Carlisle Companies Incorporated — FY 2010 Form 10-K
Reporting period: Year ended December 31, 2010. The filing is an annual report, not a standalone fourth-quarter report. Carlisle is a diversified manufacturer with five reportable segments: Construction Materials, Transportation Products, Brake & Friction, Interconnect Technologies, and FoodService Products. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $2,527.7 million | $2,258.1 million |
| Gross profit / margin | $528.7 million / 20.9% | $490.3 million / 21.7% |
| EBIT / margin | $196.1 million / 7.8% | $211.9 million / 9.4% |
| Continuing-operations income | $130.6 million | $155.3 million |
| Net income / diluted EPS | $145.6 million / $2.34 | $144.6 million / $2.34 |
| Operating cash flow | $107.4 million | $417.2 million |
| Capital expenditures | $64.6 million | $48.2 million |
| Cash and cash equivalents at year-end | $89.4 million | $96.3 million |
| Total debt at year-end | $474.1 million | $156.1 million |
| Net working capital | $560.5 million | $498.7 million |
Sales increased 11.9%; management reported organic growth of 8.7%, with acquisitions contributing $67.5 million and foreign exchange having less than a 1% effect. Gross margin contracted as raw-material costs rose and Construction Materials prices fell. EBIT declined 7.4%, while income from continuing operations fell 15.9%. Net income was nearly flat because discontinued operations contributed $15.0 million after tax in 2010 versus a $10.7 million loss in 2009.
Operating cash flow fell substantially, reflecting a $109.9 million use of cash from working capital and other assets and liabilities, including higher receivables and inventories and safety-stock builds related to the tire-factory transfer. The 2009 comparison benefited from substantial working-capital cash generation and fire-insurance proceeds. Management’s average working capital measure improved to 22.0% of annualized sales from 24.9%.
At year-end, current assets were $1,016.9 million and current liabilities $456.4 million; balance-sheet net working capital was $560.5 million. Long-term debt was $405.1 million, with $69.0 million of short-term debt/current maturities. The debt-to-capital ratio was 26%. The company reported $458.5 million available under its $500 million revolving facility and compliance with debt covenants. It issued $250 million of 5.125% notes due 2020 to help finance the Hawk acquisition; the assumed Hawk notes were redeemed in January 2011.
Segment results
| Segment | 2010 sales | 2010 EBIT | Year-over-year context |
|---|---|---|---|
| Construction Materials | $1,223.6 million | $159.2 million | Sales +8.7%; EBIT +2.6%; reroofing demand improved, but lower pricing and input costs pressured margin. |
| Transportation Products | $684.8 million | $21.7 million | Sales +8.1%; EBIT down from $53.4 million, partly because 2009 included a $27.0 million fire-insurance gain and 2010 had higher material and restructuring costs. |
| Brake & Friction | $129.4 million | $(0.9) million | Sales +73.4%, including Hawk and Japan Power Brake; results included substantial acquisition and integration costs. |
| Interconnect Technologies | $251.1 million | $30.9 million | Sales +39.1%, including acquisitions and 17% organic growth; EBIT more than doubled. |
| FoodService Products | $238.8 million | $24.3 million | Sales down 2.0%; EBIT down 1.6%, amid weak foodservice demand and higher resin and transportation costs. |
Material changes and significant items
- Carlisle acquired Hawk Corporation on December 1, 2010 for approximately $414.1 million in cash. Hawk added $21.6 million of December revenue and an approximately $11.5 million EBIT loss for that month; the loss included acquisition-related costs and purchase-accounting charges. Preliminary acquisition accounting recorded $216.5 million of goodwill.
- Hawk-related charges were reported at $14.2 million in the segment discussion; management also identified $11.4 million of acquisition and initial-integration selling and administrative expense. These disclosures use differing scopes; investors should consult the filing notes when reconciling them.
- 2010 continuing-operations results included $9.9 million of after-tax Hawk acquisition charges. In contrast, 2009 benefited from a $27.0 million pre-tax fire-insurance gain and a $19.6 million deferred-tax-liability release. Lower restructuring charges and higher volume partially offset 2010 cost pressures.
- Carlisle sold its specialty trailer business for $35 million in October 2010, recording a $6.3 million pre-tax gain; up to $5 million of additional proceeds may depend on future earnings, and the purchase price remains subject to working-capital adjustment. It sold its refrigerated truck bodies business for $20.3 million plus a working-capital adjustment, recording a $1.9 million pre-tax gain.
- 2010 discontinued operations also included currency-related gains from dissolving former businesses and a $5.9 million asbestos-related settlement charge. The $15.0 million after-tax discontinued-operations income contributed materially to reported net income.
- Reporting segments were reorganized in 2010, separating Brake & Friction from Transportation Products; comparative segment data was recast.
Outlook, risks, and contingencies
- The filing gives no numerical consolidated revenue or earnings guidance. Management described long-term prospects as favorable in Brake & Friction and Interconnect Technologies, while emphasizing economic, market, and integration uncertainties.
- Management expected 2011 capital expenditures of $70–$80 million and approximately $4 million of pension contributions. Transportation Products’ Jackson, Tennessee tire-factory consolidation was expected to finish by March 2011, with another $2.0 million of project costs anticipated in 2011. Estimated annualized savings for the segment’s consolidation projects were $30.2 million: $9.7 million realized through 2010, $12.0 million expected in 2011, and $8.5 million expected in 2012.
- Major risks include volatile petroleum-based materials, rubber and steel (raw materials and inbound freight were approximately 66% of cost of goods sold); uncertain global economic recovery; construction-market weakness and interest-rate sensitivity; pricing competition and limits on passing through costs; cyclical niche markets; acquisition integration and goodwill impairment; and foreign-exchange, trade, shipping, and China-related risks.
- The company noted potential customer concentration within several segments. It also warned that plant consolidations could disrupt customers and that savings depend on successful execution.
- Customs authorities continued reviewing classification of certain imported tires; potential duties, fines, or penalties were not quantifiable, though management did not expect a material adverse effect on consolidated financial position. The ICE investigation had been terminated. Asbestos claims remain pending; management did not expect remaining claims to materially affect financial condition, results, or cash flows, but periodic charges remain possible.
- Environmental compliance costs had not been material, but the company’s industrial history could create future liabilities. Pension expense and obligations are sensitive to actuarial assumptions and investment performance.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded Hawk, acquired December 1, 2010.
Most important facts for investors to verify
- How much 2010 earnings pressure was recurring—particularly raw-material inflation and pricing—and how quickly cost increases can be recovered.
- Hawk’s post-acquisition profitability, integration progress, realized synergies, and final purchase-price allocation.
- Whether operating cash flow recovers as inventory and receivables normalize, and whether forecast restructuring savings are achieved.
- Debt and liquidity following the Hawk acquisition, the January 2011 redemption of Hawk notes, and ongoing compliance with facility covenants.
- The sustainability of reported net income given the contribution from discontinued operations and unusual prior-year comparability items.
- Any outcome or financial exposure from the tire-classification review, remaining asbestos claims, environmental matters, and warranty obligations.