Carlisle Companies Incorporated — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Carlisle is a diversified manufacturer operating in construction materials (CCM), interconnect technologies (CIT), fluid technologies (CFT), and brake and friction (CBF). Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,024.2 | $1,314.8 | $2,054.4 | $2,386.7 |
| Operating income | $113.4 | $207.2 | $216.1 | $321.9 |
| Operating margin | 11.1% | 15.8% | 10.5% | 13.5% |
| Income from continuing operations | $75.4 | $153.0 | $137.2 | $230.4 |
| Diluted EPS from continuing operations | $1.36 | $2.65 | $2.45 | $3.98 |
- Q2 revenue fell 22.1%; six-month revenue fell 13.9%. Lower volumes across all segments, largely reflecting COVID-19, drove declines; acquisitions, especially Providien, partly offset them.
- Q2 gross margin was 27.5%, down from 30.0%; six-month gross margin was 27.2%, down from 28.6%. Lower volume and production, which increased unit costs, and wage inflation were partly offset by raw-material savings and cost actions.
- Q2 net income was $75.4 versus $152.9 a year earlier. The six-month net income comparison was $137.2 versus $232.3, including $1.9 of discontinued-operations income in 2019.
- Operating cash flow for the first six months was $226.3, compared with $197.1; working capital used $69.0. Capital expenditures were $48.5. Cash and equivalents increased to $737.7 from $351.2 at year-end 2019.
- At June 30, debt was $2,078.0, including $2,077.2 long-term debt net of current portion, versus $1,591.6 total debt at December 31, 2019. The company issued $750.0 of 2.75% notes due 2030 and redeemed $250.0 of 5.125% notes due 2020, recording an $8.8 debt-extinguishment loss. The revolving facility had no outstanding balance and $1.0 billion available; the company was covenant-compliant.
- Current assets were $2,152.9 and current liabilities $613.9 at June 30. The filing reports no material change in market risk.
Segment results and material changes
- CCM: Q2 revenue was $734.9, down 19.7%; operating income was $137.6 and margin 18.7% versus 19.9%. Lower volumes were partly offset by raw-material savings. Management reported construction activity recovering in the U.S. and Europe as the quarter progressed.
- CIT: Q2 revenue was $184.0, down 25.0%; operating loss was $1.5 versus income of $35.9. Commercial aerospace weakness was severe, while medical technologies revenue grew 15% organically, supported by patient-monitoring demand. Providien contributed $21.2 of Q2 revenue.
- CFT: Q2 revenue was $46.5, down 30.9%; operating loss was $5.2 versus income of $3.3. Management said monthly results improved through the quarter and cited early demand stabilization, particularly in Asia.
- CBF: Q2 revenue was $58.8, down 32.5%; operating loss was $1.6 versus income of $8.3. COVID-related closures and weakness in heavy-equipment and transportation markets weighed on results.
- Q2 exit and disposal costs were $8.3, versus $1.5 a year earlier; six-month costs were $13.1. CBF expected about $1.6 of its estimated $5.8 restructuring costs to be incurred in the second half of 2020.
Outlook, risks, and unusual items
- Carlisle withdrew full-year 2020 revenue guidance due to COVID-19 uncertainty. Management described the second-half outlook as cautiously optimistic, while warning recovery may be uneven and the pandemic’s duration and impact remain unpredictable.
- 2020 capital expenditures were expected to be $100–$110, subject to selected adjustments as demand evolves. Management said cash, operating cash flow, and available facility capacity should cover business needs for at least 12 months.
- COVID-19 caused reduced demand, including in commercial aerospace and nonresidential construction, and may affect operations, supply chains, labor, collections, and asset values. Management identified potential material goodwill or trade-name impairment if operating expectations, discount rates, or market multiples worsen.
- Q2 impairment testing for CFT and CBF goodwill and indefinite-lived trade names resulted in no charges. However, CFT goodwill fair value exceeded carrying value by approximately 10%; one CFT trade name had less than 10% headroom. These estimates depend on uncertain assumptions.
- Other Q2 comparability items included $8.3 of exit and disposal costs, $4.9 of other acquisition costs, $3.8 of idle-capacity and labor costs net of subsidies, and an after-tax $2.0 indemnification loss. Six-month items also included the debt-extinguishment loss and discrete tax benefits.
- On July 22, 2020, Carlisle acquired Motion Tech Automation for approximately $33.3 in cash; the initial purchase accounting was incomplete. Asbestos litigation continues, but management said reasonably possible claims were not material and insurance applies to defense and settlement costs. Other legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether construction recovery and medical-market growth offset continued aerospace, industrial, automotive, and off-highway weakness.
- How sustained volume declines, restructuring, and production levels affect segment margins and operating cash generation.
- Whether CFT and CBF meet the forecasts underlying impairment valuations, particularly the limited headroom disclosed for CFT goodwill and a CFT trade name.
- Debt levels, interest expense, liquidity, and compliance with credit-facility covenants as the pandemic develops.
- Actual 2020 capital expenditures versus the $100–$110 outlook, and the pace and cost of restructuring and the MTA integration.