Carlisle Companies Incorporated — 2017 Form 10-K
Business context and period. This annual filing covers the year ended December 31, 2017. Carlisle is a diversified manufacturer with five segments: Construction Materials (CCM), Interconnect Technologies (CIT), FoodService Products (CFS), Fluid Technologies (CFT), and Brake & Friction (CBF). The company reported record annual revenue above $4 billion, supported by a strong U.S. commercial roofing market, recovery in off-highway markets, and acquisitions.
Key financial results
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $4,089.9 million | $3,675.4 million |
| Gross margin | $1,148.0 million; 28.1% | $1,157.3 million; 31.5% |
| Operating income and margin | $505.7 million; 12.4% | $438.1 million; 11.9% |
| Income from continuing operations | $365.3 million | $250.8 million |
| Diluted EPS from continuing operations | $5.71 | $3.83 |
| Net cash provided by operating activities | $458.7 million | $531.2 million |
| Capital expenditures | $159.9 million | $108.8 million |
| Cash and cash equivalents at year-end | $379.6 million | $385.3 million |
| Long-term debt, net of discount and issuance costs | $1,586.2 million | $596.4 million |
Revenue rose 11.3%. Acquisitions contributed 6.4 percentage points of growth and price/volume contributed 5.0 points; currency reduced growth by 0.1 point. Gross margin dollars declined despite higher sales, primarily because of higher CCM raw-material costs and unfavorable CIT mix, as well as restructuring and acquired-inventory charges. Operating income increased 15.4%, helped by the absence of $141.5 million of 2016 impairment charges, higher CCM and CBF volumes, COS savings, and acquired earnings.
Operating cash flow fell year over year, reflecting a $59.2 million working-capital use in 2017 versus a $23.6 million working-capital source in 2016. Investing activities used $1,094.3 million, primarily for acquisitions and capital expenditures. Carlisle issued $1.0 billion of notes in November, repaid $1.2 billion of revolver borrowings, and ended the year with no revolver balance and $1.0 billion available. The company reported compliance with debt covenants. Dividends paid were $92.1 million ($1.44 per share); share repurchases were $268.4 million.
Segment performance
| Segment | 2017 sales | 2017 operating income | Notable change |
|---|---|---|---|
| CCM | $2,336.2 million | $421.9 million | Sales +13.8%; operating income -2.0% |
| CIT | $815.3 million | $89.5 million | Sales -2.3%; operating income -37.8% |
| CFS | $339.1 million | $39.5 million | Sales +35.5%, largely reflecting San Jamar |
| CFT | $281.4 million | $16.1 million | Sales +4.5%; operating income -48.4% |
| CBF | $317.9 million | $2.6 million | Sales +18.4%; returned to operating profit after 2016 impairment |
CCM generated approximately 57% of consolidated sales and 83% of operating income, making Carlisle particularly exposed to commercial construction and roofing demand.
Material changes and unusual items
- Four 2017 acquisitions—Accella, Drexel Metals, Arbo, and San Jamar—were funded as part of nearly $1 billion of acquisition investment. Accella was Carlisle’s largest acquisition; its preliminary consideration was $670.7 million.
- 2017 operating results included $26.8 million of exit and disposal costs, $9.7 million of other facility-rationalization costs, and $11.5 million of acquired-inventory step-up costs. These items reduced operating income.
- The 2017 effective tax rate was 22.0%, compared with 38.9% in 2016. The Tax Act produced a provisional net benefit of $57.7 million before a $5.1 million charge related to changed foreign-earnings reinvestment assertions; management cited a $52.6 million estimated net positive direct and indirect impact. Tax calculations remained provisional.
- In 2016, CBF recorded $141.5 million of goodwill and intangible-asset impairment charges. No impairment charge was recorded in 2017.
- Fourth-quarter 2017 sales were $1,071.8 million versus $893.5 million; operating income was $104.0 million versus $114.7 million, while income from continuing operations was $115.1 million versus $76.5 million. The tax benefit contributed to the higher quarterly continuing-operations income.
Outlook, risks, and contingencies
Management expected 2018 continuing-operations sales growth in the mid-teens, led by CCM, CIT, and CBF. Segment expectations included mid-teens CCM sales growth including acquisitions, mid-single-digit growth at CIT and CFT, and low-teens growth at CBF. Management forecast 2018 capital expenditures of $135 million to $160 million and stated it expected adequate liquidity for business needs and shareholder returns.
On February 1, 2018, Carlisle announced an agreement to sell CFS to The Jordan Company for $750 million in cash, subject to adjustments and customary closing conditions, with closing expected in the first quarter of 2018. Treat the stated 2018 outlook as management’s continuing-operations guidance and verify how the transaction affects reported results.
- Customer and market concentration: CCM’s largest distributor completed a merger in January 2018; the combined customers would have represented 22% of CCM’s 2017 sales and 12% of company sales. CIT and CBF also disclosed significant segment-level customer exposures. Construction and several other end markets are cyclical.
- Costs and execution: Raw materials and inbound freight represented approximately 57% of cost of goods sold. The company cited commodity-cost volatility, pricing pressure, acquisition integration, and continued restructuring as risks. CIT faced aerospace in-flight entertainment/connectivity softness and customer insourcing.
- Restructuring: Further costs were expected in 2018 for CIT and CFT actions and the CBF Tulsa-to-Medina relocation. CBF estimated total exit and disposal costs of $17.5 million to $21.0 million.
- Legal and environmental matters: Carlisle disclosed asbestos-related and other ordinary-course litigation, generally covered by insurance, and said no material adverse outcome was expected. It reported no significant environmental remediation accruals but noted potential liabilities could arise.
- Controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Acquired businesses representing 22.2% of total assets and 4.7% of 2017 sales were excluded from management’s internal-control assessment.
Important facts for investors to verify
- Whether the $750 million CFS sale closed on the expected terms and how proceeds were deployed or affected continuing-operations reporting.
- Whether 2018 mid-teens sales guidance was achieved, especially organic growth versus acquisition contribution and any effect from the CFS disposition.
- CCM pricing, raw-material recovery, and customer concentration following the distributor merger.
- CIT’s recovery in aerospace and IFEC markets, customer insourcing trends, and delivery of expected restructuring savings.
- Cash conversion and working-capital trends, leverage following the 2017 debt issuance and acquisitions, and the final tax effects of the Tax Act.
- Final purchase accounting for Accella and other acquisitions, and actual restructuring costs and savings compared with management’s estimates.