Carlisle Companies Incorporated — Q2 2016 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2016, compared with the same 2015 periods. Carlisle operates in construction materials, interconnect technologies, fluid technologies, brake and friction, and foodservice products. The filing was signed July 26, 2016.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $996.9 million | $984.6 million | $1,790.9 million | $1,693.9 million |
| EBIT | $178.9 million | $148.0 million | $289.5 million | $214.4 million |
| EBIT margin | 17.9% | 15.0% | 16.2% | 12.7% |
| Income from continuing operations | $115.3 million | $94.8 million | $183.8 million | $134.3 million |
| Net income | $115.2 million | $94.9 million | $183.7 million | $134.3 million |
| Diluted EPS | $1.75 | $1.43 | $2.80 | $2.02 |
Q2 sales increased 1.2%, while EBIT rose 20.9% and diluted EPS rose 22.4%. First-half sales grew 5.7%, EBIT 35.0%, and diluted EPS 38.6%. Gross margin improved to 32.2% in Q2 from 29.0%, and to 31.6% for the first half from 27.1%.
Management attributed improved profitability chiefly to lower raw-material costs, Carlisle Operating System productivity gains, better capacity utilization, Construction Materials pricing discipline, and the non-recurrence of $10.7 million of prior-year Finishing Brands acquisition costs. Share repurchases also contributed to EPS growth. Lower selling prices partially offset sales growth.
Cash flow, balance sheet and capital
- First-half operating cash flow was $179.9 million, versus $148.8 million in 2015. Working capital and other assets and liabilities used $64.5 million, compared with $46.6 million used in the prior-year period.
- Investing cash outflow was $148.9 million, including $95.0 million net for Micro-Coax and $8.1 million net for MS Oberflächentechnik; capital expenditures were $45.9 million. Financing cash outflow was $44.8 million, including $39.0 million dividends and $40.9 million share repurchases.
- Cash was $397.9 million at June 30, 2016, compared with $410.7 million at year-end 2015. Current assets were $1,461.8 million and current liabilities $673.3 million.
- Debt was $746.0 million: $150.0 million of notes due August 15, 2016, $250.0 million due 2020, and $350.0 million due 2022. Cash less reported debt was approximately $348 million net cash. The company had $600 million available on its revolving credit facility and $45 million available on an uncommitted line; it reported covenant compliance.
- Cash dividends paid were $0.60 per share in the first half. Cash held outside the U.S. was $109.2 million, including $19.7 million in China; management said foreign cash was intended for foreign operations and investment and was considered permanently reinvested.
Segment performance and changes
- Construction Materials: Q2 sales were $582.5 million, up 0.8%; EBIT was $133.1 million, up 18.7%, and margin rose to 22.8% from 19.4%. U.S. roofing demand was strong, partly offset by lower pricing and weaker international sales.
- Interconnect Technologies: Q2 sales were $209.4 million, up 5.6%; EBIT was $39.6 million, up 9.7%. Aerospace, medical and test-and-measurement demand improved; pricing declined. Micro-Coax contributed $2.4 million of Q2 sales after its June acquisition.
- Fluid Technologies: Q2 sales were $68.2 million, up 10.5%; EBIT was $7.3 million versus a $1.0 million loss. Results benefited from the absence of prior-year acquisition costs; Q2 2016 included $1.7 million of restructuring expense. First-half sales included $60.9 million from Finishing Brands, acquired in April 2015, limiting comparability.
- Brake & Friction: Q2 sales fell 13.8% to $73.3 million and EBIT fell 40.7% to $4.8 million. Weak heavy-equipment demand reduced volume and capacity utilization.
- FoodService Products: Q2 sales rose 2.4% to $63.5 million and EBIT rose 13.9% to $8.2 million, reflecting stronger foodservice demand and cost improvements.
In 2016 Carlisle acquired Micro-Coax for total consideration of $97.3 million before $1.5 million cash acquired (net cash cost reported as $95.8 million); the purchase-price allocation remained preliminary. It also acquired MS for $12.4 million, including contingent consideration. These acquisitions added goodwill and intangible assets.
Outlook, risks and unusual items
- Management expected full-year 2016 net-sales growth in the mid-single digits, led by Construction Materials, Interconnect Technologies and FoodService Products, with a contribution from Fluid Technologies; lower Brake & Friction sales were expected to offset some growth. Full-year capital expenditures were expected to be approximately $90 million, and the full-year effective tax rate approximately 33%.
- The $150 million notes due in August 2016 were expected to be repaid with cash and/or available revolving-credit liquidity; management noted capital markets as an alternative if those sources were used for other strategic purposes.
- Brake & Friction is a key impairment watch item. At June 30, management reported goodwill fair value approximately 7% above carrying value and one trade name approximately 3% above carrying value. Further weakness in end-market recovery or higher discount rates could prompt impairment testing and potentially a material goodwill charge; no impairment was recorded.
- Risks discussed include persistent weakness in construction, mining and heavy-equipment markets; pricing and raw-material changes; foreign-exchange exposure; customer concentration in Interconnect Technologies (one customer represented about 21% of segment sales); acquisition integration and restructuring; and potential environmental and litigation costs. Management said pending asbestos matters were not expected to have a material overall impact and that insurance covered defense and settlement costs, excluding punitive damages.
- Management reported no material change in market-risk disclosures or risk factors during the period. Disclosure controls were assessed as effective, with no material change to internal control over financial reporting.
Important facts for investors to verify
- Whether and how the August 2016 $150 million note maturity was repaid, and the resulting debt and liquidity position.
- Whether forecast mid-single-digit 2016 sales growth and approximately $90 million of capital expenditures were achieved.
- Brake & Friction market recovery and the valuation headroom for its goodwill and trade name, given the limited disclosed cushions.
- Collection and working-capital trends, particularly receivables, which rose to $631.8 million from $502.5 million at year-end.
- Final purchase accounting and integration results for Micro-Coax and MS, as well as Fluid Technologies’ restructuring and headquarters-relocation costs.