Carlisle Companies Incorporated — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparative periods ended September 30, 2011. Carlisle is a diversified manufacturer reporting five segments: Construction Materials, Transportation Products, Brake & Friction, Interconnect Technologies, and FoodService Products. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $910.2 | $870.5 | $2,783.8 | $2,434.9 |
| Gross profit / margin | $225.9 / 24.8% | $187.5 / 21.5% | $692.6 / 24.9% | $518.3 / 21.3% |
| EBIT / margin | $110.6 / 12.2% | $81.8 / 9.4% | $347.1 / 12.5% | $222.4 / 9.1% |
| Income from continuing operations | $69.7 | $53.7 | $219.2 | $142.3 |
| Net income | $69.5 | $53.7 | $222.4 | $141.7 |
| Diluted EPS | $1.08 | $0.85 | $3.48 | $2.24 |
- Q3 sales rose 4.6%; organic growth was 1.3%, reflecting higher pricing (+2.8%) offset by lower volume (-1.4%). Acquisitions contributed 3.9%.
- Nine-month sales increased 14.3%, comprising 9.5% organic growth and 5.3% acquisition growth. EBIT increased 35.2% in Q3 and 56.1% year to date.
- Management attributed stronger margins mainly to pricing, lower raw-material costs, Carlisle Operating System efficiencies, and improved Transportation Products performance. The Q3 gross-margin improvement was 330 basis points; EBIT margin improved 280 basis points.
- Interest expense, net, was $6.2 in Q3 and $19.2 year to date, up from $5.5 and $15.5, respectively. The year-to-date effective tax rate rose to 33.2% from 31.2%, primarily due to expiration of favorable tax provisions and nonrecurring 2011 tax benefits.
Cash flow, liquidity, and debt
- For the first nine months, operating cash flow was $323.2, versus $118.9 in 2011; investing cash outflow was $117.2 versus $150.9, and financing cash outflow was $194.5 versus cash inflow of $24.0. Cash increased $12.4 to $87.1.
- Capital expenditures were $93.7 year to date; management expected full-year capital spending of approximately $135–$140. Acquisitions used $49.3, while proceeds from business sales were $25.8.
- At September 30, cash was $87.1 and current assets and liabilities were $1,276.5 and $670.7. The company reported $430 of availability under its $600 revolving facility and a further $45 available under an uncommitted line.
- Total debt was $574.6, down from $762.4 at December 31, 2011; debt to capital was 25%. The $170 revolving-facility borrowing was classified as short-term because it was payable in October 2012, though Carlisle could roll it over until the facility expires in October 2016. The company reported covenant compliance.
- Cash held outside the U.S. was $61.6, including $10.1 in China subject to local conversion and transfer restrictions. Management generally considered foreign-subsidiary cash permanently reinvested.
Segments and material developments
- Construction Materials: Q3 sales rose 3.3% and EBIT rose 32.2%; lower commercial-roofing volume, drought-related reroofing weakness, and reduced production affected results. Nine-month sales rose 15.8% and EBIT 56.3%.
- Transportation Products: Q3 sales were nearly flat, while EBIT improved to $6.5 from a $10.1 loss, aided by lower materials and freight costs and the absence of prior-year start-up inefficiencies. Outdoor power equipment demand remained weak.
- Brake & Friction: Q3 sales fell 12.4% and EBIT fell 22.0%, reflecting weaker construction-related demand, unfavorable mix, and lower volume. Management expected weakness could continue through Q4 and potentially into 2013.
- Interconnect Technologies: Q3 sales increased 51.9% and EBIT 71.6%, benefiting from aerospace demand and the Tri-Star acquisition. Management expected aerospace growth to remain strong, while noting military-spending and global-growth uncertainties.
- FoodService Products: Q3 sales increased 2.1%, but the segment reported a $1.2 EBIT loss versus $4.5 profit. Restructuring, asset impairments, and product-line abandonment drove charges; estimated annualized savings were $5 beginning in 2013.
- Acquisitions included Hertalan, acquired in March 2012 for approximately $48.9 net of acquired cash, and Tri-Star, acquired in December 2011. Carlisle sold PDT Profiles in January 2012 for $22.1 with no gain or loss recognized.
Outlook, risks, and unusual items
- For full-year 2012, management expected combined organic and acquisition sales growth in the low double digits, below the 14% year-to-date rate, but expected significant EBIT-margin improvement versus 2011. It cited slowing global economic conditions and anticipated continued aerospace strength.
- Q3 included $6.9 of FoodService restructuring and impairment charges, including a $2.5 noncash impairment tied to abandoning the flameless chafer line. The company expected a further $1.2 of FoodService costs in Q4. Nine-month exit and disposal costs totaled $6.4.
- Year-to-date discontinued-operations income included a $3.75 gain from settlement of an earn-out on the 2010 specialty-trailer business sale; Q3 discontinued operations included a $0.2 loss related to legacy workers’ compensation claims.
- Transportation Products goodwill had only approximately 2% estimated fair-value headroom at September 30. Management said a 3% reduction in its EBIT assumption would cause carrying value to exceed estimated fair value and require the next impairment-test step.
- Risks discussed include economic and market cyclicality, weaker demand in several end markets, raw-material cost and pricing pressures, acquisition integration, foreign exchange, possible military-spending reductions, and litigation and environmental exposure. Carlisle said asbestos claims had not materially affected results and were insured, but particular-period costs remain possible; future environmental requirements could also entail costs.
Investor verification priorities
- Track whether slowing demand, especially in roofing, Brake & Friction, and FoodService, affects the stated full-year sales and margin outlook.
- Review Transportation Products performance and the assumptions behind its narrow goodwill valuation cushion.
- Verify completion and costs of FoodService and other restructuring projects, and whether projected savings materialize.
- Monitor debt refinancing or rollover of the $170 revolving borrowing, facility availability, covenant compliance, and cash accessibility outside the U.S.
- Assess the quality and sustainability of operating cash flow, working-capital trends, capital spending, and acquisition-related earnings contributions.