Carlisle Companies Incorporated — Q1 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Carlisle is a diversified manufacturer serving construction, aerospace/interconnect, foodservice, fluid technologies, and brake and friction markets. It acquired San Jamar and Arbo during the quarter.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $857.3 million | $794.0 million | +8.0% |
| Gross profit / margin | $247.7 million / 28.9% | $245.4 million / 30.9% | Margin down 2.0 percentage points |
| EBIT / margin | $96.7 million / 11.3% | $110.6 million / 13.9% | EBIT down 12.6%; margin down 2.6 points |
| Continuing-operations income | $61.5 million | $68.5 million | Down 10.2% |
| Diluted EPS from continuing operations | $0.94 | $1.05 | Down 10.5% |
| Operating cash flow | $31.9 million | $109.0 million | Down 70.7% |
| Capital expenditures | $30.4 million | $18.7 million | Up $11.7 million |
Net sales growth reflected acquisition contribution of 4.9% and volume growth of 4.4%, partly offset by price (0.7%) and foreign exchange (0.6%). Cost of goods sold was $609.6 million; selling and administrative expense was $139.7 million. Net income was $61.8 million, including $0.3 million from discontinued operations. The effective tax rate on continuing operations was 31.7%, including a year-to-date discrete tax benefit of $1.5 million; adoption of stock-compensation accounting guidance produced a $2.6 million tax benefit.
Segment results
| Segment | Sales | EBIT | Notable year-over-year movement |
|---|---|---|---|
| Construction Materials | $446.1 million | $80.7 million | Sales +10.5%; EBIT +11.6% |
| Interconnect Technologies | $194.2 million | $22.3 million | Sales down 1.3%; EBIT down 39.1% |
| FoodService Products | $83.3 million | $5.8 million | Sales +37.9%; EBIT down 18.3% |
| Fluid Technologies | $60.5 million | $4.9 million | Sales down 1.1%; EBIT down 29.0% |
| Brake & Friction | $73.2 million | $1.2 million | Sales +1.7%; EBIT down 67.6% |
Balance sheet, cash flow, debt and liquidity
At March 31, 2017, cash and cash equivalents were $134.0 million, down from $385.3 million at year-end 2016. Total assets were $4.071 billion, current assets $1.191 billion, current liabilities $508.3 million, and shareholders’ equity $2.518 billion. Receivables rose to $560.0 million and inventories to $428.0 million from $511.6 million and $377.0 million, respectively, at December 31.
Operating cash flow declined principally due to lower net income and working-capital use, including higher inventory, personnel-related payments, and customer rebates. Investing cash outflow was $256.2 million, mainly acquisition spending; financing cash outflow was $28.1 million, primarily dividends. Cash declined by $251.3 million during the quarter.
Long-term debt was $596.5 million, consisting principally of $350 million of 3.75% notes due 2022 and $250 million of 5.125% notes due 2020. Carlisle reported a 19.2% debt-to-capital ratio and compliance with debt covenants. The revolving credit commitment was increased from $600 million to $1.0 billion and extended to February 2022; no borrowings were outstanding at quarter-end. Carlisle stated it had sufficient resources for business needs for at least 12 months. Non-U.S. cash of $105.7 million was described as permanently reinvested; cash held in China is subject to transfer and currency-conversion restrictions.
Material changes, outlook and management commentary
- Sales growth was led by strong U.S. non-residential roofing demand and the San Jamar acquisition. San Jamar and Arbo together accounted for most of the quarter’s acquisition activity; cash paid for acquisitions, net of cash acquired, was $225.8 million. San Jamar’s preliminary purchase-price allocation included $86.9 million of goodwill and $135.1 million of definite-lived intangibles.
- Profitability weakened despite higher sales. Management cited unfavorable mix and raw-material dynamics, lower Interconnect Technologies performance, approximately $5.2 million of facility-rationalization and restructuring charges, and $3.9 million of acquired inventory costs. FoodService results also included approximately $2.7 million of acquired-intangible amortization.
- Interconnect Technologies faced customer in-sourcing and a shift from standard in-flight entertainment products toward satellite connectivity platforms. Management expected mid-single-digit 2017 segment sales growth as satellite-connectivity sales ramped, while anticipating substantial operational-efficiency savings beginning in 2018.
- Management maintained its full-year total sales-growth outlook in the high-single-digit range and forecast 2017 capital expenditures of approximately $125–$150 million. Segment expectations included mid-to-high-single-digit growth at Construction Materials, low-to-mid-single-digit organic growth at FoodService, mid-single-digit growth at Fluid Technologies, and slightly positive Brake & Friction sales for the remainder of the year.
- Construction Materials faces raw-material inflation, competitive capacity and pricing pressure, and possible labor constraints. Brake & Friction demand remains uncertain. Carlisle announced an approximately 18-month Tulsa, Oklahoma facility exit and relocation, with expected total exit costs of $16.5–$18.5 million and additional Medina facility/equipment investment.
- Other restructuring actions included Interconnect Technologies site and medical-business initiatives and Fluid Technologies facility/administrative relocations. Q1 total exit and disposal costs were $3.2 million; the related accrued liability was $10.1 million at quarter-end.
- Risks and contingencies include asbestos-related claims (management considers reasonably possible additional claims not material, and reports insurance coverage), ordinary-course litigation, and potential environmental liabilities. No significant environmental-remediation accrual was recorded at quarter-end. Management reported no material change in disclosed risk factors.
Important facts for investors to verify
- Whether acquisition-related sales and San Jamar integration translate into sustainable organic growth and improved FoodService margins; San Jamar purchase accounting remained preliminary.
- Whether Interconnect Technologies recovers from customer in-sourcing and product-transition timing, and whether the planned efficiency savings begin as expected.
- Whether raw-material inflation, mix, pricing, and restructuring costs continue to pressure gross and EBIT margins.
- Whether operating cash flow and working capital improve as seasonal inventory is converted to sales; Q1 operating cash flow was substantially below the prior-year quarter.
- Progress and final costs of the Tulsa-to-Medina relocation and the company’s planned $125–$150 million annual capital expenditure program.
- Potential effects of goodwill and intangible-asset judgments, acquisition integration, environmental and litigation matters, and adoption of forthcoming accounting standards. Carlisle reported no additional impairment-test trigger for the CBF goodwill or Wellman trade name in Q1.