Carlisle Companies Incorporated — Q2 2017 Form 10-Q
Business context and period. Carlisle designs and manufactures products across construction materials, interconnect technologies, foodservice products, fluid technologies, and brake and friction markets. This unaudited filing covers the quarter and six months ended June 30, 2017, compared with the same periods in 2016.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,071.7 million | $996.9 million | $1,929.0 million | $1,790.9 million |
| Gross margin | 29.3% | 32.2% | 29.1% | 31.6% |
| EBIT | $158.8 million | $178.9 million | $255.5 million | $289.5 million |
| EBIT margin | 14.8% | 17.9% | 13.2% | 16.2% |
| Income from continuing operations | $102.3 million | $115.3 million | $163.8 million | $183.8 million |
| Diluted continuing-operations EPS | $1.58 | $1.75 | $2.52 | $2.80 |
| Operating cash flow | Not separately provided | Not separately provided | $134.7 million | $179.9 million |
For the first six months, capital expenditures were $66.1 million, making operating cash flow less capital expenditures $68.6 million. The comparable 2016 amount was $134.0 million. Cash and cash equivalents were $139.8 million at June 30, down from $385.3 million at year-end 2016. Long-term debt was $706.7 million; net debt, using reported cash, was approximately $566.9 million. The current ratio was approximately 2.2. The amended $1.0 billion revolving facility had $110 million drawn and $890 million available. The company reported compliance with debt covenants.
Six-month dividends were $0.70 per share, compared with $0.60 a year earlier. The company repurchased $150 million of shares during the first half.
Material changes and segment results
- Sales increased 7.5% in Q2 and 7.7% for the first half. Management attributed growth to roofing demand and acquisitions, partly offset by lower Interconnect Technologies volume and unfavorable foreign exchange and pricing effects.
- Profitability weakened: Q2 EBIT fell 11.2% and first-half EBIT fell 11.7%. Management cited raw-material and price pressures, adverse product mix, Interconnect Technologies customer in-sourcing and technology changes, and restructuring charges. First-half results also included $4.3 million of acquired inventory costs.
- Construction Materials sales rose 8.4% in Q2, while EBIT declined 3.1%; lower roofing prices and raw-material costs pressured margins. Interconnect Technologies EBIT fell 49.2% in Q2 amid lower IFE-related volume, customer in-sourcing, mix effects, and restructuring. FoodService Products sales rose 38.3%, primarily reflecting the San Jamar acquisition. Brake & Friction sales rose 9.0%, but EBIT fell 70.8% amid mix, input-cost and restructuring pressures.
- First-half operating cash flow declined mainly because of lower earnings and working-capital use, including increased receivables and inventory. Acquisition spending was $225.9 million, principally for San Jamar and Arbo; capital expenditures were $66.1 million.
Outlook, commentary and risks
- Management continued to expect 2017 total sales growth in the mid-to-high-single-digit range and capital expenditures of $125–$150 million. Segment expectations included high-single-digit growth at Construction Materials; a mid-single-digit decline at Interconnect Technologies; approximately 40% growth at FoodService Products, including San Jamar; and mid-single-digit growth at Fluid Technologies and Brake & Friction.
- The company expected approximately $100 million of additional share repurchases in the second half. It said available cash and credit resources were sufficient for requirements over at least the next 12 months.
- Restructuring and footprint actions are expected to continue. Brake & Friction estimated $18–$21 million of costs for the Tulsa-to-Ohio relocation, with completion expected over 18–21 months. Fluid Technologies anticipated approximately $13 million of charges for accelerated facility consolidation in the second half of 2017. Interconnect Technologies also expected continuing rationalization and restructuring costs, with savings anticipated from 2018.
- On July 3, 2017, after quarter-end, Carlisle acquired Drexel Metals for estimated consideration of $54 million, funded through the revolving facility. Management expected a $4.6 million net expense in Q3 related to expiration of the LHi seller indemnification, unless claims were made before expiration.
- Risks include raw-material inflation and the ability to recover costs through pricing, competitive pressure, construction-market and industrial-cycle conditions, foreign exchange, customer concentration and in-sourcing, and acquisition integration. Management highlighted potential impairment sensitivity: at year-end 2016, Brake & Friction goodwill fair value exceeded carrying value by only 5%; continued weak recovery or higher discount rates could require material impairment charges. No triggering event was identified in the first half.
- Management reported no material change in risk factors or market-risk disclosures. Asbestos claims are insured and were not expected to have a material overall effect, though costs could affect particular periods. Environmental matters could create future liabilities; no significant remediation accrual was recorded at June 30.
Key facts for investors to verify
- Whether sales growth translates into margin recovery, especially given lower gross and EBIT margins and persistent price and raw-material pressures.
- The pace of recovery in Interconnect Technologies and Brake & Friction, including customer in-sourcing, end-market demand, and restructuring savings.
- Working-capital trends and operating cash conversion after the first-half decline; reported cash also fell substantially due to acquisitions, investment, dividends, and repurchases.
- Actual restructuring costs and savings versus management estimates, including Fluid Technologies’ expected charges and the Tulsa relocation.
- Acquisition performance and purchase-price allocations for San Jamar, Arbo, and Drexel, plus impairment assumptions for Brake & Friction goodwill and the Wellman trade name.