Carlisle Companies Incorporated — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; dollar amounts are in millions except per-share data.
Business context
Carlisle operates four segments: Construction Materials (CCM), Interconnect Technologies (CIT), Fluid Technologies (CFT), and Brake & Friction (CBF). Management’s strategy emphasizes organic growth, operating efficiencies through the Carlisle Operating System, acquisitions, and shareholder returns.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,314.8 | $1,236.1 | $2,386.7 | $2,220.8 |
| Operating income | $207.2 | $159.7 | $321.9 | $254.4 |
| Operating margin | 15.8% | 12.9% | 13.5% | 11.5% |
| Continuing-operations income | $153.0 | $114.7 | $230.4 | $172.6 |
| Diluted continuing-operations EPS | $2.65 | $1.87 | $3.98 | $2.78 |
| Net income | $152.9 | $113.7 | $232.3 | $423.3 |
Q2 revenue rose 6.4%; management attributed growth to volume, company-wide pricing, and acquisitions, partly offset by currency. Q2 gross margin increased to 30.0% from 26.9%. Management cited price realization, favorable raw-material costs, COS savings, and higher CCM and CIT volumes, partly offset by labor costs. Q2 diluted continuing EPS also benefited from fewer average shares following repurchases and a lower effective tax rate.
Six-month operating cash flow was $197.1, compared with a $2.8 outflow in 2018. Working capital used $153.8 of cash, mainly reflecting receivables. Investing activities used $311.9, including acquisitions and $41.0 of capital expenditures. Financing activities used $267.2, including $232.1 of share repurchases and $46.2 of dividends.
Balance sheet, liquidity, and debt
At June 30, cash and equivalents were $422.0, down from $803.6 at year-end 2018. Current assets were $1,922.2 and current liabilities $649.9. Long-term debt, net of current maturities, was $1,589.4; the $1.0 billion revolving credit facility was undrawn and fully available. Carlisle reported compliance with debt covenants and said it expected sufficient resources for at least the next 12 months. Cash held in China is subject to restrictions on conversion and transfer.
Cash declined primarily due to acquisitions, repurchases, capital spending, and dividends. The company’s notes include $250 due in 2020, $350 due in 2022, $400 due in 2024, and $600 due in 2027, with stated rates ranging from 3.5% to 5.125%.
Material changes and segment trends
- CCM: Q2 revenue increased 10.4% to $915.0 and operating margin rose to 19.9% from 17.1%. Growth reflected Petersen, construction demand, pricing, and product development.
- CIT: Q2 revenue increased 3.2% to $245.4 and operating margin rose to 14.6% from 11.6%, supported by aerospace and medical demand, pricing, and efficiencies. MicroConnex was acquired in April for about $46.8.
- CFT: Q2 revenue fell 8.2% to $67.3 and operating margin declined to 4.9% from 10.6%, amid lower volumes, foreign-exchange headwinds, wage and raw-material inflation, and acquisition-related costs.
- CBF: Q2 revenue fell 9.7% to $87.1, while operating margin improved to 9.5% from 3.0%, mainly reflecting lower restructuring costs and operational efficiencies. Weaker heavy-equipment and transportation volumes weighed on sales.
Acquisitions included Petersen Aluminum, acquired in January for $207.2, and MicroConnex. Petersen contributed $48.3 of Q2 revenue; MicroConnex contributed $3.0. Carlisle also described acquisitions to establish a sealants-and-adhesives platform within CFT. Share repurchases and dividends continued; the board authorized a 5 million-share increase to the repurchase program in February.
The prior-year six-month net income included $250.7 from discontinued operations, principally the gain on the 2018 sale of Carlisle FoodService Products. Accordingly, reported six-month net income fell year over year despite higher continuing-operations income; continuing EPS is a more comparable measure.
Outlook, commentary, and risks
Management expressed confidence in progress toward its Vision 2025 goals of $8 billion in revenue, 20% operating income, and 15% return on invested capital. Segment revenue expectations for 2019 were: CCM low-double-digit growth; CIT mid-to-high-single-digit growth; CFT mid-single-digit growth; and CBF down mid-single digits. These are segment expectations, not consolidated guidance.
Management cited healthy construction and replacement demand at CCM and favorable commercial-aircraft production at CIT. It also noted trade uncertainty, Brexit, slower industrial capital spending, severe North American weather, and difficult conditions in transportation and industrial markets, particularly China. Other risks include competition and pricing pressure, input-cost inflation, labor availability and costs, acquisition integration, cyclicality, foreign exchange, litigation, and environmental obligations.
Six-month exit and disposal costs were $8.3. CIT manufacturing relocations were expected to take 12–18 months, with about $7.5 of total project costs remaining; CBF’s Tulsa-to-Medina consolidation was substantially complete, with about $1.0 of costs remaining. The filing reported no significant environmental remediation accruals and stated that pending legal matters were not expected to have a material effect, while noting possible asbestos-related costs and environmental liabilities.
The company adopted lease accounting standard ASC 842 on January 1, 2019. Adoption added operating lease right-of-use assets and liabilities; management said it did not materially affect net income or cash flows.
Important facts for investors to verify
- Whether segment revenue expectations and the construction, aerospace, and industrial demand assumptions remain valid.
- Whether CCM’s pricing and favorable raw-material costs can sustain margin gains, and whether CFT and CBF can recover from volume weakness.
- Acquisition integration, final purchase-price allocations, and the performance of acquired businesses.
- Working-capital cash use, cash balances and restrictions, and the funding plan for the $250 note due in 2020.
- The costs and completion timing of CIT and CBF restructuring, alongside repurchases, dividends, and other capital-allocation priorities.
- Potential effects of trade, currency, environmental, asbestos-litigation, and other disclosed risks.