Carlisle Companies Incorporated — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Carlisle is a diversified manufacturer reporting four continuing segments: Construction Materials (CCM), Interconnect Technologies (CIT), Brake & Friction (CBF), and FoodService Products (CFSP). Transportation Products was sold on December 31, 2013 and is reported as discontinued operations.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $904.1 million | $796.8 million | $2,414.0 million | $2,219.0 million |
| Gross margin | 26.2% | 25.1% | 25.8% | 25.2% |
| EBIT | $134.0 million | $109.6 million | $319.3 million | $274.4 million |
| EBIT margin | 14.8% | 13.8% | 13.2% | 12.4% |
| Continuing-operations income | $86.3 million | $66.4 million | $198.4 million | $175.0 million |
| Net income | $87.3 million | $76.6 million | $198.4 million | $140.0 million |
| Diluted EPS, continuing operations | $1.31 | $1.02 | $3.01 | $2.69 |
Q3 sales rose 13.5%; management attributed organic growth to 14.1% higher volume, partly offset by 0.7% lower prices. For the first nine months, sales increased 8.8%, reflecting 9.7% higher volume, 1.2% lower prices and a 0.3% currency benefit. Management cited higher capacity utilization and Carlisle Operating System productivity improvements as key margin drivers; lower prices, freight costs and certain startup costs partly offset them.
Q3 continuing-operations income increased 30%, while net income rose 14%, partly because Q3 2013 included $10.2 million of discontinued-operations income versus $1.0 million in Q3 2014. Nine-month 2013 discontinued operations included a $100 million goodwill impairment and a $35 million after-tax loss; 2014 included no nine-month discontinued-operations income or loss.
Segment results
| Segment | Q3 sales change | Q3 EBIT change | Management commentary |
|---|---|---|---|
| CCM | +16.5% | +16.9% | Commercial roofing and insulation demand strengthened; price competition and freight costs constrained results. |
| CIT | +11.2% | +36.7% | Aerospace demand and utilization drove growth; lower selling prices partly offset gains. |
| CBF | +4.8% | +17.3% | Construction demand improved, while agriculture and mining markets remained weaker. |
| CFSP | +5.5% | +7.2% | Higher volume and price realization supported growth. |
For the first nine months, CIT EBIT increased 50.7%; CBF EBIT declined 8.7%, with lower selling prices contributing to weaker margins. Segment results are for continuing operations.
Cash flow, balance sheet and debt
- Operating cash flow: $164.7 million for the first nine months, compared with $315.5 million in 2013. Management attributed the decline to the Transportation Products divestiture and higher working-capital usage as receivables and inventory grew with sales.
- Investing and financing: Investing cash outflow was $80.7 million, including $93.1 million of capital expenditures; financing cash outflow was $32.3 million, including $45.0 million of dividends. Cash increased $50.6 million to $805.1 million.
- Liquidity: At September 30, cash was $805.1 million, current assets $1,761.1 million and current liabilities $437.3 million. The company had $600 million available on its committed revolver and $45 million on an uncommitted line, with no revolver borrowings.
- Debt: Long-term debt was $751.3 million, principally notes due 2016, 2020 and 2022. Debt-to-capital was 26%; the company reported compliance with debt covenants.
- Working capital: Average working capital as a percentage of annualized sales improved to 17.7% from 18.9% for the comparable nine-month period, which management linked to improved inventory turns and lower days sales outstanding.
Outlook, transactions and risks
- For full-year 2014, management expected high-single-digit sales growth and improved EBIT margin versus 2013; it anticipated an approximately 33% effective tax rate. CCM was expected to deliver low-double-digit sales growth; CIT low-double-digit sales growth and strong EBIT growth; CBF low-single-digit sales growth; and CFSP low-to-mid-single-digit sales growth with improved EBIT and margin.
- CIT’s Q4 margin was expected below its 20.7% nine-month level because of contractual price reductions and acquisition-related inventory fair-value costs. Management expected LHi to be accretive within its first year, but noted these costs could substantially offset Q4 contribution.
- Carlisle completed its $195 million enterprise-value acquisition of medical-cabling company LHi on October 1, 2014, using cash on hand. On October 8 it agreed to acquire Liquid Finishing Brands for $590 million cash, subject to regulatory approvals and other closing conditions, with completion expected around December 31, 2014. Management expected the latter acquisition to be earnings-accretive in its first year and anticipated $600 million of revolver availability after closing.
- Risks highlighted include price competition and raw-material cost recovery, cyclicality and market weakness in agriculture and mining, customer concentration (including one CBF customer at approximately 21% of segment sales and one CIT IFEC customer at approximately 18%), foreign-exchange exposure, and execution/integration of acquisitions. Management also cited possible effects from regulation, litigation and environmental obligations. It reported no material change in risk factors during the quarter.
- Unusual or notable items include $2.0 million of Q3 and $5.6 million of year-to-date CCM plant startup costs; $1.1 million of Q3 LHi transaction costs in CIT; and a Q4 estimate of approximately $1 million for accelerated depreciation and relocation costs after CCM’s Smithfield facility decision.
Important facts for investors to verify
- Whether sales growth, pricing and margin improvements persist, particularly in CCM and CIT, and whether Q4 CIT acquisition costs and price reductions match management’s expectations.
- Funding and liquidity after the LHi acquisition and the pending $590 million Liquid Finishing Brands transaction, including the closing conditions, use of foreign-held cash and expected remaining revolver capacity.
- Cash conversion and working-capital trends, given the year-over-year decline in operating cash flow and increases in receivables and inventories.
- Exposure to softer agriculture and mining markets, customer concentration, currency movements, and potential litigation or environmental costs.
- The effect of discontinued-operations comparisons and prior-year impairment charges when assessing reported net-income growth.