Carlisle Companies Incorporated — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Carlisle is a diversified manufacturer of engineered products, reporting four continuing segments: Carlisle Construction Materials (CCM), Carlisle Interconnect Technologies (CIT), Carlisle Fluid Technologies (CFT), and Carlisle Brake & Friction (CBF). Carlisle FoodService Products (CFS) is reported as discontinued operations following its sale in March 2018. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,181.4 | $1,002.4 | $3,402.2 | $2,760.3 |
| Operating income | $140.0 | $134.8 | $394.4 | $370.6 |
| Operating margin | 11.9% | 13.4% | 11.6% | 13.4% |
| Continuing-operations income | $96.9 | $79.1 | $269.5 | $231.7 |
| Net income | $99.7 | $86.3 | $523.0 | $250.4 |
| Diluted EPS, continuing operations | $1.59 | $1.26 | $4.37 | $3.60 |
| Diluted EPS, total | $1.64 | $1.37 | $8.49 | $3.89 |
Q3 revenue increased 17.9% year over year; nine-month revenue increased 23.3%. Management attributed growth to acquisitions, higher volume, pricing, and ASC 606 adoption. Gross margin fell to 26.6% from 28.4% in Q3 and to 26.3% from 28.9% year to date, reflecting raw-material, freight and labor cost inflation, unfavorable mix, and other cost pressures. Operating income rose, but operating margin declined; higher acquired costs and compensation expenses partly offset pricing, volume, and Carlisle Operating System savings.
Q3 continuing-operations effective tax rate was 20.5%, versus 36.0%; the nine-month rate was 22.2%, versus 33.3%. The lower rate primarily reflects the U.S. statutory tax-rate reduction under the Tax Cuts and Jobs Act, as well as year-to-date discrete tax benefits. Nine-month net income includes a $296.8 million pretax gain on the CFS sale; the filing reports $253.5 million of discontinued-operations income for the period. Thus total net income and EPS growth substantially reflect the divestiture rather than continuing operations alone.
Segment results, Q3 2018
| Segment | Revenue | Operating income (loss) | Operating margin | Year-over-year context |
|---|---|---|---|---|
| CCM | $776.8 | $120.9 | 15.6% | Revenue +21.3%; income −2.8%. Weather, input costs, labor and freight weighed on results. |
| CIT | $240.2 | $29.3 | 12.2% | Revenue +13.9%; income +13.1%, supported by aerospace, defense and medical demand. |
| CFT | $72.4 | $11.6 | 16.0% | Revenue +2.1%; operating income improved from $0.1, including restructuring benefits and a facility-sale gain. |
| CBF | $92.0 | $(1.1) | (1.2)% | Revenue +14.3%; loss reflected higher restructuring costs from the Tulsa-to-Ohio consolidation. |
Cash flow, liquidity and debt
- Nine-month operating cash flow was $102.6, down from $299.6. Management cited $323.6 of working-capital uses, higher taxes related to the CFS sale, and acquisition-related mix effects.
- Investing activities provided $653.8, mainly from $758.0 gross cash proceeds from the CFS sale, offset in part by $96.1 of capital expenditures. Financing activities used $352.5, including $295.4 of share repurchases and $69.7 of dividends.
- Cash and equivalents were $780.5 at September 30, 2018, versus $378.3 at year-end 2017. Current assets were $2,201.4 and current liabilities $672.7.
- Long-term debt was $1,587.4, consisting of senior notes due 2020, 2022, 2024 and 2027. The $1.0 billion revolving credit facility had no borrowings and was fully available. Carlisle reported compliance with debt covenants.
- Dividends declared and paid were $0.40 per share in Q3 and $1.14 per share year to date. The company repurchased $295.4 of shares year to date.
Material changes and notable items
- CFS divestiture: Sold on March 20, 2018, for $758.0 gross proceeds; the sale generated a $296.8 pretax gain. CFS results are presented as discontinued operations.
- Accella acquisition: Acquired in November 2017 for total consideration of $671.4. It contributed $112.3 of Q3 revenue and $340.7 year to date, but reported an operating loss of $1.3 for Q3 and $1.2 year to date.
- ASC 606: Adoption increased reported 2018 revenue by $6.3 in Q3 and $26.3 year to date, and continuing-operations income by $1.2 and $5.8, respectively, versus amounts without adoption.
- Restructuring: Exit and disposal costs were $4.1 in Q3 and $11.8 year to date. Carlisle expected approximately $7.0 of remaining Tulsa/Medina consolidation costs, principally in Q4 2018; some related costs could continue into 2019.
- Share count: Average diluted shares fell to 60.3 million in Q3 from 62.8 million, reflecting share repurchases.
Outlook, commentary and risks
Management maintained a positive outlook for 2018 and beyond, citing underlying demand, liquidity, and its growth strategy, while acknowledging September weather challenges at CCM and Accella pricing-related volume pressure. Segment revenue expectations for 2018 were: CCM growth in the low twenties including acquisitions, with organic growth in the low-to-mid single digits; CIT double-digit growth; CFT mid-single-digit growth; and CBF mid-teens growth. These are management expectations, not guarantees.
Management identified risks including weather and seasonality in construction, raw-material and freight inflation, price competition, labor availability, cyclical end markets, interest rates, foreign exchange, acquisition integration, and restructuring execution. It expects moderate raw-material cost increases. Carlisle stated it had sufficient resources for at least the next 12 months. The filing reported no material change in disclosed risk factors or market risk. Asbestos claims and environmental matters remain potential contingencies; management considered their expected impact not material, while noting that particular periods could incur costs or charges.
Other points to monitor include integration of Accella’s operations and internal controls; the company said its assessment of 2018 controls would include Accella. The company expected adoption of the lease standard in 2019 to add approximately $50–$60 of right-of-use assets and lease liabilities, without a material effect on earnings or liquidity.
Investor verification checklist
- Separate organic growth from acquisition contribution and ASC 606 effects, particularly in CCM and CIT.
- Assess whether CCM can recover margins amid weather variability, raw-material inflation, freight and labor costs, and Accella’s pricing and integration challenges.
- Track working-capital investment and operating cash conversion, which weakened materially year over year despite higher earnings.
- Distinguish recurring earnings from the CFS disposal gain and other comparability items, including restructuring charges and facility-sale gains.
- Verify progress and remaining costs for the CBF Tulsa-to-Medina relocation and the expected segment growth outlook.
- Monitor debt maturities, capital returns, and the use of cash following the CFS sale; confirm continued covenant compliance.