Carlisle Companies Incorporated — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Carlisle makes engineered products through four segments: Construction Materials (CCM), Interconnect Technologies (CIT), Fluid Technologies (CFT), and Brake & Friction (CBF). Management said COVID-19 negatively affected sales and diluted EPS.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1,030.2 million | $1,071.9 million | Down 3.9% |
| Gross margin | $278.4 million; 27.0% | $288.6 million; 26.9% | Margin up 0.1 percentage point |
| Operating income / margin | $102.7 million / 10.0% | $114.7 million / 10.7% | Income down 10.5% |
| Continuing-operations income | $61.8 million | $77.4 million | Down 20.2% |
| Net income | $61.8 million | $79.4 million | Down 22.2% |
| Diluted EPS from continuing operations | $1.09 | $1.33 | Down $0.24 |
| Operating cash flow | $53.2 million | $109.8 million | Down $56.6 million |
| Capital expenditures | $22.8 million | $23.3 million |
Lower segment volumes and costs from wage inflation and under-absorption of production costs weighed on operating income; raw-material savings and cost-management actions partly offset the pressure. The effective tax rate was 18.9%, versus 23.6%, including a $3.8 million net discrete tax benefit. Q1 2019 included $2.0 million of discontinued-operations income. Comprehensive income was $16.3 million, including $45.5 million of other comprehensive loss, primarily reflecting foreign-currency and other losses.
Segments and material changes
| Segment | Revenue | Operating income (loss) | Notable comparison |
|---|---|---|---|
| CCM | $676.4 million, up 0.8% | $107.7 million, up from $92.9 million | Higher architectural metals and European sales; margin rose to 15.9% from 13.8%. |
| CIT | $224.5 million, down 8.9% | $16.4 million, down from $30.6 million | Commercial aerospace weakness partly offset by Providien and MicroConnex contributions. |
| CFT | $58.3 million, down 7.6% | $2.8 million, down from $6.4 million | Lower volumes and customer closures; prior-year results included a contingent-consideration gain. |
| CBF | $71.0 million, down 22.2% | Loss of $3.8 million versus income of $6.5 million | Heavy-equipment and transportation declines, COVID-related closures, and restructuring costs. |
Consolidated sales fell $41.7 million; acquisition contributions of 3.4% were more than offset by a 7.0% negative price/volume effect and a 0.3% negative exchange-rate effect. Providien contributed $23.9 million of Q1 revenue.
Cash, debt, and liquidity
- Cash and equivalents were $1,187.7 million at March 31, 2020, versus $351.2 million at year-end 2019. Operating activities provided $53.2 million; working capital used $96.0 million.
- Long-term debt was $2,577.3 million before unamortized discounts and issuance costs; net debt on the balance sheet was $2,577.3 million, including $0.9 million current and $2,576.4 million long-term.
- Carlisle issued $750 million of 2.75% notes due 2030, receiving $740.7 million of proceeds, and redeemed $250 million of 5.125% notes due 2020 for $262.1 million. The redemption generated an $8.8 million extinguishment loss.
- The company drew $500 million on its revolving facility; another $500 million remained available. The facility maturity was extended to February 2025. Carlisle reported compliance with debt covenants.
- Financing cash flow was $813.0 million, principally reflecting the notes issuance and revolver borrowing. Carlisle repurchased $120.6 million of stock and paid $28.3 million in dividends.
Outlook, risks, and unusual items
- Carlisle withdrew full-year 2020 revenue guidance because of COVID-19 uncertainty. It said it could not predict the duration or full extent of impacts.
- Management expected Q2 2020 CCM North American sales to decline 20%–30% from Q2 2019; CIT sales to decline up to 50%; and CFT sales to decline more than 20%. CBF expected declines similar to Q1. These were estimates, not full-year guidance.
- Management expected 2020 capital expenditures of $100 million–$120 million, subject to possible adjustments as demand changes. It stated liquidity was sufficient for business needs for at least 12 months.
- COVID-19 caused temporary facility suspensions, customer delays, and demand declines, especially in commercial aerospace and construction-related markets. The company cited risks to demand, operations, supply chains, collections, and asset values.
- COVID-19 indicators prompted quantitative impairment reviews of CFT and CBF goodwill and indefinite-lived trade names. No impairment was recorded at March 31, 2020; management warned future impairment charges could be material if assumptions deteriorate.
- Q1 items affecting comparability totaled $10.2 million of operating-income impact and $0.20 per diluted share from continuing operations, including restructuring, excess capacity and labor costs, debt extinguishment, and discrete tax items. The company also reported $4.8 million of exit and disposal costs.
- Asbestos-related litigation and other legal matters were disclosed; management did not expect them to materially affect consolidated financial position or annual operating cash flows. The filing says reasonably possible asbestos claims, if any, were not material at that time.
Investor verification priorities
- Track COVID-19 effects on segment demand, production, and the stated Q2 revenue expectations, particularly aerospace and construction.
- Review operating cash conversion and working-capital needs, given the $96.0 million Q1 working-capital use and lower operating cash flow.
- Monitor leverage, revolver usage, liquidity, and covenant compliance following new borrowing and the notes refinancing.
- Reassess CFT and CBF goodwill and trade-name impairment assumptions as results, market multiples, and discount rates change.
- Check actual capital spending against the $100 million–$120 million outlook and note that full-year revenue guidance was withdrawn.