Carlisle Companies Incorporated — Q2 2018 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2018. Carlisle reports four continuing segments: Construction Materials (CCM), Interconnect Technologies (CIT), Fluid Technologies (CFT), and Brake & Friction (CBF). Carlisle FoodService Products (CFS) was sold on March 20, 2018 and is presented as discontinued operations.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,236.1m | $983.9m | $2,220.8m | $1,757.9m |
| Operating income | $159.7m | $146.3m | $254.4m | $235.8m |
| Operating margin | 12.9% | 14.9% | 11.5% | 13.4% |
| Continuing-operations income | $114.7m | $94.7m | $172.6m | $152.6m |
| Diluted EPS from continuing operations | $1.87 | $1.46 | $2.78 | $2.34 |
| Net income | $113.7m | $102.3m | $423.3m | $164.1m |
| Net cash from operating activities | Not presented quarterly | Not presented quarterly | $(2.8)m | $134.7m |
- Q2 revenue increased 25.6%; management attributed growth to acquisitions (14.3%), price/volume (10.6%) and foreign exchange (0.7%). Six-month revenue increased 26.3%.
- Q2 continuing-operations diluted EPS rose 28%. In the first half, reported net income included a $293.5m pretax gain on the CFS sale; discontinued operations contributed $250.7m after tax. Continuing-operations diluted EPS is a more comparable earnings measure.
- Margins contracted despite higher sales. Gross margin was 26.9% in Q2 versus 29.1% and 26.2% for the first half versus 29.2%. The filing cites unfavorable mix and raw-material dynamics, plus acquired costs; price, volume, capacity utilization and operating-efficiency savings provided offsets.
- Q2 segment revenue and operating income: CCM $828.6m / $141.4m; CIT $237.7m / $27.5m; CFT $73.3m / $7.8m; CBF $96.5m / $2.9m. CCM revenue benefited from acquisitions and commercial construction demand; CIT and CBF also reported stronger demand. CFT described mixed end-market conditions and sequential operating-income improvement.
- Interest expense, net, increased to $14.2m in Q2 from $7.0m and to $28.7m for six months from $13.6m, primarily reflecting notes issued in November 2017. The six-month continuing-operations effective tax rate was 23.1%, versus 31.9%, largely reflecting the U.S. tax-rate reduction.
- Cash and equivalents were $762.4m at June 30, versus $378.3m at year-end; long-term debt was $1,586.9m. The $1.0bn revolving facility was undrawn and available, and the company reported compliance with debt covenants. Six-month operating cash flow was negative $2.8m, including $276.7m of working-capital uses. Investing cash flow was $674.1m, mainly reflecting $754.6m gross CFS sale proceeds; financing cash use was $285.9m.
- For the first half, Carlisle paid $45.6m in dividends and repurchased $235.7m of shares. Dividends declared and paid were $0.37 per share in Q2, compared with $0.35 a year earlier.
Material changes, outlook and risks
- Management described Q2 as a record for sales and diluted EPS. It cited strong U.S. commercial construction demand, commercial aircraft production, recovering off-highway vehicle markets, price realization and Carlisle Operating System savings.
- Management expected approximately 20% overall revenue growth for 2018. Segment expectations: CCM growth in the mid-twenties, including acquisitions, with organic growth in the mid-to-high single digits; CIT growth above 10%; CFT mid-single-digit growth; and CBF mid-teens growth.
- Accella, acquired in November 2017 for approximately $671m, contributed $121.9m of Q2 revenue and $228.4m for the first half. Management noted its integration and expected $2m–$3m of second-half expense for employee stock-option and stock-appreciation-right awards.
- Margin pressures include rising raw-material, freight and labor costs, unfavorable product mix, and competition that may limit price realization. CCM also cited possible construction-demand effects from fiscal policy and interest rates and labor availability constraints. Foreign-exchange movements and acquisition integration are additional risks.
- Restructuring continued, including CIT medical operations relocation and CBF’s Tulsa-to-Ohio consolidation. CBF expected approximately $9m of remaining exit and disposal costs, principally in the second half of 2018; related facility investment was also planned. Management cautioned that CBF remained in a cyclical recovery.
- The company reported no material change in risk factors or market-risk disclosures. It described asbestos litigation and environmental exposure as not expected to be material overall, while noting that particular-period costs or future environmental requirements could have an impact. Accella controls were still being integrated into the company’s compliance program.
- ASC 606 adoption increased reported Q2 revenue by $9.0m and six-month revenue by $20.0m versus amounts without adoption; management expected the ongoing effect to be immaterial. The filing also notes provisional Tax Act accounting and continued review of certain tax effects.
Important facts for investors to verify
- Whether forecast growth and acquisition contributions translate into improved operating margins as raw-material, freight and labor costs evolve.
- Whether working-capital investment—especially receivables associated with strong June sales—converts into operating cash flow.
- Accella’s post-acquisition profitability and integration progress; its reported first-half operating income contribution was $0.1m.
- The timing and total cost of restructuring, especially the CBF facility consolidation and associated capital spending.
- The amount of CFS sale proceeds ultimately retained after working-capital adjustments, taxes and other uses of cash.
- Progress on integrating Accella’s internal controls and the final effects of provisional tax accounting.