Carlisle Companies Incorporated — Q3 2016 Form 10-Q
Business context and period. Carlisle is a diversified manufacturer reporting for the quarter and nine months ended September 30, 2016. Its segments are Construction Materials (CCM), Interconnect Technologies (CIT), Fluid Technologies (CFT), Brake & Friction (CBF), and FoodService Products (CFS). Amounts below are in millions of dollars except per-share data.
Key financial results
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $991.0, up 1.8% from $973.1 | $2,781.9, up 4.3% from $2,667.0 |
| Gross profit / margin | $323.6 / 32.7%, versus $295.5 / 30.4% | $890.2 / 32.0%, versus $753.9 / 28.3% |
| EBIT / margin | $36.4 / 3.7%, versus $161.8 / 16.6% | $325.9 / 11.7%, versus $376.2 / 14.1% |
| Net income (loss) | $(9.8), versus $103.6 | $173.9, versus $237.9 |
| Diluted EPS | $(0.15), versus $1.56 | $2.66, versus $3.58 |
| Operating cash flow | Not provided for the quarter | $355.1, versus $352.9 |
Q3 results included $141.5 of impairment charges: $130.0 for CBF goodwill and $11.5 for its Wellman trade name. CBF’s fair value was estimated at approximately 25% below carrying value; remaining CBF goodwill was $96.5 and the Wellman trade name carrying value was $35.4. The filing attributes the charge to deteriorating outlook for CBF end markets. Q3 income tax expense was $38.4, producing a 132.9% effective rate, primarily because of the impairment and its limited anticipated tax benefit. Nine-month effective tax rate was 42.2%.
Segment performance
| Segment | Q3 2016 sales / EBIT | Key comparison or driver |
|---|---|---|
| CCM | $578.2 / $132.0 | Sales +1.4%; EBIT +14.3%. Strong U.S. roofing and insulation demand, favorable raw materials, and COS efficiencies. |
| CIT | $218.2 / $42.2 | Sales +7.9%; EBIT +2.4%. Aerospace and medical demand and Micro-Coax contribution; partially offset by pricing and startup/integration costs. |
| CFT | $69.0 / $9.5 | Sales +1.6%; EBIT down 5.9%. MS acquisition and higher U.K./China demand partly offset by a prior-year systems order that did not repeat and integration spending. |
| CBF | $62.6 / $(141.3) | Sales down 11.5%; EBIT includes the $141.5 impairment. Weak construction, mining, and other off-highway markets. |
| CFS | $63.0 / $9.0 | Sales +1.4%; EBIT +16.9%. Better pricing, volume, and lower input and operating costs. |
Financial position, debt, and liquidity
- At September 30, cash and cash equivalents were $355.4, including $129.2 held outside the U.S. and $32.7 in China. Current assets were $1,399.7 and current liabilities were $523.6.
- Debt was $596.2, consisting of $250.0 of 5.125% notes due 2020 and $350.0 of 3.75% notes due 2022, less unamortized discount and issuance costs. Carlisle repaid $150.0 of 6.125% notes at maturity in August.
- The $600.0 revolving credit facility was fully unused. Debt-to-capital ratio was 19.6%; the company reported compliance with debt covenants.
- Nine-month investing cash use was $179.6, including acquisitions and $77.3 of capital expenditures. Financing cash use was $231.7, including debt repayment, $61.8 of dividends, and share repurchases. Cash declined $55.3 to $355.4.
- Dividends paid were $0.35 per share in Q3 and $0.95 per share for the nine months. Nine-month share repurchases were $61.3 in cash-flow reporting.
Changes, outlook, and material developments
- Sales growth reflected acquisitions and higher volume, especially in commercial roofing, aerospace, and medical applications; lower selling prices and weak CBF demand offset some growth. Gross margin improved on favorable raw-material dynamics, COS savings, and higher volume, while selling and administrative costs rose.
- Acquisitions included Micro-Coax, acquired in June for approximately $94.8 net of acquired cash, and MS Oberflächentechnik, acquired in February. On October 3, after quarter-end, Carlisle acquired Star Aviation for estimated consideration of $82.0; results are expected in CIT beginning in Q4.
- Management expected full-year 2016 capital expenditures of approximately $110. CCM announced a 5% price increase on polyiso insulation products effective January 1, 2017. No specific consolidated earnings or sales guidance is provided in the filing text.
- Management said CBF end-market recovery was taking longer than previously expected and that further impairment could be required if recovery expectations weaken or discount rates rise. CBF was reducing headcount and operating costs and focused on cash generation.
- Risks cited include raw-material and pricing pressure, cyclical and weak end markets, foreign-exchange movements, acquisition integration and execution, and customer concentration: one CIT customer represented approximately 23.7% of CIT sales. CFT also cited exposure to international markets and currency movements.
- Asbestos claims, generally insured, were not expected by management to materially affect the company overall, though particular-period charges remain possible. Environmental compliance costs had not been material and no significant remediation accrual was reported; future liabilities cannot be ruled out.
Important facts for investors to verify
- Whether CBF demand and projected margins recover as assumed, and whether additional goodwill or trade-name impairment is needed.
- How much of sales and earnings growth reflects organic volume and pricing versus acquisitions, including the integration and performance of Micro-Coax, MS, and Star Aviation.
- Whether CCM can sustain margins amid competitor capacity, selling-price pressure, and changing raw-material costs; assess the announced insulation price increase.
- CIT’s dependence on its largest customer and the execution, costs, and returns of its new China facility and aerospace connectivity investments.
- Availability and use of cash held abroad, planned capital spending, debt maturities, and share repurchases; confirm the impact of the elevated projected tax rate.
- Potential asbestos, environmental, warranty, and other legal exposures, which management describes as not currently expected to be material overall.