Carlisle Companies Incorporated — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited results; amounts in millions except per-share data. Carlisle is a diversified manufacturer operating in construction materials, transportation products, brake and friction, interconnect technologies, and foodservice products.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $996.1 | $984.6 | $1,853.1 | $1,873.9 |
| Gross profit / margin | $240.2 / 24.1% | $255.4 / 25.9% | $427.8 / 23.1% | $466.6 / 24.9% |
| EBIT / margin | $22.5 / 2.3% | $140.3 / 14.2% | $92.6 / 5.0% | $236.5 / 12.6% |
| Continuing income | $8.2 | $89.4 | $63.5 | $149.4 |
| Diluted EPS | $0.13 | $1.39 | $0.98 | $2.34 |
Q2 net income was $8.2 million, versus $92.8 million a year earlier; six-month net income was $63.4 million, versus $152.8 million. The Q2 $100.0 million non-cash goodwill impairment at Transportation Products accounted for an estimated $66.1 million after-tax impact, or $1.01 per diluted share. Excluding that charge, underlying performance was still pressured by lower volume and production, higher unit costs, and weaker pricing relative to raw-material costs.
Acquisitions contributed 2.6% to Q2 sales and 3.0% to first-half sales. Organic sales declined 1.4% in Q2 and 4.1% in the first half. Q2 results were supported by Construction Materials and Interconnect Technologies growth; weaker Transportation Products and Brake & Friction demand offset those gains.
Cash flow, balance sheet, and debt
- First-half operating cash flow was $119.5 million, down from $154.3 million. Capital expenditures were $49.4 million; investing cash outflow was $49.1 million.
- Cash increased to $168.2 million at June 30, 2013, from $112.5 million at year-end. Operating, investing, and financing activities produced a net cash increase of $55.7 million.
- Current assets were $1,328.3 million and current liabilities $465.2 million. Receivables rose to $597.5 million from $482.7 million; inventories declined to $493.0 million from $538.0 million. Working capital as a percentage of annualized sales improved to 21.0% from 21.8% in the comparable prior-year period.
- Long-term debt was $752.6 million, with no short-term debt. Cash exceeded undrawn debt: $600 million was available under the revolving facility and a further $45 million under an uncommitted line. Debt-to-capital was 29%; the company reported compliance with covenants.
- Dividends paid were $25.6 million in the first half, or $0.40 per share, compared with $22.5 million, or $0.36 per share, in 2012. Cash and cash equivalents held outside the U.S. totaled $83.8 million; management generally considered these funds permanently reinvested abroad.
Segment trends and material changes
- Construction Materials: Q2 sales rose 4.4% to $490.5 million, while EBIT fell 8.5% to $78.2 million; margin was 15.9% versus 18.2%. New construction and waterproofing/coatings demand helped, but weather delayed reroofing and higher raw-material costs and lower pricing weighed on profitability.
- Transportation Products: Q2 sales declined 3.7% to $203.5 million; EBIT was a loss of $86.8 million, including the estimated $100.0 million impairment. Lower outdoor-power, agriculture, and construction demand, adverse weather, and reduced production also hurt results. Goodwill was reduced to zero; management expected to finalize the impairment valuation in Q3.
- Brake & Friction: Q2 sales fell 25.3% to $93.6 million and EBIT declined 48.1% to $12.4 million. Construction and mining demand weakened sharply, partly offset by agriculture demand.
- Interconnect Technologies: Q2 sales increased 27.0% to $145.7 million, including $26.0 million from the Thermax/Raydex acquisition; EBIT rose 28.2% to $22.3 million. Organic growth was 4.3%, led by aerospace and test-and-measurement demand.
- FoodService Products: Q2 sales were nearly flat at $62.8 million, while EBIT increased 28.1% to $7.3 million, reflecting restructuring and administrative savings.
Outlook, commentary, and risks
- For full-year 2013, management expected combined organic and acquisition sales growth in the low-to-mid single-digit percentage range, modest EBIT growth excluding the impairment, and an EBIT margin slightly below the 11.7% achieved in 2012. The company expected a full-year effective tax rate of approximately 30% and capital expenditures of about $116 million.
- On July 23, 2013, Carlisle announced it would explore strategic options for Transportation Products, including a possible sale. The process could create uncertainty among customers, suppliers, and employees and adversely affect performance.
- Management expected Construction Materials sales growth in the mid-single digits, but cautioned that recovering raw-material costs through pricing could be difficult. Brake & Friction sales were expected to remain around current levels for the rest of 2013. Interconnect Technologies’ commercial aerospace outlook was favorable, but supplier pricing negotiations, military-spending uncertainty, and longer-term shifts in in-flight connectivity demand presented risks.
- Other disclosed risks include cyclicality, competition, unrecoverable input-cost increases, acquisition integration, interest-rate and currency movements, litigation, and environmental compliance or remediation. The company reported asbestos claims generally had not materially affected results and maintained insurance for certain related costs; it noted potential environmental liabilities despite historically immaterial compliance costs.
Investor facts to verify
- Whether the final Q3 valuation changed the estimated $100.0 million Transportation Products goodwill impairment.
- Progress and outcome of the announced Transportation Products strategic review, and any effect on operations or financial reporting.
- Whether forecast sales growth, modest adjusted EBIT growth, and the expected tax rate and capital spending were achieved.
- Whether working-capital conversion and operating cash flow recovered, given the first-half cash-flow decline and increased receivables.
- Whether Construction Materials pricing recovered higher input costs and whether weakness in Brake & Friction and military/industrial interconnect markets persisted.