Carlisle Companies Incorporated — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Comparatives are for Q1 2017; CFS results are presented as discontinued operations.
Business context and results
Carlisle manufactures engineered products across construction materials, interconnect technologies, fluid technologies, and brake and friction markets. Management described record first-quarter revenue, strong organic growth, and progress on its Vision 2025 plan. Revenue growth reflected acquisitions, higher volumes, favorable foreign exchange, and adoption of ASC 606.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue from continuing operations | $984.7 million | $774.0 million |
| Operating income | $94.7 million | $89.5 million |
| Operating margin | 9.6% | 11.6% |
| Continuing-operations income | $57.9 million | $57.9 million |
| Diluted EPS, continuing operations | $0.92 | $0.88 |
| Net income | $309.6 million | $61.8 million |
| Diluted EPS, including discontinued operations | $4.94 | $0.94 |
Revenue increased 27.2%; management attributed 15.5 percentage points to acquisitions, 10.2 points to price/volume, and 1.5 points to exchange rates. Organic revenue growth was 8.8%. Gross margin fell to 25.3% from 29.2%, reflecting raw-material cost pressure and unfavorable mix. Operating income rose 5.8%, but margin declined as gross-margin pressure and acquired costs outweighed savings and other operating gains.
Segments and material changes
- Construction Materials (CCM): Revenue $598.6 million, up 34.2%; operating income $75.8 million, down 6.1%; margin 12.7% versus 18.1%. Acquisition contribution and commercial construction volumes lifted sales; raw materials, freight, and mix pressured profitability.
- Interconnect Technologies (CIT): Revenue $224.3 million, up 15.5%; operating income $27.2 million, up 26.5%. SatCom and aerospace demand, operational savings, and ASC 606 aided results.
- Fluid Technologies (CFT): Revenue $63.5 million, up 5.0%; operating income $5.7 million, up 16.3%. Price realization and cost savings supported improved margin.
- Brake & Friction (CBF): Revenue $98.3 million, up 34.3%; operating income $4.5 million versus $1.2 million. Recovery in construction, agriculture, and mining markets drove sales; restructuring costs partly offset improvement.
Continuing-operations diluted EPS improved despite unchanged continuing income, aided by a lower tax rate and fewer average shares, partly offset by higher interest expense. Interest expense, net rose to $14.5 million from $6.6 million, principally reflecting notes issued in November 2017. The continuing-operations effective tax rate was 26.1%, versus 31.3%, largely due to U.S. tax reform.
Cash flow, liquidity, and debt
- Operating cash flow was $33.2 million, compared with $31.9 million; working capital used $84.5 million.
- Investing cash flow was $715.0 million, primarily from $754.6 million gross proceeds from the CFS sale, less $42.5 million of capital expenditures.
- Financing cash outflow was $148.0 million, including $122.0 million of share repurchases and $23.1 million of dividends.
- Cash and equivalents at quarter-end were $979.1 million, versus $378.3 million at year-end. Long-term debt was $1,586.4 million. The $1.0 billion revolving facility was undrawn and available; the company reported compliance with debt covenants.
Outlook, management commentary, and risks
For 2018, management expected total revenue growth, including acquisitions, in the mid-to-high teens; corporate expense of about $70 million; a full-year tax rate of 25%–27%; net interest expense of $60–$70 million; and share repurchases exceeding $250 million. Segment outlook included CCM revenue growth in the low 20% range (mid-single-digit organic), CIT growth above 10%, CFT mid-single-digit growth, and CBF mid-teens growth. These are forward-looking expectations, not guarantees.
Management cited rising raw-material and freight costs, competitive pricing pressure, construction labor availability, cyclical end markets, interest-rate and currency movements, and successful acquisition integration as risks. CBF’s Tulsa-to-Ohio relocation was expected to continue through 2018, with $17.0–$20.5 million of related exit costs and planned facility/equipment investment. CIT expected further restructuring costs in 2018. The filing reported no material change to previously disclosed risk factors.
CFS was sold on March 20, 2018 for $754.6 million gross proceeds, subject to adjustment. The sale produced a $293.8 million pretax gain and contributed $251.7 million of discontinued-operations income; therefore, reported net income and total EPS were substantially boosted by a non-recurring divestiture gain. Excluding that gain, CFS operating results through the sale date were lower than the prior-year quarter.
ASC 606 was adopted January 1, 2018. It increased reported Q1 revenue by $11.0 million, operating income by $4.1 million, and continuing income by $3.1 million versus the amounts that would have been reported without adoption. The company said the ongoing revenue effect was expected to be immaterial. Other unusual items included $4.9 million of legal-settlement gain and $2.0 million of asset-sale gains in operating income, as well as $4.4 million net operating-income impact from items affecting comparability.
Other matters: the company reported asbestos litigation and environmental exposure, but management did not expect these matters to have a material overall effect based on current assessments. The filing noted no significant environmental remediation accrual. Accella represented 10.8% of Q1 revenue and 14.5% of assets; integration and extension of internal controls were ongoing.
Key facts for investors to verify
- Underlying operating performance and margins excluding acquisition effects, ASC 606 adoption, legal and asset-sale gains, and restructuring or other comparability items.
- Whether CCM can offset raw-material and freight inflation through pricing and whether projected segment growth is achieved.
- Cash generation after working-capital investment and the use of CFS sale proceeds, including planned buybacks, acquisitions, and capital spending.
- Accella integration, synergy realization, and completion of its internal-control integration.
- Execution, costs, and expected savings from CIT and CBF restructuring, including the Tulsa relocation and planned CBF facility/equipment investments.
- Final tax effects of U.S. tax reform and the continuing impact of higher interest expense and share repurchases.