Carlisle Companies Incorporated — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2019, compared with the same periods in 2018. Carlisle operates four segments: Construction Materials (CCM), Interconnect Technologies (CIT), Fluid Technologies (CFT), and Brake & Friction (CBF). Amounts below are in millions of dollars except per-share data.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,280.6 | $1,181.4 | $3,667.3 | $3,402.2 |
| Operating income | $191.0 | $140.0 | $512.9 | $394.4 |
| Operating margin | 14.9% | 11.9% | 14.0% | 11.6% |
| Gross margin | 29.7% | 26.6% | 29.0% | 26.3% |
| Continuing-operations income | $139.3 | $96.9 | $369.7 | $269.5 |
| Diluted EPS from continuing operations | $2.42 | $1.59 | $6.40 | $4.37 |
| Net income | $137.9 | $99.7 | $370.2 | $523.0 |
- Q3 revenue increased 8.4%; management reported organic growth of 3.4%. Growth reflected acquisitions, volume and pricing, partly offset by foreign exchange.
- Operating income rose 36.4% in Q3 and 30.0% year to date. Management attributed improvement primarily to pricing, favorable raw-material costs, volume leverage and Carlisle Operating System savings, partly offset by wage inflation.
- Year-to-date net income fell despite higher continuing-operations income because 2018 included a $296.8 million pretax gain on the sale of Carlisle FoodService Products (CFS). Nine-month diluted EPS was $6.41 versus $8.49, while continuing-operations EPS increased to $6.40 from $4.37.
- Q3 segment results: CCM revenue $893.5 and operating income $173.0; CIT $241.9 and $36.0; CFT $68.5 and $4.2; CBF $76.7 and $5.7. CCM and CIT operating income improved; CFT revenue and income declined, while CBF revenue declined but returned to operating profit.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was $489.5, compared with $102.6 in 2018. The filing attributes the increase to higher cash earnings, more efficient working-capital investment and the non-recurrence of cash tax payments related to the CFS sale. Working capital used $62.9 of cash.
- Investing activities used $342.1, mainly for acquisitions ($287.7 net of acquired cash) and capital expenditures ($56.6). Financing activities used $291.7, including $232.1 of share repurchases and $74.5 of dividends.
- Cash and cash equivalents were $658.1 at September 30, 2019, down from $803.6 at year-end 2018. Current assets were $2,107.4 and current liabilities $692.2.
- Long-term debt was $1,590.2. The company had no borrowings under its $1.0 billion revolving facility, which remained fully available, and reported compliance with debt covenants. Senior notes include $250 due in 2020, $350 due in 2022, $400 due in 2024 and $600 due in 2027.
- Management said available resources should meet requirements for at least the next 12 months, including operations, investment, dividends, repurchases and acquisitions. Some cash held in China is subject to restrictions on conversion and transfer.
Outlook, commentary and notable items
- Management reaffirmed its Vision 2025 goals: $8 billion in revenue, 20% operating income and 15% return on invested capital; its longer-term organic-growth objective is 5%.
- 2019 segment revenue outlook: CCM low-double-digit growth; CIT mid-single-digit growth; CFT low-to-mid-single-digit decline; and CBF low-double-digit decline. The filing does not provide a consolidated 2019 revenue or earnings forecast.
- Management cited strong commercial roofing demand and aerospace and medical markets, but said global uncertainty related to Brexit and U.S.–China trade negotiations was weighing on CFT and CBF. CFT also faced weak industrial and automotive demand, particularly in China.
- Acquisitions completed in 2019 included Petersen Aluminum ($207.2 consideration) and MicroConnex ($46.2); the company also acquired Ecco Finishing. After quarter-end, Carlisle announced an agreement to acquire medical-device manufacturer Providien, expected to close in Q4 2019, and an offer and exclusive discussions for Draka Fileca, expected to close by Q1 2020, subject to conditions.
- Items affecting comparability reduced Q3 continuing-operations diluted EPS by $0.07 and nine-month EPS by $0.12, primarily from restructuring, facility rationalization and acquisition costs, partly offset by discrete tax benefits and other gains. The nine-month effective tax rate was 21.6%, including a $7.2 net discrete tax benefit.
- Restructuring included CIT manufacturing relocations and the substantially completed CBF Tulsa-to-Ohio consolidation. CIT’s relocation project was expected to take 12–18 months; management estimated approximately $4.8 of total project costs remained. CBF expected approximately $0.5 of costs to remain.
- Adoption of the new lease standard increased reported assets and liabilities; management said it did not materially affect net income or cash flows. At September 30, operating lease liabilities totaled $81.5.
Risks and contingencies
- Risks discussed include economic and market cyclicality, foreign-exchange movements, competition and pricing pressure, raw-material and labor cost inflation, construction labor availability, and the ability to integrate acquisitions and realize expected benefits.
- The company faces asbestos-related lawsuits concerning historically manufactured brake products; it maintains insurance and said reasonably possible claims were not material to its financial position, results or operating cash flows at the reporting date. Environmental laws and potential remediation at current or former facilities could create future costs, though no significant environmental accrual was recorded.
- Management did not expect ordinary-course litigation to have a material adverse effect. The filing reported no material change in risk factors from the 2018 Form 10-K.
Important facts for investors to verify
- Whether margin expansion and CCM/CIT demand persist as CFT and CBF face weaker end markets.
- Whether cash conversion and working-capital performance continue, given the year-to-date receivables-related cash use and acquisition spending.
- Acquisition closing conditions, purchase-price allocations, integration costs and expected returns for recent and announced transactions.
- Progress and remaining costs for CIT and CBF restructuring, and whether savings offset disruption and wage or input-cost pressure.
- Debt maturities, covenant headroom, restricted cash availability and capital allocation among acquisitions, dividends and repurchases.