Carlisle Companies Incorporated — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unless noted, amounts are in millions. Q3 results include Transportation Products; the subsequent sale means that segment was expected to be reported as discontinued operations beginning in Q4 2013.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $968.8 | $910.2 | $2,821.9 | $2,783.8 |
| Gross profit / margin | $234.8 / 24.2% | $225.9 / 24.8% | $662.6 / 23.5% | $692.6 / 24.9% |
| EBIT / margin | $123.4 / 12.7% | $110.6 / 12.2% | $216.0 / 7.7% | $347.1 / 12.5% |
| Income from continuing operations | $76.6 | $69.7 | $140.1 | $219.2 |
| Diluted EPS from continuing operations | $1.18 | $1.08 | $2.16 | $3.43 |
| Operating cash flow | Not separately reported for the quarter | $315.5 | $323.2 |
Q3 sales rose 6.4%, including 2.6% from acquisitions and 3.7% organic growth. EBIT increased 11.6% and continuing-operations income increased 9.9%; gross margin declined 60 basis points. For the nine-month period, sales increased 1.4%, but EBIT fell 37.8% and continuing-operations income fell 36.1%, chiefly due to a $100.0 goodwill impairment at Transportation Products. That impairment reduced the segment’s goodwill to zero and accounted for $1.02 of the year-over-year decline in diluted EPS.
- Segment trends, Q3: Construction Materials sales grew 10.7%, but margin fell to 16.4% from 17.4%, reflecting price/raw-material pressure and plant start-up costs. Interconnect Technologies sales grew 28.5%, including acquired sales; EBIT rose 32.6%. Brake & Friction sales fell 23.0% and EBIT fell 72.5% amid weak construction and mining demand. FoodService Products sales fell 7.3%, while EBIT improved to $6.9 from a loss, helped by the absence of prior-year restructuring charges and a facility-sale gain. Transportation Products sales rose 4.1% and EBIT rose to $13.9.
- Taxes and unusual items: The nine-month effective tax rate was 26.5%, versus 33.2% a year earlier, including an $11.8 tax benefit from a foreign tax election. Management expected a full-year rate of about 30%, with the planned Transportation Products disposal expected to add about one percentage point to the continuing-operations rate. Q3 other income included a $1.3 favorable adjustment to the PDT earn-out and a $1.0 gain on the Reno facility sale.
Balance sheet, cash flow and debt
At September 30, 2013, cash and equivalents were $332.4, compared with $112.5 at year-end 2012. Current assets were $1,462.1 and current liabilities $515.6. Long-term debt was $752.6, with no short-term debt; shareholders’ equity was $1,923.6. The company reported $600.0 available on its committed revolver and $45.0 available on an uncommitted line, and was in compliance with debt covenants. Debt to capital was 28%.
For the first nine months, operating cash flow was $315.5; capital expenditures were $77.7; investing cash outflow was $71.0; and financing cash outflow was $24.4. Cash increased $219.9. Inventory reduction provided $56.2 of cash, while receivables used $90.4. Average working capital as a percentage of annualized sales improved to 20.7% from 22.1%.
Outlook, risks and significant events
- Management expected full-year sales growth in the low-single-digit range from acquisitions and organic growth, excluding Transportation Products. It anticipated continued commercial-roofing and aerospace growth, FoodService margin improvement, and an EBIT margin modestly below 2012 levels for the remaining businesses, citing challenging end markets, particularly Brake & Friction.
- In October 2013, Carlisle agreed to sell Transportation Products to American Industrial Partners for $375 million cash, subject to customary adjustments and regulatory and other closing conditions; closing was expected in Q1 2014. The segment’s September 30 assets were $435.6 and liabilities $86.1. Sale proceeds were intended to support capital investment, acquisitions, and increased share repurchases.
- Management cited risks including weak heavy-equipment, construction/mining, and military markets; pricing and raw-material cost pressures; customer concentration; potential Boeing contract negotiations affecting Interconnect Technologies revenue and EBIT; and uncertainty around installed in-flight entertainment demand as wireless alternatives develop.
- Other exposures include asbestos litigation, self-insured claims, and potential environmental liabilities. Management stated that pending asbestos and other litigation were not expected to materially affect financial condition or annual operating cash flows, while noting possible period-specific charges. Existing climate regulations were not then considered materially impactful; future requirements could create costs.
- Capital expenditures were expected to be about $108 for 2013, including capacity projects in Construction Materials. A planned Brake & Friction facility closure was expected to cost about $3.0, with estimated annual savings of $0.6 beginning in late 2014.
Most important facts for investors to verify
- Progress, final terms, regulatory clearances, working-capital adjustments, and closing of the $375 million Transportation Products sale; also verify the eventual disposal gain or loss and discontinued-operations presentation.
- Underlying earnings and cash generation excluding the $100.0 impairment, tax benefit, acquisition effects, facility-sale gain, and other unusual items.
- Whether Brake & Friction demand and margins stabilize, and whether planned cost actions deliver savings without further restructuring expense.
- Construction Materials price recovery versus raw-material costs and the returns and timing of new plant and product-line investments.
- Interconnect Technologies customer concentration, Boeing negotiations, and the balance of aerospace growth against military, industrial, and in-flight entertainment risks.