Carlisle Companies Incorporated — Q3 2015 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2015, compared with the same 2014 periods. Carlisle is a diversified manufacturer reporting five segments: Construction Materials (CCM), Interconnect Technologies (CIT), Fluid Technologies (CFT), Brake & Friction (CBF), and FoodService Products (CFSP). On April 1, 2015, Carlisle acquired Finishing Brands from Graco for $598.9 million net of cash acquired, funded with cash on hand; it is reported as CFT. LHi, acquired in October 2014, is included in CIT.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $973.1 million | $904.1 million | $2,667.0 million | $2,414.0 million |
| EBIT | $161.8 million | $134.0 million | $376.2 million | $319.3 million |
| EBIT margin | 16.6% | 14.8% | 14.1% | 13.2% |
| Income from continuing operations | $103.6 million | $86.3 million | $237.9 million | $198.4 million |
| Diluted EPS | $1.56 | $1.31 | $3.58 | $3.01 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $352.9 million | $164.7 million |
Q3 sales rose 7.6%, but organic sales declined 1.0%; acquisition contribution was 10.4%, foreign exchange reduced sales 1.8%, and volume added 0.6% while price reduced sales 1.6%. For the first nine months, sales increased 10.5%, comprising 3.9% organic growth, 8.6% acquisition growth, and a 2.0% foreign-exchange headwind. Gross margin improved to 30.4% in Q3 from 26.2%, and to 28.3% year to date from 25.8%. Selling and administrative expenses increased to 12.5% of sales in Q3 from 10.4%, partly reflecting acquired operations and amortization.
Net income was $103.6 million for Q3 and $237.9 million year to date. Q3 continuing-operations income increased 20.0%; year-to-date income rose 19.9%. The nine-month effective tax rate was 32.2% (MD&A reports 32.1%); management expected a full-year rate of 32%–33%. Q3 comprehensive income was $95.1 million, including a $9.2 million foreign-currency translation loss.
Segment highlights
- CCM: Q3 sales fell 3.2% to $570.1 million, including a 1.2% organic decline; EBIT increased 19.1% to $115.5 million and margin rose to 20.3%. Lower raw-material costs and operating efficiencies helped, while demand moderated and pricing remained competitive.
- CIT: Q3 sales increased 23.1% to $202.3 million, with 7.4% organic growth; EBIT rose 21.5% to $41.2 million. Aerospace and military demand grew, but contractual price reductions and acquisition dilution weighed on margins.
- CFT: Since acquisition, sales were $129.6 million and EBIT $9.1 million; Q3 sales were $67.9 million and EBIT $10.1 million. Year-to-date EBIT included $8.6 million of acquired-inventory fair-value cost and $0.7 million of acquisition-related costs.
- CBF: Q3 sales declined 20.8% to $70.7 million and EBIT fell to $0.5 million from $6.1 million; margin was 0.7%. Weak construction, agriculture, and mining markets, currency effects, lower capacity utilization, and $1.1 million of severance costs contributed.
- CFSP: Q3 sales increased 1.3% to $62.1 million and EBIT increased 4.1% to $7.7 million. Year-to-date sales and EBIT declined 2.1% and 11.4%, respectively.
Cash, debt, and liquidity
At September 30, 2015, cash was $354.4 million, down from $730.8 million at December 31, 2014. Current assets were $1,426.4 million and current liabilities $661.6 million. Debt totaled $748.6 million, including $149.9 million of 6.125% notes due in 2016 classified as current; long-term debt net of current maturities was $598.7 million. The company had $600 million available under its revolving facility and $45 million available under an uncommitted line, with no revolving-facility borrowings. Debt-to-capital was 24%; all covenants were met.
Nine-month operating cash flow was $352.9 million. Investing used $647.5 million, primarily the $598.9 million Finishing Brands acquisition; capital expenditures were $48.7 million. Financing used $78.3 million, including $52.7 million of dividends and $57.9 million of share repurchases, partly offset by share-issuance proceeds. Working capital as a percentage of annualized sales increased to 18.3% from 17.7%. Management expected 2015 capital expenditures of $70–$80 million and anticipated sufficient cash and facility capacity to repay the 2016 notes at maturity.
Outlook, commentary, and risks
- For full-year 2015, management expected low-to-mid single-digit organic sales growth, led by CIT and CCM, partly offset by weaker CBF; LHi and Finishing Brands were expected to contribute 8%–9% to overall sales. Based on September 30 exchange rates, the stronger U.S. dollar was expected to reduce sales by about 1.8% and EBIT by about $14 million, excluding CFT for the sales estimate.
- Management expected 2015 EBIT growth and margin improvement from lower material costs, Carlisle Operating System efficiencies, organic growth, and acquisitions. It expected CBF organic sales to decline in the low-double-digit range and its EBIT and margin to fall year over year. CFSP expected relatively level sales and lower margin; CCM expected significant margin improvement.
- CBF’s goodwill and indefinite-lived trade names passed the September 2015 impairment tests. Management warned that failure of end-market recovery assumptions and/or further dollar strengthening could lead to impairment.
- Risks include cyclical and weak end markets, price competition and inability to retain raw-material savings, currency movements, customer and government budget exposure, acquisition integration and execution, and economic conditions. CFT system-project timing can cause quarterly sales variability; management expected Q4 sales to exceed Q2 and Q3.
- Asbestos-related claims are insured for defense and settlements or judgments, subject to stated exclusions; management did not expect a material overall effect, but individual periods could incur charges. Environmental compliance costs had not been material and no significant remediation accrual was recorded, though future liabilities cannot be ruled out.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material change in market-risk disclosures or risk factors was reported.
Important facts for investors to verify
- Whether projected 2015 organic growth, acquisition contribution, EBIT improvement, tax rate, and currency impacts were achieved.
- Underlying CBF demand and cash generation, and whether impairment assumptions remain supportable.
- Finishing Brands integration progress, CFT margins after purchase-accounting and acquisition costs, and final purchase-price allocation.
- Working-capital trends, cash use, repurchases and dividends, and the planned repayment or refinancing of the $150 million 2016 notes.
- Exposure to foreign exchange, customer concentration in CIT (one customer represented about 22% of CIT sales), litigation, and potential environmental liabilities.