Carlisle Companies Incorporated — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Carlisle is a diversified manufacturer operating in Construction Materials (CCM), Interconnect Technologies (CIT), Brake & Friction (CBF), and FoodService Products (CFSP). The Transportation Products business was sold on December 31, 2013; its results are presented as discontinued operations.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $859.5 million | $792.6 million | $1,509.9 million | $1,422.2 million |
| EBIT | $122.3 million | $109.3 million | $185.3 million | $164.8 million |
| EBIT margin | 14.2% | 13.8% | 12.3% | 11.6% |
| Income from continuing operations | $75.7 million | $64.3 million | $112.1 million | $108.6 million |
| Net income | $75.2 million | $8.2 million | $111.0 million | $63.4 million |
| Diluted EPS | $1.14 | $0.13 | $1.69 | $0.98 |
| Operating cash flow | Not stated separately | Not stated separately | $70.4 million | $119.5 million |
Q2 sales rose 8.4%; organic sales increased 8.0%, mainly from volume growth, partly offset by lower prices. First-half sales grew 6.2%, reflecting 7.3% higher volume and 1.5% lower pricing. Gross margin was 26.1% in Q2 versus 26.1%; first-half gross margin was 25.6% versus 25.3%.
Q2 net income increased sharply in part because the prior-year period included a $100 million pretax goodwill impairment in discontinued Transportation Products. First-half 2014 continuing-operations income increased only 3.2%, as higher EBIT and lower interest expense were partly offset by higher taxes. The prior-year first-half tax rate benefited from an $11.8 million foreign tax benefit.
Segments and notable changes
- CCM: Q2 sales rose 9.2% to $535.6 million, while EBIT increased 3.7% to $81.1 million and margin declined to 15.1% from 15.9%. Lower prices, freight and warranty costs, and plant start-up expense offset volume and productivity gains. First-half EBIT fell 1.0% to $112.9 million.
- CIT: Q2 sales rose 11.3% to $162.2 million; EBIT increased 52.9% to $34.1 million and margin expanded to 21.0% from 15.3%, supported by aerospace demand, capacity utilization, and operating efficiencies.
- CBF: Q2 sales grew 4.3% to $97.6 million, but EBIT fell 12.9% to $10.8 million and margin declined to 11.1% from 13.2%, primarily due to pricing pressure. Recovery in off-highway markets was described as modest.
- CFSP: Q2 sales increased 2.1% to $64.1 million and EBIT rose 15.1% to $8.4 million, including a $1.1 million property-sale gain.
Cash, debt, and liquidity
At June 30, 2014, cash and cash equivalents were $757.0 million, current assets $1,689.0 million, and current liabilities $431.1 million. Long-term debt was $751.2 million, with no current portion reported; the company also had $600 million available under its revolving facility and $45 million available under an uncommitted line. Debt-to-capital was 26%, and the company reported compliance with debt covenants.
First-half operating cash flow declined to $70.4 million from $119.5 million. Management attributed much of the decline to the sale of Transportation Products, whose cash generation was seasonally concentrated in the first half of 2013. Receivables used $135.2 million of cash and inventories used $30.8 million. Capital expenditures were $63.9 million, compared with $49.4 million a year earlier. Cash ended the period $2.5 million above year-end 2013. Of cash on hand, $180.3 million was held by foreign subsidiaries, including $27.5 million in China; management described foreign cash as generally intended for reinvestment abroad.
Outlook, risks, and contingencies
- Management expected high-single-digit full-year 2014 sales growth and EBIT margin improvement versus 2013, with an effective tax rate of approximately 33%. Full-year capital expenditures were expected to be approximately $117 million.
- CCM outlook reflected expected commercial roofing demand, but management cited difficulty maintaining or raising prices and recovering raw-material and freight costs. Full-year CCM capital expenditures were expected to be $35 million; additional TPO capacity was expected to be completed later in 2014.
- CIT expected favorable commercial aerospace demand, but ongoing Boeing pricing and long-term contract negotiations could adversely affect future revenue and EBIT. One IFEC customer represented approximately 18% of CIT sales; customer in-sourcing and shifts in aircraft connectivity demand were also risks.
- CBF expected modestly positive 2014 sales growth but cited continued pricing pressure, weak mining demand, and agricultural market constraints. One global OEM represented approximately 18% of CBF sales. A facility closure was expected to incur a further $1.4 million in costs during the second half of 2014, with estimated annual savings of $0.6 million beginning in 2015.
- Asbestos litigation was described as not expected to have a material overall financial effect; insurance covers defense costs and settlements or judgments, excluding punitive damages. Management reported no significant environmental remediation accruals, while noting potential exposure from historical industrial operations and future regulatory requirements.
- The company had not determined the financial-statement impact or adoption method for the new revenue-recognition standard, effective for periods beginning after December 15, 2016.
Investor verification priorities
- Track whether full-year high-single-digit sales growth and EBIT margin improvement are achieved, particularly given CCM pricing and start-up costs.
- Assess operating cash conversion and working-capital movements; first-half operating cash flow was materially lower year over year.
- Monitor Boeing contract negotiations, CIT customer concentration, and CBF customer concentration and pricing trends.
- Review the use and accessibility of overseas cash, including potential U.S. tax consequences of repatriation and China transfer restrictions.
- Follow the remaining CBF closure costs and expected savings, and assess any developments in litigation or environmental exposures.