Carlisle Companies Incorporated — Q2 2011 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods. Carlisle is a diversified manufacturer reporting five segments: Construction Materials, Transportation Products, Brake & Friction, Interconnect Technologies, and FoodService Products. Hawk, acquired in December 2010, is included in Brake & Friction.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $870.8 million | $687.6 million | $1,564.4 million | $1,234.9 million |
| Gross profit / margin | $183.7 million / 21.1% | $143.6 million / 20.9% | $330.8 million / 21.1% | $255.6 million / 20.7% |
| EBIT / margin | $85.4 million / 9.8% | $64.0 million / 9.3% | $140.6 million / 9.0% | $102.8 million / 8.3% |
| Continuing-operations income | $55.3 million | $38.8 million | $88.6 million | $61.9 million |
| Net income | $54.6 million | $38.6 million | $88.0 million | $62.8 million |
| Diluted EPS | $0.86 | $0.62 | $1.39 | $1.01 |
Q2 sales rose 26.6%; management attributed approximately 12 percentage points to Hawk and reported 14% organic growth, led by higher volume, with additional contributions from pricing. Six-month sales rose 26.7%, including 12.9 percentage points from Hawk and 13% organic growth. The six-month effective tax rate was 32.2%, versus 37.5% in 2010; management cited tax-law changes affecting foreign earnings and the research credit.
Cash flow and liquidity: Six-month operating cash flow was $13.7 million, compared with $20.5 million in 2010. Capital expenditures were $33.8 million, making operating cash flow less capital expenditures negative $20.1 million. Receivables increased with sales and working-capital needs; management also cited inventory purchases to address raw-material supply concerns. Cash at June 30 was $99.1 million, including $83.6 million held outside the United States. Current assets were $1,207.9 million and current liabilities $538.9 million.
Debt: Short-term debt, including current maturities, was $100.8 million; long-term debt was $405.1 million. The company reported a 26% debt-to-capital ratio. It had $369 million available under its $500 million revolving facility and an additional $55 million uncommitted line available. The revolving facility terminates July 12, 2012; renewal discussions were underway. The company reported covenant compliance.
Material changes and segment results
- Construction Materials: Q2 sales were $412.0 million, up 19.1%; EBIT was $54.2 million, up 5.7%. Stronger commercial re-roofing demand supported sales, but raw-material inflation reduced margin.
- Transportation Products: Q2 sales were $204.3 million, up 6.4%; EBIT was $6.8 million, up 7.9%. Higher prices and demand in agricultural and power-sports applications were partly offset by Jackson, Tennessee tire-plant start-up inefficiencies and inventory-reserve charges.
- Brake & Friction: Q2 sales were $119.4 million and EBIT $19.3 million, compared with $26.2 million and $2.9 million in 2010. Hawk contributed $83.5 million of sales and $15.6 million of EBIT. Organic sales growth was 33% in Q2.
- Interconnect Technologies: Q2 sales were $71.7 million, up 14.9%; EBIT was $11.7 million, up 95.0%, reflecting aerospace demand and efficiency gains.
- FoodService Products: Q2 sales were $63.4 million, up 3.6%; EBIT fell 15.9% to $5.3 million as raw-material and freight costs outpaced pricing.
Overall, higher volumes, pricing, Hawk’s contribution, and operating efficiencies lifted earnings. Raw-material cost increases remained a significant offset. Interest expense increased to $4.9 million in Q2 and $10.0 million for six months, primarily due to higher debt following the Hawk acquisition.
Outlook, risks, and unusual items
- Management expected full-year 2011 sales growth from acquisitions and organic growth combined to be in the mid-twenty-percent range. It cautioned that raw-material costs, global conditions, and economic recovery could pressure sales and earnings.
- Management expected additional CCM price increases in Q3, but noted price competition and uncertainty about recovering further input-cost increases. CTP expected sales to follow the current trend, while raw-material costs and Jackson plant ramp-up inefficiencies could continue to weigh on results.
- CTP’s tire-manufacturing consolidation was substantially complete. Total expected cost was approximately $20.3 million, with $19.5 million incurred through June 30 and $0.8 million expected in Q3. Annual savings were projected at approximately $16 million by 2013. The company also expected about $2.0 million of second-half 2011 costs to centralize CTP headquarters in Franklin, Tennessee.
- On July 18, 2011, Carlisle agreed to acquire Germany-based PDT, a roofing-membrane and industrial-components manufacturer, for approximately €80 million, including assumption of approximately €16 million of net debt and debt-like items, plus contingent payments. Closing was expected by August 15, subject to customary conditions and German regulatory approval.
- Discontinued operations generated a Q2 after-tax loss of $0.7 million. Q2 included a $0.6 million pretax write-down of land and a building associated with the thermoset molding operation. Exit and disposal costs were $0.6 million in Q2 and $3.0 million for six months.
- Customs authorities continued to work with Carlisle on classification of certain imported tires; potential additional duties, fines, or penalties could not be determined. Management did not expect a material adverse effect on consolidated financial position. The company also disclosed asbestos litigation and potential environmental liabilities; management did not expect remaining asbestos claims to materially affect overall financial condition, results, or cash flows, though individual-period charges remain possible.
- Other risks cited include unrecouped raw-material inflation, economic and market cyclicality, defense-program delays or budget cuts, aircraft-production changes, acquisition integration, and potential impairment if CTP’s outlook deteriorates. No material changes in market risk were reported.
Key facts for investors to verify
- Whether organic growth and Hawk’s contribution are sustained, and whether input-cost increases can be passed through to customers.
- Jackson tire-plant production progress, customer impacts, remaining consolidation costs, and realization of projected savings.
- Operating cash conversion and working-capital trends, given the $13.7 million of first-half operating cash flow and increased receivables and inventory.
- Revolving-credit-facility renewal ahead of its July 2012 termination, and funding and completion of the PDT acquisition.
- Resolution and financial exposure, if any, from tire-classification duties or penalties, asbestos claims, and environmental matters.