Carlisle Companies Incorporated — Q1 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2016, compared with the same 2015 period. Carlisle operates in construction materials, interconnect technologies, fluid technologies, brake and friction, and foodservice products. The 2015 comparison excludes Fluid Technologies (CFT), which includes Finishing Brands acquired April 1, 2015; therefore, reported growth includes a significant acquisition contribution.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $794.0 million | $709.3 million |
| Gross profit / margin | $245.4 million / 30.9% | $173.0 million / 24.4% |
| EBIT / margin | $110.6 million / 13.9% | $66.4 million / 9.4% |
| Income from continuing operations | $68.5 million | $39.5 million |
| Net income | $68.5 million | $39.4 million |
| Diluted EPS | $1.05 | $0.59 |
| Operating cash flow | $109.0 million | $49.5 million |
Sales rose 11.9%; EBIT increased 66.6%, continuing-operations income 73.4%, and diluted EPS 78.0%. Gross margin expanded 650 basis points. Management attributed improved profitability chiefly to Construction Materials pricing discipline, lower raw-material costs, higher capacity utilization, and Carlisle Operating System savings. Acquisition contribution and share repurchases also supported reported growth and EPS, respectively.
Cash and cash equivalents were $450.5 million at March 31, up from $410.7 million at year-end; $123.3 million was held by foreign subsidiaries, including $22.9 million in China. Current assets were $1,382.7 million and current liabilities $628.8 million. Total debt carrying value was $745.7 million, including $149.9 million due in 2016; the $600 million revolving facility and $45 million uncommitted line were undrawn. Debt-to-capital was 24%, and the company reported compliance with covenants. The 6.125% notes mature August 15, 2016; management expected cash and available credit to be sufficient for repayment.
Operating cash flow funded $18.7 million of capital expenditures, the MS acquisition, dividends of $19.5 million, and share repurchases. Investing cash outflow was $26.8 million and financing cash outflow was $43.5 million. Working capital as a percentage of annualized sales improved to 20.2% from 20.4% a year earlier.
Segments and material changes
- Construction Materials: Sales grew 8.7% to $403.7 million; EBIT nearly doubled to $72.3 million, with margin rising to 17.9% from 9.9%. Higher roofing demand and favorable weather contributed, partly offset by lower pricing.
- Interconnect Technologies: Sales increased 1.2% to $196.7 million and EBIT rose 6.1% to $36.6 million. Aerospace and medical demand improved, while industrial sales declined 16% and aerospace contractual pricing reductions weighed on price.
- Fluid Technologies: Reported sales and EBIT were $61.2 million and $6.9 million, respectively, versus no comparable segment in Q1 2015. Results include Finishing Brands; MS Oberflächentechnik, acquired in February for consideration of $12.4 million, had immaterial Q1 sales. CFT EBIT included $1.2 million of integration and headquarters-relocation costs.
- Brake & Friction: Sales fell 16.7% to $72.0 million and EBIT declined 54.9% to $3.7 million amid weak construction, mining, agriculture, and aircraft-braking demand and lower utilization.
- FoodService Products: Sales increased 5.6% to $60.4 million and EBIT rose 31.5% to $7.1 million, supported by foodservice demand and higher utilization.
Outlook, risks, and unusual items
- Management expected full-year 2016 sales growth in the mid-single digits, led by Construction Materials, Interconnect Technologies, and FoodService Products, with a CFT contribution; softer Brake & Friction demand was expected to offset some growth. Expected capital expenditures were $90–$110 million and the expected full-year effective tax rate was approximately 33%. No full-year earnings or EPS guidance was stated.
- Construction Materials sales and EBIT are typically stronger in Q2 and Q3. Management cited competitive capacity and potential roofing price pressure, labor availability, and sensitivity to construction activity and interest rates.
- Brake & Friction’s weak outlook and currency exposure prompted interim impairment testing. No impairment was recorded; estimated goodwill fair value exceeded carrying value by approximately 7%, and one trade name exceeded carrying value by approximately 3%. A further deterioration in forecasts or higher discount rates could result in a potentially material impairment charge.
- Other risks include customer concentration in Interconnect Technologies (one customer represented approximately 22% of its segment sales), foreign-exchange exposure, CFT integration costs and overseas market conditions, and volatile timing of large CFT systems orders.
- Asbestos claims are generally insured and management did not expect pending claims to materially affect the company overall, though costs could affect particular periods. Environmental liabilities could arise from current or former facilities; no significant remediation accrual was reported. Management stated other litigation was not expected to materially affect financial position or annual operating cash flows.
- Standard product warranty liabilities were $30.6 million at March 31, 2016, compared with $14.7 million a year earlier. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Separate organic growth from the acquired Finishing Brands contribution when assessing sales and EBIT trends.
- Track Construction Materials pricing, raw-material savings, and whether the unusually strong margin improvement is sustainable.
- Monitor Brake & Friction demand, goodwill and trade-name valuation headroom, and any impairment indicators.
- Confirm repayment or refinancing of the $150 million notes due August 2016 and continued covenant compliance.
- Review progress on CFT integration and relocation costs, warranty claims, and the timing and use of foreign-held cash.