Business context and reporting period
Carlisle Companies Incorporated filed this unaudited Form 10-Q for the quarter ended March 31, 2015. The diversified manufacturer operated through Construction Materials (CCM), Interconnect Technologies (CIT), Brake & Friction (CBF), and FoodService Products (CFSP). Results are for continuing operations unless noted; interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $709.3 million | $650.4 million | +9.1% |
| Gross profit / margin | $173.0 million / 24.4% | $162.1 million / 24.9% | +6.7%; margin down 0.5 percentage points |
| EBIT / margin | $66.4 million / 9.4% | $63.0 million / 9.7% | +5.4%; margin down 0.3 percentage points |
| Income from continuing operations | $39.5 million | $36.5 million | +8.2% |
| Net income | $39.4 million | $35.8 million | +10.1% |
| Diluted EPS | $0.59 | $0.55 | Up $0.04 |
| Operating cash flow | $49.5 million | $51.3 million | Down $1.8 million |
| Capital expenditures | $19.1 million | $24.1 million | Down $5.0 million |
Organic sales grew 7.4%; acquisition contribution was 3.9% and foreign exchange reduced sales 2.2%. Lower selling prices reduced sales 0.8%. The effective tax rate was 31.9%, versus 33.6%, including a $0.8 million discrete tax benefit in 2015. Comprehensive income was $19.4 million, down from $39.3 million, principally reflecting a $20.7 million foreign-currency translation loss.
Segment results
| Segment | Sales | EBIT | Notable comparison |
|---|---|---|---|
| CCM | $371.3 million, +6.9% | $36.7 million, +15.0% | Margin 9.9%, up from 9.2%; organic sales growth was 9.3%. |
| CIT | $194.4 million, +28.8% | $34.5 million, +12.4% | LHi contributed $25.4 million in sales; margin fell to 17.7% from 20.3%. |
| CBF | $86.4 million, down 6.3% | $8.2 million, down 10.9% | Foreign exchange and weaker agriculture demand weighed on results. |
| CFSP | $57.2 million, down 4.5% | $5.4 million, down 23.9% | Margin declined to 9.4% from 11.9%, partly due to inventory costs and lower utilization. |
Financial position, debt and liquidity
At March 31, 2015, cash and cash equivalents were $744.4 million, total current assets $1,630.7 million, and current liabilities $377.8 million. Long-term debt was $749.9 million, with no current portion; shareholders’ equity was $2,212.9 million. The company reported a 25% debt-to-capital ratio and compliance with all debt covenants. Its $600 million revolving facility and $45 million uncommitted line were fully available, with no borrowings under either at quarter-end.
Operating cash flow was lower year over year, while working capital as a percentage of annualized sales increased to 20.4% from 19.7%, reflecting higher inventory and lower days payable outstanding. The company paid $16.7 million in dividends and repurchased 95,200 shares for $8.8 million during the quarter. Management expected approximately $100 million of capital expenditures for full-year 2015.
Outlook, management commentary and notable items
- Management forecast mid-to-high-single-digit organic sales growth for 2015, with EBIT and EBIT margin improvement versus 2014. It estimated stronger U.S. dollar effects would reduce sales by about 2% and EBIT by approximately $12 million, excluding Finishing Brands, using March 31 exchange rates.
- On April 1, 2015, Carlisle acquired Graco’s Finishing Brands business for $590 million in cash, subject to working-capital adjustments. The business had approximately $275 million of 2014 sales and was expected to be accretive to net earnings in the second half of 2015; it will be reported as Carlisle Fluid Technologies. Carlisle said it funded the purchase with $445 million of U.S. cash and $145 million of foreign cash. The acquisition occurred after quarter-end.
- CCM expected high-single-digit sales growth and improved margins, but cited pricing pressure, construction seasonality, foreign exchange and uncertainty around passing lower input costs through to customers. CIT anticipated favorable aerospace and medical demand, partly offset by contractual price reductions and LHi integration-related margin dilution. CBF expected weak agriculture and mining markets; CFSP expected low-single-digit market growth and improved margins after first-quarter inventory effects.
- After quarter-end, a jury returned a $13.42 million verdict in a discrimination lawsuit against subsidiaries. Carlisle planned to seek amendment under statutory damages limits and expected the ultimate award to be below $1 million; the company was partially reserved.
- Other exposures include asbestos litigation, workers’ compensation claims, environmental regulation and potential remediation costs. Management did not expect these matters to have a material overall effect, but noted that litigation could affect earnings in particular periods. The company disclosed no material market-risk changes or material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether organic growth and margin improvement meet management’s 2015 outlook, particularly amid currency headwinds and pricing competition.
- Post-acquisition liquidity, integration progress, and whether Finishing Brands delivers the expected earnings contribution.
- CIT’s margin recovery as LHi is integrated, and performance in aerospace, medical, industrial and test-and-measurement markets.
- Working-capital trends, especially inventory and payable days, and cash conversion through the seasonal construction period.
- The final damages and reserve outcome in the post-quarter jury verdict, and developments in other legal and environmental contingencies.