CSW Industrials' Q2 2026: Contradictions Emerge on Tariff Coverage, Organic Growth, Inventory, M&A, and SRS Expansion

Date of Call: October 30, 2025

Financials Results

• Revenue: $277.0M, up 22% YOY (record quarterly revenue)
• EPS: $2.96 per diluted share (adjusted), up 15.2% YOY; includes $0.08 per share of acquisition transaction expenses in the quarter
• Gross Margin: 43.0%, down 260 basis points YOY from 45.6%
• Operating Margin: 26.3% adjusted EBITDA margin, down 40 basis points YOY from 26.7%

Guidance:

• Consolidated revenue and adjusted EBITDA expected to grow in fiscal 2026; consolidated EPS and operating cash flow expected to increase.
• Aspen Manufacturing expected to grow mid‑teens on its trailing 12‑month revenue; Aspen will be included ~11 months in FY2026.
• Mars Parts acquisition expected to close November 2025; financing via Term Loan A and revolver with net leverage ~2x at close.
• Fiscal 2026 GAAP tax rate forecast ~23% (adjusted ~26%); Q3 tax rate may be lower due to potential $6.3M reserve release.
• Continued pricing actions planned to offset tariff/input cost impacts; further price increases possible as needed.

Business Commentary:

* Record Financial Performance: - CSW Industrials reported a record quarterly revenue of $277 million, representing a 22% increase, and record adjusted EBITDA of $73 million, indicating a 20% growth. - This growth was primarily driven by recent acquisitions, including Aspen Manufacturing, PSP Products, and PF Waterworks.

• Impact of Market Conditions on Organic Growth:
• The Contractor Solutions segment experienced a 7.7% decline in organic revenue, attributed to soft housing activity and the shift from replacement to repair of HVAC units due to higher costs and new refrigerant standards.

• However, acquisitions like Aspen Manufacturing showed a strong 40% weighted average growth, contributing positively to overall performance.

• Tariff иnd Impact on Pricing:

• CSW Industrials implemented pricing actions to offset cost increases from tariffs, leading to a 260 basis point reduction in gross profit margin to 43%.

• They expect to continue adjusting pricing as necessary to maintain margin dollars amid ongoing tariff fluidity.

• Future Growth Opportunities and Acquisitions:

• The company announced the acquisition of Mars Parts, which is expected to expand its HVAC/R product portfolio and enhance customer value proposition.
• CSW Industrials anticipates that Mars Parts will contribute to above-market growth and increase EBITDA margins to the low 30s over time.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly described results as "record quarterly results" (revenue $277M, +22%) and highlighted acquisition-driven growth and accretive M&A (Mars Parts closing expected Nov). Management stated they are "absolutely very bullish on the long-term health and opportunity" and expect FY26 revenue, adjusted EBITDA and EPS growth, supporting a positive outlook.

Q&A:

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): Congrats on a nice quarter, especially on the inorganic front. 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.
  Response: Management: Mars' recent trends sit between CSW's organic and Aspen—more weighted toward repair (not pure replacement), i.e., performance is between those two benchmarks.

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): Okay. Could you speak to the growth rate that they've seen over the last -- the trailing 12 months?
  Response: Management declined to give a specific trailing‑12 growth rate pre‑integration, saying Mars has seen a repair-driven tailwind but detailed metrics will be provided after close and system integration.

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): 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.
  Response: Management: Mars (~$200M revenue) has mid‑20s margins today; $10M of identified synergies (front‑loaded) should drive run‑rate margins to ~30% within ~1 year, with additional revenue upside from cross‑selling not included in that $10M.

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): 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?
  Response: Management: They cannot provide segment organic growth guidance now due to seasonality, market uncertainty and destocking; expect better visibility into next fiscal year and will update on the next call.

• Question from Richard Reid (Wells Fargo Securities, LLC, Research Division): 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.
  Response: Management: Destocking reduced order volumes late summer; distributor inventories appear "in pretty good shape" per channel checks, destocking likely runs through year‑end and should normalize into next spring.

• Question from Richard Reid (Wells Fargo Securities, LLC, Research Division): 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.
  Response: Management: Mars' product pricing is largely in the existing CSW ballpark (many SKUs sub‑$100); no dramatic gap vs competitors—some premium positioning on select products but overall similar weighted price profile.

• Question from Jamie Cook (Truist Securities, Inc., Research Division): 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?
  Response: Management: Still expects Contractor Solutions full‑year margins in the low‑30s (seasonally lower in winter); Mars will be a near‑term headwind but targeted to reach ~30% run‑rate in ~1 year; SRS and EBS still target ~20% margins long term though currently a few points below.

• Question from Susan Maklari (Goldman Sachs Group, Inc., Research Division): 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?
  Response: Management: Implementing annual price increases—SRS already took a 7% increase; Contractor Solutions is calibrating a season‑entry price increase to cover tariffs and inflation; EBS adjusts project‑by‑project; will continue passing through costs and take further increases if commodity/tariff trends persist.

• Question from Susan Maklari (Goldman Sachs Group, Inc., Research Division): 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?
  Response: Management: All capital allocation tools remain available—M&A, buybacks and debt paydown; expect continued acquisitiveness but likely smaller bolt‑on deals near term while integrating recent ~$1B of acquisitions; buybacks will be considered when returns are attractive.

• Question from Natalia Bak (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?
  Response: Management: Order cadence generally fine but softer in October; Q3 comp is easier versus last year; destocking continues but nothing unusual in order patterns; Mars expected to come on in November and will be monitored.

• Question from Natalia Bak (City): 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?
  Response: Management: SRS is making good progress on new product development and customer/channel diversification—expect to report more over time, but no specific timing given for meaningful revenue contribution.

• Question from Tomohiko Sano (JPMorgan Chase & Co, Research Division) (asked by 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?
  Response: Management: Legacy organic down ~7.7%—pricing contributed mid‑single‑digit positive; volumes down low‑double digits; including acquisitions, volume down a couple points and price up mid‑single digits. End‑market: repair‑focused products showed strength; weakness tied to fewer new installs and replacement delays.

Contradiction Point 1

Tariff Coverage and Pricing Adjustments

It involves how the company is addressing tariff impacts on pricing and margins, which are critical for financial planning and investor expectations.

How are you managing price-cost dynamics across segments, and what are your expectations for winter? - Susan Maklari(Goldman Sachs)

2026Q2: Tariffs are being covered, and ongoing monitoring will ensure all input costs are addressed. - James Perry(CFO)

How much of the mid- to high single-digit organic growth in the remaining year is due to pricing increases to offset tariffs? - Jonathan Tanwanteng(CJS Securities)

2026Q1: Some of the price increase is to offset tariff impacts, but the primary driver of organic growth is the expected recovery in organic demand. The pricing increase was low to mid-single digits and expected to cover current tariff exposure. - James Perry(CFO)

Contradiction Point 2

Contractor Solutions' Organic Growth Expectations

It involves expectations for organic growth in Contractor Solutions, which is a key revenue driver and critical for investor expectations.

What are your expectations for organic growth in Contractor Solutions for the rest of the year? - Jonathan Tanwanteng(CJS Securities)

2026Q2: Organic growth expectations are difficult to predict given market volatility. While there's no current visibility into growth, the team aims to provide a better view as channel checks improve and customers start ordering for the busy season next spring. - James Perry(CFO)

Could you explain the organic growth decline in Contractor Solutions by distinguishing between end-user and distributor demand and tariff effects? - Jonathan Tanwanteng(CJS Securities)

2026Q1: We expect mid- to high-single-digit organic growth in Contractor Solutions each of the next three quarters. - James Perry(CFO)

Contradiction Point 3

Inventory Levels and Market Conditions

It raises concerns about the company's ability to manage inventory levels and adapt to changing market conditions, which impacts operational efficiency and customer relationships.

Can you quantify the destock impact in Contractor Solutions and inventory levels in the channel? - Richard Reid (Wells Fargo Securities, LLC)

2026Q2: We've seen some destocking. The destocking, I think, is largely industry-driven. The industry has been growing pretty consistently for a few years now, and it's gone through a few cycles of inventory. So the sort of pull on inventory has probably been the largest sector that we've seen. - James Perry(CEO)

How will volumes in Contractor Solutions be affected by tariff-driven pricing increases? - Jamie Cook (Truist Securities)

2025Q4: There's been no significant change in customer behavior due to regulations or tariffs. Inventory levels are normal, with a focus on strategic positioning to meet seasonal demand. - James Perry(CEO)

Contradiction Point 4

M&A Strategy and Synergies

It involves differing expectations regarding the timeline and extent of synergies from a major acquisition, which could impact financial projections and strategic planning.

What are your expectations for the business regarding growth and earnings accretion, particularly with the Mars acquisition? - Jonathan Tanwanteng(CJS Securities)

2026Q2: The synergies alone of $10 million will bring margins to around 30%. The post-acquisition expected run rate margin should be around 30% within a year. - James Perry(CFO)

What are the synergies from the PF WaterWorks acquisition and how did the channel expand during the busy spring and summer seasons? - Susan Maklari(Goldman Sachs)

2025Q3: Synergies are ahead of schedule, with a clear line of sight to the $25 million run rate annual synergies from the acquisition. - Joseph Armes(CEO)

Contradiction Point 5

SRS's New Sales Channels and Customer Diversification Initiatives

It involves the progress and expected outcomes of SRS's expansion efforts, which are crucial for growth and market positioning.

Is there early traction in SRS's new sales channels and customer diversification efforts? - Natalia Bak(Citigroup)

2026Q2: SRS is making progress in new product development and market expansion. Positive progress has been noted, with more details expected as these efforts continue to develop. - James Perry(CFO)

How do R&D and sales force investments support EBS revenue opportunities? - Natalia Bak(Citigroup)

2026Q1: We have a significant customer diversification opportunity in SRS. And we expect that we'll have more customers in unique end markets accounting for a larger percentage of our volume in the second half than we do today. - James Perry(CFO)