Carlisle Companies Incorporated — Q3 2011 Form 10-Q
Business context and period: Diversified manufacturer reporting the quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Operations comprise Construction Materials, Transportation Products, Brake & Friction, Interconnect Technologies, and FoodService Products. Figures are in millions of dollars except per-share data.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $870.5 | $665.9 | $2,434.9 | $1,900.8 |
| EBIT | $81.8 | $66.5 | $222.4 | $169.3 |
| EBIT margin | 9.4% | 10.0% | 9.1% | 8.9% |
| Continuing-operations income, net of tax | $53.7 | $46.8 | $142.3 | $108.7 |
| Net income | $53.7 | $50.5 | $141.7 | $113.4 |
| Diluted EPS | $0.85 | $0.81 | $2.24 | $1.83 |
- Q3 sales increased 31%; management attributed growth to acquisitions (15%), organic growth (15%, principally higher volume and pricing), and a small foreign-exchange contribution. Nine-month sales rose 28%, including acquisition contribution of about 14%.
- Gross margin was 21.5% in Q3 versus 21.6%; for nine months it was 21.3% versus 21.0%. Q3 EBIT margin declined despite higher sales, reflecting Transportation Products losses and Construction Materials’ unrecovered raw-material inflation.
- Net cash from operations was $118.9 for nine months, versus $62.4 in 2010. Capital expenditures were $48.5; operating cash flow less capital expenditures was $70.4 before acquisitions and other investing uses. Receivables and inventory absorbed cash as the business grew.
- Cash was $81.8 at September 30, down from $89.4 at year-end 2010. Short-term debt was $113.1 and long-term debt $405.3, totaling $518.4. The filing reports a 26% debt-to-capital ratio. Current assets were $1,212.8 and current liabilities $585.4.
- Cash used in investing was $150.9, principally including the $113.4 cash payment for PDT and $48.5 of capital expenditures. Financing provided $24.0, including $103.0 of net revolving-credit borrowings, offset partly by $59.0 of bond redemptions and $32.3 of dividends.
Material changes and operating performance
- Hawk, acquired in December 2010, materially increased Brake & Friction sales and earnings. In Q3 it contributed $86.2 of sales and $19.6 of EBIT; for nine months, $245.9 and $48.5, respectively.
- PDT Phoenix GmbH was acquired August 1, 2011 for $118.3, including $4.9 of contingent consideration. It contributed $13.4 of sales and $2.2 of EBIT through September 30. Preliminary purchase accounting included $46.7 of goodwill.
- Construction Materials Q3 sales rose 25% to $442.2, but EBIT margin fell to 13.6% from 15.2%, principally due to raw-material costs. Transportation Products posted a Q3 EBIT loss of $8.9, versus $3.5 of EBIT a year earlier, amid Jackson, Tennessee tire-plant start-up inefficiencies and organizational costs.
- Brake & Friction Q3 sales were $126.6 and EBIT $24.2, with reported growth largely reflecting Hawk and strong organic demand. Interconnect Technologies improved sales and margin; FoodService sales and EBIT declined, reflecting weaker volume and higher material and freight costs.
- Interest expense rose to $5.5 in Q3 and $15.5 for nine months, largely reflecting debt incurred in connection with the Hawk acquisition. Nine-month effective tax rate fell to 31.2% from 33.8%, including benefits from tax legislation, foreign tax credits, and recognition of previously unrecorded foreign deferred tax assets.
Outlook, risks, contingencies, and unusual items
- Management expected full-year 2011 sales growth from acquisitions and organic growth in the mid-twenty-percent range. It estimated a full-year effective tax rate of about 32%. Management cautioned that raw-material costs, global market conditions, and uncertainty about economic recovery could pressure sales and earnings.
- Transportation Products expected higher costs and Jackson plant inefficiencies to continue affecting margins, though management reported recent productivity improvement and cost-reduction actions. A deterioration in that segment’s outlook could lead to future impairment; no impairment had been recorded through September 30.
- Construction Materials faced elevated raw-material costs and uncertain ability to recover them through pricing amid competition. FoodService also cited uncertain pricing recovery and announced price increases effective January 1, 2012. Brake & Friction noted potential demand effects from weaker commodity prices and slower growth in emerging markets; Interconnect noted potential defense-budget cuts.
- On October 20, 2011, after quarter-end, Carlisle replaced its $500 million revolver with a $600 million revolving facility due October 20, 2016. It carries financial and other covenants. At September 30, $359 million was available under the former facility; the company reported covenant compliance.
- The acquired PDT Profiles business was classified as held for sale; the company was negotiating with a potential buyer and expected a sale in the first half of 2012. Nine-month discontinued operations included a $0.6 net loss, including a $0.6 pretax write-down of a thermoset molding operation.
- Q3 included $2.1 of continuing-operations exit and disposal costs. Stock-based compensation expense included $1.9 related to changes in certain senior-management award terms. The company also recorded $0.7 of PDT acquisition-related expense in Q3.
- Contingencies include unresolved U.S. customs classification work concerning imported tires, asbestos-related claims, and possible environmental liabilities. Management did not expect these matters to materially harm consolidated financial position, but acknowledged potential period-specific earnings effects and that the customs duty or penalty amount, if any, could not be determined.
Important facts for investors to verify
- Whether Jackson plant productivity and Transportation Products profitability improve, and whether related costs or impairment indicators emerge.
- Whether Construction Materials can pass through raw-material increases and sustain roofing demand and margins.
- Final PDT purchase-price allocation, contingent consideration, and timing and proceeds of the planned PDT Profiles sale.
- Cash conversion and working-capital trends as sales expand, alongside debt, revolver availability, and compliance with the new facility’s covenants.
- Actual realization of the tax benefits and the resolution or financial impact, if any, of customs, asbestos, environmental, and other contingencies.