Carlisle Companies Incorporated — Q2 2010 Form 10-Q
Business context and period. Carlisle is a diversified manufacturer serving markets primarily in North America. It reports five segments: Construction Materials, Engineered Transportation Solutions, Interconnect Technologies, FoodService Products and Specialty Products. This unaudited filing covers the quarter and six months ended June 30, 2010; 2009 comparative figures were revised for presentation and discontinued-operations classifications.
Financial results
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $709.4 million | $636.7 million | $1,271.4 million | $1,168.0 million |
| EBIT | $64.2 million | $84.9 million | $102.7 million | $104.3 million |
| Income from continuing operations | $38.9 million | $57.2 million | $61.8 million | $68.2 million |
| Net income | $38.6 million | $55.5 million | $62.8 million | $62.1 million |
| Diluted EPS | $0.62 | $0.90 | $1.01 | $1.01 |
| Gross margin | 20.7% | 22.8% | 20.5% | 20.4% |
| Operating cash flow | Not stated separately | Not stated separately | $20.5 million | $269.0 million |
Q2 sales rose 11%; first-half sales increased 8.9%. Excluding acquisitions and foreign exchange, management reported organic growth of 8.6% for Q2 and 5.6% for the first half. Higher volumes drove growth, partly offset by lower selling prices. Q2 EBIT fell 24%, while first-half EBIT was down 2%.
Prior-year comparisons include fire-settlement gains of $24.5 million in Q2 and $27.0 million in the first half. These gains materially inflate reported 2009 EBIT and earnings comparisons. 2010 results also included restructuring costs of $4.0 million in Q2 and $6.9 million in the first half; 2009 included higher restructuring and impairment charges.
Cash, balance sheet and liquidity
- Cash was $96.6 million at June 30, 2010, compared with $96.3 million at year-end 2009. Operating cash flow was $20.5 million for the first half, versus $269.0 million a year earlier. Management attributed the decline mainly to working-capital use, including higher receivables and inventories; the prior-year period also included $54.5 million of fire-insurance proceeds.
- Capital expenditures were $31.6 million, compared with $20.1 million in the first half of 2009. Sale proceeds from the refrigerated truck-bodies business were $20.3 million. Cash increased by $0.3 million over the half-year.
- Long-term debt was $156.2 million. The company reported $469 million available on its $500 million revolving credit facility and a further $55 million available under an uncommitted line. It said it was in compliance with debt covenants.
- Current assets were $941.2 million and current liabilities $367.1 million at June 30. Receivables rose to $414.5 million from $292.5 million at year-end; inventories were $363.2 million, up from $345.8 million.
Material changes and segment trends
- Construction Materials: Q2 sales rose 10% to $345.8 million, while EBIT was nearly flat at $51.3 million. Lower selling prices and higher input costs pressured the margin; first-half EBIT rose 26% to $70.6 million.
- Engineered Transportation Solutions: Q2 sales rose 10% to $218.2 million, but EBIT fell to $9.2 million from $39.0 million, primarily reflecting the prior-year fire gain, higher raw-material costs and production inefficiencies. First-half EBIT was $22.8 million versus $55.2 million.
- Interconnect Technologies: Q2 sales increased 60% to $62.4 million, supported by the Jerrik and Electronic Cable Specialists acquisitions and organic aerospace demand. EBIT rose to $6.0 million from $2.7 million.
- FoodService Products: Q2 sales declined 4% to $61.3 million, but EBIT increased to $6.3 million, supported by operating efficiencies.
- Specialty Products: Q2 sales were approximately flat at $21.7 million; EBIT improved to $0.2 million from a $3.3 million loss, which had included impairment charges.
Outlook, risks and unusual items
- Management expected moderate sales growth for the remainder of 2010, but cited uncertainty around economic recovery, credit availability, raw-material costs and the ability to recover costs through pricing.
- Engineered Transportation Solutions consolidations were expected to cost approximately $26.9 million in total, with $14.4 million incurred through June 30. The company expected approximately $20 million of annual savings by 2012. Management warned that the Jackson, Tennessee startup and related relocations could disrupt production, customers and employees.
- The Interconnect Technologies facility consolidation was expected to cost approximately $4.4 million in total; management estimated annual savings of about $3.2 million. Segment prospects were described as favorable, with potential risks from aircraft schedule cancellations, defense-budget reductions and acquisition integration.
- ICE was investigating the classification of certain imported tires dating back to 2004. The company could not estimate potential duties, fines or penalties; management said the matter was not expected to materially affect consolidated financial position but could materially affect results or cash flows in a particular period.
- The refrigerated truck-bodies business was sold for $20.3 million, approximately book value, subject to working-capital adjustments and indemnifications that management did not expect to be material. The filing also cites competition, cyclical markets, acquisition integration, litigation and regulatory changes among forward-looking risks.
- The six-month effective tax rate on continuing operations rose to 37.6% from 31.3%, primarily due to higher tax requirements for certain Chinese operations and the sunset of favorable U.S. tax provisions.
Important facts for investors to verify
- How much of the reported sales growth and segment improvement is organic, and how durable are acquisition contributions?
- Whether pricing actions and operating efficiencies can offset rising raw-material costs, particularly in Engineered Transportation Solutions and Construction Materials.
- Receivables, inventory and operating cash-flow trends, given the substantial first-half working-capital use.
- Progress, remaining costs, savings realization and execution risks for the announced facility consolidations.
- Developments in the U.S. Customs investigation and any resulting duties, penalties or financial effects.