Business context and reporting period
Carlisle Companies Incorporated filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The diversified manufacturer operates in construction materials, interconnect technologies, foodservice products, fluid technologies, and brake and friction products.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,089.1 million | $991.0 million | $3,018.1 million | $2,781.9 million |
| EBIT | $142.9 million | $36.4 million | $398.4 million | $325.9 million |
| EBIT margin | 13.1% | 3.7% | 13.2% | 11.7% |
| Income from continuing operations | $86.4 million | $(9.5) million | $250.2 million | $174.3 million |
| Diluted EPS from continuing operations | $1.37 | $(0.15) | $3.89 | $2.66 |
- Sales increased 9.9% in Q3 and 8.5% year to date. Acquisitions and favorable price/volume effects drove growth; foreign exchange had little effect in Q3 and reduced year-to-date sales slightly.
- Gross margin declined to 28.6% from 32.7% in Q3 and to 28.9% from 32.0% year to date, reflecting raw-material costs, unfavorable mix, restructuring charges, and acquisition inventory costs.
- Cash from operations was $299.6 million for the first nine months, down from $355.1 million. Capital expenditures were $105.8 million; operating cash flow less capital expenditures was approximately $193.8 million.
- Cash and equivalents were $147.6 million at September 30, versus $385.3 million at year-end 2016. Long-term debt was $781.9 million, compared with $596.4 million; revolving-facility borrowings were $185.0 million, with $815.0 million available. The company reported compliance with debt covenants.
- Current assets were $1,361.7 million and current liabilities $635.6 million. Dividends paid were $69.0 million year to date; share repurchases used $266.4 million.
Material changes versus the prior comparable period
- Q3 EBIT and earnings improved sharply versus 2016, principally because the prior-year quarter included $141.5 million of goodwill and intangible-asset impairment charges in Brake & Friction. The improvement should not be read as solely underlying operating growth.
- Construction Materials sales rose 10.7% in Q3, but EBIT fell 5.9% to $124.2 million and margin declined to 19.4% from 22.8%, mainly due to raw-material inflation and acquisition costs.
- Interconnect Technologies sales declined 3.4% in Q3; EBIT fell 39.1% to $25.7 million. Management cited commercial aerospace softness, customer insourcing, unfavorable mix, and restructuring costs.
- FoodService Products sales increased 37.6% in Q3, largely reflecting the San Jamar acquisition; EBIT rose 28.9% to $11.6 million.
- Fluid Technologies EBIT declined to $0.1 million from $9.5 million, including $8.1 million of Q3 restructuring and facility-rationalization costs.
- Brake & Friction sales increased 28.6% in Q3 and EBIT was $1.2 million versus a prior-year loss that included the impairment. Its operating margin remained low at 1.5%.
Outlook, commentary, risks, and unusual items
- Management maintained its 2017 consolidated net-sales growth outlook at mid-to-high single digits, excluding the pending Accella acquisition, and expected capital expenditures of approximately $150 million.
- Segment outlooks included high-single-digit sales growth for Construction Materials, a mid-single-digit decline for Interconnect Technologies, approximately 40% growth for FoodService Products including San Jamar, mid-single-digit growth for Fluid Technologies, and mid-teens growth for Brake & Friction. Management described Brake & Friction as cautiously optimistic but noted uncertain end-market demand.
- The company agreed to acquire Accella, a specialty polyurethane business, for $670 million in cash, subject to closing adjustments and regulatory approval. Closing was expected in Q4 2017; management anticipated using the revolving credit facility to fund it.
- Special items reduced Q3 continuing-operations income by $15.7 million, or $0.25 per diluted share; year-to-date impact was $29.0 million, or $0.45 per diluted share. Items included exit and disposal costs, facility rationalization, acquisition-related costs, and an indemnification loss.
- Restructuring plans include manufacturing relocations and facility exits across Interconnect Technologies, Fluid Technologies, and Brake & Friction. Management expects further costs, with some actions continuing into 2018 and, for the Brake & Friction relocation, into 2019.
- Management identified raw-material inflation, commercial aerospace weakness, cyclical and uncertain industrial markets, acquisition integration, foreign exchange and interest rates, and potential impairment as risks. The company said no impairment trigger was identified in 2017 through September 30, but further deterioration in Brake & Friction recovery expectations or higher discount rates could lead to additional charges.
- Asbestos-related claims are insured and management did not expect a material overall effect, while acknowledging possible period-specific charges. No significant environmental remediation accruals were recorded; future environmental liabilities remain a potential risk. Management reported no material change in disclosed risk factors.
Important facts for investors to verify
- Whether Accella closed on the expected terms and timing, how it was financed, and its subsequent contribution to sales, earnings, and leverage.
- Whether gross-margin pressure from raw materials and product mix persists, and whether pricing and COS savings offset it.
- Whether Interconnect Technologies stabilizes as aerospace demand and customer sourcing patterns evolve.
- Actual restructuring costs, timing of expected savings, and execution of the announced facility relocations.
- Cash conversion and working-capital trends: year-to-date operating cash flow was lower, with working capital uses of $98.6 million.
- Brake & Friction recovery and goodwill valuation sensitivity, including the effect of market conditions and discount rates.