Carlisle Companies Incorporated — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial statements are unaudited. Carlisle manufactures engineered products through four segments: Construction Materials (CCM), Interconnect Technologies (CIT), Fluid Technologies (CFT), and Brake & Friction (CBF).
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,126.7 million | $1,280.6 million | $3,181.1 million | $3,667.3 million |
| Operating income | $155.7 million | $191.0 million | $371.8 million | $512.9 million |
| Operating margin | 13.8% | 14.9% | 11.7% | 14.0% |
| Income from continuing operations | $102.3 million | $139.3 million | $239.5 million | $369.7 million |
| Diluted EPS from continuing operations | $1.87 | $2.42 | $4.31 | $6.40 |
| Operating cash flow | Not separately stated for the quarter | $440.2 million | $489.5 million |
Q3 revenue declined 12.0% year over year; nine-month revenue fell 13.3%. Management attributed the pressure primarily to lower volumes amid COVID-19, especially in commercial aerospace, along with lower production levels and wage inflation. Raw-material savings, cost controls, and lower incentive compensation and travel costs partially offset the impact. Q3 gross margin was 29.3%, versus 29.7% a year earlier; nine-month gross margin was 28.0%, versus 29.0%.
- CCM: Q3 revenue fell 7.8% to $823.5 million, while operating income rose 4.8% to $181.3 million; margin improved to 22.0% from 19.4%. Lower volumes were offset by favorable raw-material pricing, COS savings, and lower costs.
- CIT: Q3 revenue fell 30.3% to $168.5 million and the segment recorded a $3.7 million operating loss, compared with $36.0 million operating income a year earlier. Aerospace demand was severely depressed; medical technologies benefited from demand for patient-monitoring equipment.
- CFT: Q3 revenue fell 5.1% to $65.0 million, while operating income increased 4.8% to $4.4 million. Price realization, operational execution, and new products supported results.
- CBF: Q3 revenue fell 9.1% to $69.7 million and operating income declined to $0.9 million from $5.7 million. Sales improved sequentially from Q2, but markets remained weak.
Cash, debt, and capital allocation
Cash and cash equivalents were $719.0 million at September 30, 2020, up from $351.2 million at year-end 2019. Current assets were $2,140.2 million and current liabilities were $645.7 million. Long-term debt, net of current portion, was $2,079.4 million; total debt carrying value was $2,080.3 million. The $1.0 billion revolving facility was undrawn, and the company reported compliance with debt covenants.
For the first nine months, operating cash flow was $440.2 million; investing activities used $106.7 million, including $72.7 million of capital expenditures and the MTA acquisition. Financing activities provided $36.7 million, including $740.7 million of note proceeds and $500.0 million of revolver borrowings, offset by $500.0 million of revolver repayments, $341.7 million of share repurchases, and $84.5 million of dividends. Carlisle issued $750 million of 2.75% senior notes due 2030 and redeemed $250 million of 5.125% notes due 2020, recording an $8.8 million debt-extinguishment loss.
Material developments, outlook, and risks
- COVID-19 adversely affected demand, with commercial aerospace particularly weak. Management saw signs of recovery in some markets but cautioned that the timing and pace remained uncertain.
- Q4 2020 revenue outlook versus Q4 2019: CCM low-single-digit growth; CIT decline of mid-30%; CFT decline of mid-teens; CBF decline of low-single digits; total Carlisle decline of high-single digits. Full-year expectations included corporate expenses of about $95 million, depreciation and amortization of about $230 million, capital expenditures of $100–$110 million, net interest expense of about $75 million, and a tax rate of about 23%. Management said COVID-related demand declines could require adjustments.
- Restructuring and exit costs were $18.6 million for the first nine months. CIT planned a Kent, Washington facility exit and relocation estimated at $18.9 million total cost, with about $15.5 million remaining; additional CBF restructuring costs were also expected.
- COVID-related weakness triggered second-quarter goodwill and indefinite-lived trade-name impairment tests for CFT and CBF; no impairment was recorded. One CFT reporting unit’s fair value exceeded carrying value by about 10%, and one CFT trade name’s fair value exceeded carrying value by less than 10%. Further deterioration in forecasts, discount rates, or market multiples could result in material impairment charges.
- Other stated risks include supply-chain and operating disruptions, collection of receivables, raw-material cost changes, foreign exchange, market cyclicality, and uncertainty in aerospace and construction demand. The company reported no material legal proceedings; asbestos-related claims were described as not currently material, with insurance coverage maintained.
- MTA was acquired in July for approximately $33.3 million. It contributed $4.1 million of revenue and an operating loss of less than $0.1 million through September 30.
Investor verification priorities
- Track recovery in commercial aerospace and the resulting CIT revenue, operating performance, and restructuring progress.
- Compare Q4 segment revenue and full-year expense, capital-spending, interest, and tax expectations with subsequent results.
- Monitor CCM demand and margins, and whether favorable raw-material pricing and cost savings persist.
- Assess potential impairment exposure at CFT and CBF as actual performance and valuation assumptions evolve.
- Review debt maturities, liquidity, cash generation, and the continued pace of share repurchases and dividends.
- Reconcile reported results with the filing’s items affecting comparability, including restructuring, idle-capacity costs, acquisition costs, debt-extinguishment loss, and discrete tax items.