there's anything terrible unusual. There weren't any one-offs. There wasn't a big, someone earlier asked about pre-sales. It wasn't that. We had a price increase May 1st, June 1st, and July 1st, and we didn't really see exceptional buys ahead of those price increases. So really just good job finding orders and great job executing, getting things out the door.

That's great. And just on SG&A, it was very well managed and you called out lower operating expenses. Just curious where you're finding the cost saving opportunities and sort of how sustainable is the SG&A margin at this level or sort of where do you think you can get additional opportunities?.

Yes, one thing I would say, and I'll let Joe add if he wants to, you know, we've got a bit of a commitment internally that as we grow, we don't need to add as much SG&A. You know, we're starting to really see some economies of scale with the billion dollars we invested in acquisitions last year, and we don't need to add a whole lot of folks to manage that. Joe? No, it's a really important part of the, you know, the acquisition. algorithm for value creation here is that, and we talk a lot about the volume leverage, but that has a cost component. And we have to be mindful of costs creeping up, and we are very vigilant in trying to make sure that these shareholders get every bit of benefit out of these acquisitions that they should get. It's a great question. Glad you asked because I think the cost containment has been a little bit of an underappreciated part of the story here. But yes, top line growth provides the opportunity for operating leverage. And so the cost containment is a key part of really realizing that.

Thanks, Eric. Thank you. And our next question comes from the line of Susan McClary with Goldman Sachs. Please receive the question.

Thank you. Good morning everyone. Good morning. My first question is on the supply chain. Can you give us an update on the efforts there to move some of your production to Vietnam? And then I guess with that, just talk generally to the impact of tariffs and anything that's changed from that perspective?.

Sure, so this is James. Yes, we continue to move things as we can into Vietnam and Thailand's another good home for us right now. We've talked about as we make acquisitions, they tend to have a little more in China, so we take a step backwards and then a step forward, so we're doing a great job. Overall, we continue to be around those same numbers. Vietnam's in the low 30s, is a percent of cost of good sales. We look at this fiscal year, kind of going forward where we're targeting within contractor solutions. The US is about 45 to 50% or so. Thailand's upper single digits, and then you got a little strewn around here and there.

China's around 10%. So we keep hovering around that 10%. The goal is to continue to take that down, but again, acquisitions tend to have some of that and we've done a good job. You know, we've talked about, we've even got some folks that have set up their own shops within Vietnam from other countries because it's a favorable place to do business and we've helped them do that. So it's not always just moving into our own facility there in Vietnam. So I think the team's done a good job. The numbers haven't moved dramatically, And part of that's, again, just getting some of the acquisition-related supply chain out of China. But the team's done a great job, and we're very comfortable where we are.

In terms of tariffs, things have been relatively stable. You know, the HVAC part's got a little bit of relief, and so that helped us. It helped us keep down that most recent price increase we put in early July, having that benefit, knowing that those tariffs were going to be helped a little bit. little bit. The most recent tariff activity last Friday really just replaced what was there before. You know, the 10% goes to either 10% or 12%, depending on where you are. So, Some of the things are not impacted by that at all because they're under a different tariff structure. So some of our parts coming out of Vietnam and other places are not impacted by that.

So there was no change as a result of that. So on the whole, the last few months have been relatively stable from a tariff perspective, Sue. Thank you.

okay alright that that's very helpful color and then maybe turning to the M&A pipeline can you just talk what you're seeing there, your appetite for some smaller deals, especially as you've hit some of your key hurdles with Aspen and Mars, and then how we should also just be thinking about other priorities for capital allocation.

Sure. No, it's a great question, Sue, and this is Joe. We continue to see a number of opportunities. I feel like we're seeing all of the opportunities that are reasonable for us to see. And as I think we talked about 10 years ago, that wasn't the case. We were small. We didn't have a track record of success in doing that. acquisitions and integrating them successfully and now we do and so we see most every opportunity that I think we should see which really good. Our rigor and analysis and our discipline and investment continues to be be a real focal point for us. But yes, there is a nice pipeline, robust pipeline, of smaller deals in particular right now that we've been analyzing and evaluating.

And as you noted, we needed a little bit of digestion period here with these larger acquisitions. I feel like we're largely through that. success of the team and continued kind of performance on integrating well gives us higher, even higher level of confidence in our ability to continue to do that going forward. So, as we think about capital allocation broadly, the rubric remains the same. I mean, we are going to evaluate everything on risk-adjusted returns. And I will tell you, for the past quarter, the most attractive risk-adjusted returns was to invest in our own stock. And so that's what you saw. It's what we've done. We've paid down some debt as well.

There's a nice return on that. So all options remain open to us, and we'll continue to... invest in the highest risk-adjusted return opportunities. Okay. That's great, Cullors. Thank you, and good luck with the quarter.

Thank you, Sue. Thank you. And our next question comes from the line of Andy Kaplowitz with Citigroup. Please refer.

with your questions. Good morning, everyone. Hi, Andy. George James, just back to Mars for a second. I think you've talked previously that there's a tradeoff between your core contractor solutions business and Mars that you're working on in terms of who's got the best products and which ones you're going to focus on. So has that continued to happen? And I didn't catch Mars growing. oath, did you disclose that? Was it still negative in a quarter or did it turn? Yes.

Yes, let me first address the first part. The team's done a great job with the product rationalization work that they've been going through. Okay. They've done that for the most part. They've picked the best product from kind of each category. As we've said, at times we pick a product that's got maybe a lower cost base and push it through our distribution network. Our customers have received that very well. So we're really pleased with that.

We did not give specific Mars products. performance. Now that it's pretty fully integrated within contractor solutions, it'll become organic in a few months, but we didn't break that or Aspen out anymore. That's kind of behind us. We did talk about the 13 million of synergies that we're seeing now up from the original 10. We've talked about we've already hit the 30% EBITDA margin target, two quarters in a row ahead of schedule. So we're pleased with that. So, yes, we're not breaking out the specifics anymore. Now it's just really so well integrated, it's part of the segment.

Helpful. I think last quarter you talked about not taking price increases in contractor solutions and then of course you just told us that you took them in July, but you still grew EBITDA margin in contractor solutions in Q1 even without them. We talked about fluctuating freight and commodity costs. So I know you don't want to give specific forward guidance, but can you continue to grow contractor solutions, keep it down marginal over the next few quarters, given sort of the puts and takes with the price and the inflation that we've talked about? Yes.

Yes, we had the price in July, which really covered what we need to do for inflation. So that's usually not a margin enhancement. We kind of work over time to get that back. When we do mid-year price increases, that's really kind of neutral from a dollar perspective. And it, in fact, can be a tiny bit of a headwind to margin for a little while. And we work to get that back over time. whether annual price increase is appropriate or finding ways to cut costs. The team's always looking to do that as well.

The 34% margin, very pleased with that. Obviously, Mars getting well above the 30% number now. We're pleased with that. That's a contributor. That wasn't in the portfolio a year ago. Aspen was there a year ago. And Aspen's a bit deluded by that, just given the nature of the business. So I don't think we would commit to margin expansion necessarily.

As you know, the summer month is going to be a big one. be the best margin. So quarter to quarter, things are going to fluctuate. Kind of the quarter we just finished and the one we're in are the high water marks for margin. And then you have your lower margin kind of dip in December and then start recovering in March. So we've always said being in the low 30s is premier industry-wide margins. We've grown that over time. But we've always said that if we can grow the top line to maintain these margins, we'll be thrilled. So very pleased with the quarter that the team put together.

The goal is to continue to produce good margins. But yes, to your point, not giving guidance, I don't think we'll commit to where these margins are going forward or the ability to grow necessarily, but we're very pleased with the performance there.

Appreciate the call. Thanks, Andy.

Thank you. And with that, that does conclude the question and answer session.

I'll turn the floor back over to Joe Arms for closing remarks. Thank you, Julian. We really appreciate everyone joining us for today's call and appreciate your interest in our company and continue to support us. following on our progress as we go through the fiscal year. Look forward to talking to you again soon. Thank you.

Thank you. And with that, ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful rest of your day.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

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.