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CSL > SEC Filings for CSL > Form 10-K on 19-Feb-2014All Recent SEC Filings

Show all filings for CARLISLE COMPANIES INC

Form 10-K for CARLISLE COMPANIES INC


19-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Executive Overview

We are a diversified manufacturing company focused on achieving profitable growth internally through new product development, product line extensions, and entering new markets, and externally through acquisitions that complement our existing technologies, products, and market channels. We have approximately 8,000 employees in our continuing operations. We currently manage our businesses under the following segments:


Carlisle Construction Materials ("CCM" or the "Construction Materials segment");


Carlisle Interconnect Technologies ("CIT" or the "Interconnect Technologies segment");


Carlisle Brake & Friction ("CBF" or the "Brake & Friction segment"); and


Carlisle FoodService Products ("CFSP" or the "FoodService Products segment").

We are a multi-national company with manufacturing operations located throughout North America, Western Europe, and the Asia Pacific region. Management focuses on maintaining a strong and flexible balance sheet, year-over-year improvement in sales, earnings before interest and income taxes ("EBIT") margins and net earnings, globalization, and reducing working capital (defined as receivables, inventories, net of accounts payable) as a percentage of net sales. Resources are allocated among the operating companies based on management's assessment of their ability to obtain leadership positions and competitive advantages in the markets they serve.

On December 31, 2013, the Company sold its Transportation Products business for total net proceeds of $375.6 million, including a receivable from the buyer of $6.6 million related to the additional estimated proceeds to be received upon settlement of the working capital adjustment component of the sales agreement, which is expected to be finalized in the first quarter of 2014. The results for the Transportation Products business are reported in discontinued operations for all periods presented. Prior to its sale, the Transportation Products business was our second largest segment based on $767.9 million in net sales in 2013. However, this segment was not core to our strategy and did not support our net sales growth and EBIT margin objectives. We intend to use the proceeds to provide value to shareholders by either making investments in furtherance of our long term goals or returning capital to shareholders.

In 2008 we established the Carlisle Operating System, a manufacturing structure and strategy deployment system based on lean enterprise and six sigma principles. The purpose of the Carlisle Operating System is to eliminate waste in all production and business processes, improve manufacturing efficiencies to increase productivity, and to increase EBIT margins and improve cash conversion.

For a more in-depth discussion of the results discussed in this "Executive Overview", please refer to the discussion on "Financial Reporting Segments" presented later in "Management's Discussion and Analysis of Financial Condition and Results of Operations".

We achieved a record $2.94 billion in net sales from continuing operations in the year ended December 31, 2013, a 3.2% increase from net sales of $2.85 billion for the year ended December 31, 2012. Organic sales (defined as net sales excluding sales from acquisitions and divestitures within the last twelve months, as well as the impact of changes in foreign exchange rates) declined 0.4% for the year ended December 31, 2013 versus the prior year, reflecting a decline in sales at Carlisle Brake & Friction largely offset by organic sales growth at Carlisle Construction Materials and Carlisle Interconnect Technologies. Our Brake & Friction segment experienced a 22% decline in sales during 2013 due to a global downturn in the market for heavy equipment. Carlisle Construction Materials and Carlisle Interconnect Technologies experienced growth in the commercial roofing and commercial aerospace markets, respectively. Acquisitions in the Construction Materials and Interconnect


Technologies segments contributed $98.9 million to sales in 2013. The impact of foreign exchange rates had a negligible impact on the year-over-year change in sales.

For the year ended December 31, 2013, EBIT declined 1.4% to $366.8 million primarily due to the sales downturn at Carlisle Brake & Friction as well as the impact of lower selling price and higher raw material cost at Carlisle Construction Materials. Offsetting these negative impacts were higher earnings from organic sales growth at Carlisle Interconnect Technologies and significant profit improvement at Carlisle Foodservice Products from previous consolidation efforts and performance improvement initiatives. Our EBIT margin (EBIT as a percent of net sales) decreased 50 basis points in 2013 to 12.5% primarily due to the lower performance at Carlisle Brake & Friction.

Income from continuing operations was $235.2 million, or $3.61 per diluted share, for the year ended December 31, 2013, a slight increase compared to income of $228.7 million, or $3.57 per diluted share, for the year ended December 31, 2012. For more information regarding the change in income from continuing operations from 2012 to 2013, refer to the discussion below on "2013 Compared to 2012".

2012 was a breakthrough year for Carlisle with respect to sales growth, earnings growth and margin improvement. During 2012, we achieved sales of $2.85 billion, a 14.4% increase from net sales of $2.49 billion for the year ended December 31, 2011. Organic sales (defined as net sales excluding sales from acquisitions and divestitures within the last twelve months, as well as the impact of changes in foreign exchange rates) increased 8.5% for the year ended December 31, 2012 versus the prior year, reflecting higher demand primarily in the Interconnect Technologies and Construction Materials segments and strong selling price realization in the Construction Materials and Foodservice Products segments. Our Brake & Friction Products segment experienced a 5% decline in sales during 2012 due to softening conditions in the worldwide market for off-highway mining and construction applications. Acquisitions in the Construction Materials and Interconnect Technologies segments contributed $158.9 million to sales in 2012. The impact of foreign exchange rates had a negligible impact on the year-over-year change in sales.

For the year ended December 31, 2012, EBIT grew 40% to $371.9 million, due to strong selling price realization, contribution from acquisitions, higher sales volumes and savings from the Carlisle Operating System. For the full year 2012, increased selling prices achieved by our segments exceeded the impact of higher raw material costs. Pre-tax expense related to acquisitions, business development activity and excess costs related to acquired inventory in 2012 were $8.1 million, versus pre-tax expense in 2011 of $6.4 million. See Note 3 in Item 8 for discussion of these acquisitions. In 2012, EBIT margin rose 230 basis points to 13.0% from 10.7% in 2011, reflecting strong price realization and operating performance.

In 2012, as a result of our strong sales and operational performance, we achieved income from continuing operations of $228.7 million, or $3.57 per diluted share, a 33% increase compared to income of $172.0 million, or $2.73 per diluted share, for the year ended December 31, 2011. For more information regarding the change in income from continuing operations from 2011 to 2012, refer to the discussion below on "2012 Compared to 2011".

Due to favorable outlook in some of our key markets and performance initiatives already put in place, we expect higher sales growth and EBIT improvement in 2014 versus 2013. For the full year of 2014, we expect sales growth to total in the high- single digit percentage range and corresponding improvement in EBIT and EBIT margin. Growth in 2014 is anticipated to primarily reflect sales expansion from commercial construction at Carlisle Construction Materials and commercial aerospace demand and new product offerings generating growth at Carlisle Interconnect Technologies. Recovery in the off-highway braking market for Carlisle Brake & Friction in 2014 is expected to be modest. We are also planning for continued sales and EBIT improvement at Carlisle Foodservice Products.


As of December 31, 2013, we had $755 million of cash on hand, including proceeds from the sale of the Transportation Products business, and $600 million of availability under our revolving credit facility. We are committed to using this liquidity to maximize shareholder value by acquiring companies that fit our long term growth profile, investing in our businesses to fuel organic growth and returning capital to shareholders through dividends and our share repurchase program. We currently have authorization from our Board to repurchase 3,024,499 shares.

2013 Compared to 2012

Net Sales

                                                    Acquisition     Volume     Price      Product        Exchange
(in millions)     2013        2012       Change       Effect        Effect    Effect     Mix Effect     Rate Effect
Net Sales       $ 2,943.0   $ 2,851.2        3.2 %           3.5 %      0.4 %    -0.8 %          0.0 %           0.1 %

In 2013, we achieved record net sales of $2.94 billion and an overall increase in sales over 2012 of 3.2%. Acquisitions in the Construction Materials and Interconnect Technologies segments contributed $98.9 million to net sales in 2013. Refer to the discussion below on "Acquisitions".

During 2013, our organic sales declined slightly by 0.4% primarily due to the large decline in demand at Brake & Friction resulting from a global downturn in the heavy equipment market. Largely offsetting this decline was growth in our Construction Materials and Interconnect Technologies segments from increased demand for commercial roofing and aerospace growth, respectively. Despite higher demand, selling price at Construction Materials fell slightly due to increased pressure in its markets. Brake & Friction also experienced some selling price decline towards the latter part of 2013 resulting from pricing renegotiations with key customers.

     Sales by Geographic Area

              Country                          2013               2012
              United States              $ 2,260.8     77 % $ 2,206.0     77 %
              International:
              Europe                         330.4              315.9
              Asia                           126.3              117.3
              Canada                          90.1               82.6
              Mexico and Latin America        69.7               65.8
              Middle East and Africa          47.4               46.6
              Other                           18.3               17.0
              Total International            682.2     23 %     645.2     23 %


              Net sales                  $ 2,943.0          $ 2,851.2

We have a long-term goal of achieving 30% of total net sales from outside the United States. Total sales to customers located outside the United States increased by 5.7% from $645.2 million in 2012 to $682.2 million in 2013. Of the growth in 2013, $31.2 million in sales came from the acquisitions of Hertalan and Thermax/Raydex. Sales from outside the United States as a percentage of total net sales grew from 22.6% in 2012 to 23.2% in 2013.


Gross Margin

                      (in millions)    2013      2012     Change
                      Gross profit    $ 745.6   $ 767.0      -2.8 %
                      Gross margin       25.3 %    26.9 %

Our gross margin (net sales less cost of goods sold, expressed as a percent of net sales) declined by 160 basis points in 2013 versus 2012. The decline in gross margin primarily reflected loss of margin from the sales decline at Brake & Friction as well as lower selling price and higher raw material costs at Construction Materials. Partially offsetting this was organic sales growth at Construction Materials and Interconnect Technologies, efficiency gains from the Carlisle Operating System and savings from plant consolidation activities and other performance improvement initiatives at Foodservice Products.

Selling and Administrative Expenses

               (in millions)                   2013      2012     Change
               Selling & Administrative       $ 353.7   $ 356.6      -0.8 %
               As a percentage of net sales      12.0 %    12.5 %

The reduction in selling and administrative expenses in 2013 versus the prior year primarily reflected the non-recurrence of costs in 2012 totaling $4.5 million for acquisitions and business development activity and $5.6 million of non-cash expense related to the settlement of pension liabilities. In addition, Foodservice Products and Brake & Friction reduced their selling and administrative expenses by $5.5 million and $3.0 million, respectively. These decreases were partially offset by $15.0 million in higher selling and administrative expenses in 2013 from the acquisitions in the Construction Materials and Interconnect Technologies segments and higher selling commission costs at Construction Materials.

Research and Development Expenses

                (in millions)                   2013     2012    Change
                Research and Development       $ 29.3   $ 26.1      12.2 %
                As a percentage of net sales      1.0 %    0.9 %

Increased research and development expenses during 2013 versus the prior year included expenses of $1.1 million related to acquisitions in the Construction Materials and Interconnect Technologies segments and investment in new product development at Interconnect Technologies.

Other Expense (Income), Net

                    (in millions)                  2013     2012
                    Other expense (income), net   $ (4.2 ) $ 12.4


                                                  $ (4.2 ) $ 12.4

Other income, net in 2013 of $4.2 million primarily reflects pre-tax gains related to changes in fair value of contingent consideration for the PDT acquisition in the Construction Materials segment as well as a net gain on the sale of fixed assets. During the third quarter of 2013, the Construction Materials recorded a $1.3 million gain related to the settlement of contingent consideration related to its 2011 acquisition of PDT based upon an earn-out settlement agreement with the former owners, which was paid in the fourth quarter of 2013. In addition, during the third quarter of 2013, Foodservices Products sold its distribution facility in Reno, NV and recognized a pre-tax gain of


$1.0 million on the sale. During the third and fourth quarter of 2013, Construction Materials sold property and fixed assets in Kingston, NY and Kent, WA and recognized a net pre-tax gain of $1.0 million on the sale.

Other expense, net in 2012 of $12.4 million includes $6.0 million in fixed asset impairment charges incurred by the FoodService Products segment related to restructuring activity and its decision to exit the flameless chafer product line. In addition, the Construction Materials segment recorded $5.0 million in Other expense during 2012 for the fair value adjustment to contingent consideration primarily reflecting higher expected earnings of the PDT acquired operations, as part of the PDT purchase agreement.

EBIT (Earnings Before Interest and Taxes)

                      (in millions)    2013      2012     Change
                      EBIT            $ 366.8   $ 371.9      -1.4 %
                      EBIT Margin        12.5 %    13.0 %

In 2013, our EBIT declined 1.4% primarily due to the sales downturn at Brake & Friction as well as the impact of lower selling price and higher raw material cost at Construction Materials. Offsetting these negative impacts were higher earnings from organic sales growth at Interconnect Technologies and significant profit improvement at Foodservice Products from previous consolidation efforts and performance improvement initiatives. Included in EBIT in 2013 were exit and disposal costs of $1.3 million and plant start-up costs at Construction Materials of $7.3 million. By comparison, included in EBIT in 2012 were total exit and disposal costs and impairment charges of $6.2 million, which primarily reflected the aforementioned consolidation activities within FoodService Products.

Costs incurred related to the acquisition of Thermax/Raydex totaled $1.1 million in 2013. By comparison, costs incurred related to the acquisitions of Thermax/Raydex, Hertalan, and Tri-Star, and other acquisition and business development efforts during 2012 were $8.1 million. In addition, during 2012 we incurred $5.6 million of expense related to the settlement of pension liabilities under a lump sum offer elected by certain former employees under our core pension plan and recorded $5.0 million in Other expense to adjust contingent consideration for the PDT acquisition to fair value.

Interest Expense

                   (in millions)             2013     2012    Change
                   Gross interest expense   $ 34.3   $ 26.0
                   Interest Income            (0.5 )   (0.5 )


                   Interest Expense, net    $ 33.8   $ 25.5      32.5 %

Interest expense, net for the year ended December 31, 2013 increased 32.5% versus 2012 due to higher average long term borrowings in 2013 versus 2012. In November 2012, we issued $350 million in 3.75% senior unsecured notes due 2022 to pay down outstanding borrowings under our revolving credit facility and fund the Thermax/Raydex acquisition as well as to support our long term growth objectives. We expect interest expense to be approximately $34 million in 2014.

Income Taxes

                    (in millions)         2013     2012     Change
                    Income tax expense   $ 97.8   $ 117.7     -16.9 %
                    Effective tax rate     29.4 %    34.0 %


Our effective tax rate varies from the statutory rate within the United States of 35% due primarily to the deduction attributable to U.S. production activities, state tax requirements, earnings in foreign jurisdictions taxed at rates different from the statutory U.S. federal rate, and tax credits. The effective income tax rate on continuing operations in 2013 of 29.4% differs from the statutory rate primarily due to a tax election made in a foreign jurisdiction that resulted in an increase in the tax basis of certain assets with a corresponding elimination of a deferred tax liability. The net tax impact of the election resulted in an $11.8 million one-time benefit in the first six months of the year. This election decreased our effective tax rate by 350 basis points in 2013. The effective tax rate was also decreased because of U.S. Federal tax legislation enacted in January 2013 related to taxation of foreign earned income and research and development expenditures. We estimate our effective tax rate for 2014 will be approximately 34%.

We participated in the U.S. Internal Revenue Service's ("IRS") real time audit program, Compliance Assurance Process ("CAP"), during 2013 and 2012. Under the CAP program, material federal income tax matters were disclosed to the IRS throughout the year with the objective of reaching agreement as to the proper reporting treatment in advance of filing our U.S. Federal tax return. The examinations of the 2011 and 2012 returns have been completed. We believe that this program reduces tax-related uncertainties, enhances transparency, and reduces administrative costs. We expect to continue to participate in the CAP program in 2014.

Income from Continuing Operations

      (in millions)                                    2013      2012      Change
      Income from continuing operations, net of tax   $ 235.2   $ 228.7        2.8 %
      EPS
      Basic                                           $  3.69   $  3.64
      Diluted                                            3.61      3.57

The increase in income from continuing operations, net of tax, in 2013 was attributable to the aforementioned $11.8 million tax benefit resulting from an election in a foreign jurisdiction. This benefit was partially offset by slightly lower EBIT in 2013 versus 2012 and higher interest expense from increased long term borrowing levels.

Income (Loss) from Discontinued Operations

            (in millions)                                 2013      2012
            Income (loss) from discontinued operations   $ (60.5 ) $ 55.2
            Tax expense (benefit)                          (35.0 )   13.7


                                                         $ (25.5 ) $ 41.5

EPS
Basic $ (0.40 ) $ 0.66 Diluted (0.39 ) 0.65

Loss from Discontinued Operations for the year ended December 31, 2013 primarily reflects the results of the Transportation Products business, which was sold on December 31, 2013 to American Industrial Partners ("AIP"). During 2013, the Transportation Products business had sales of $767.9 million. Included in loss from discontinued operations during 2013 was a pre-tax goodwill impairment charge of $100.0 million due to a decline in the reporting unit's estimated fair value relative to its carrying value. In addition, the Company recorded a pre-tax loss of $12.3 million on the sale of the Transportation Products business, which included charges of $8.4 million for curtailment and


settlement charges related to the transfer of all former Transportation Products business employees and certain of the pension and other post employment obligations to AIP as part of the sale.

Under the terms of the sale agreement, the Company settled $18.6 million in pension liabilities and $1.2 million of other post employee benefit obligations related to certain unionized employees of the Transportation Products business, via the transfer of those liabilities to AIP. An estimated $19.8 million in pension assets are to be transferred from plan assets to AIP in 2014 under the terms of the sale agreement. A finalized asset transfer to the buyer will be performed during 2014 under the terms of the sale agreement. Assets to be transferred to the buyer will be adjusted, as determined by the Company's actuary, to take into account the actual investment return on such assets and benefit payments to plan participants from the closing date to the date of transfer. In regards to this settlement, the Company recorded $7.3 million in settlement costs, including recognition of $6.1 million of previously unrecognized actuarial losses, in discontinued operations.

Pension obligations associated with non-unionized current and former employees of the Transportation Products business were not settled in connection with the sale. Employees transferred with the sale, including certain unionized employees, are no longer active participants in the plan and therefore the expected years of future service of participants has been curtailed and as required under ASC 715, Compensation-Retirement Benefits, the Company has recognized a curtailment charge, inclusive of prior service cost, of $0.8 million in discontinued operations.

The after-tax loss from discontinued operations for the full year 2013 reflects the aforementioned losses from operations due to the goodwill impairment charge, offset by operating earnings of the Transportation Products business and a net after-tax gain on the sale of the Transportation Products business of $6.2 million.

Income from Discontinued Operations for the year ended December 31, 2012 primarily reflects the results of the Transportation Products business as well as a $3.75 million gain recognized in April 2012 upon final settlement of contingent consideration from the 2010 sale of our specialty trailer business. During 2012, the Transportation Products business had sales of $778.2 million and pre-tax income from discontinued operations of $52.4 million.

Net Income

                      (in millions)    2013      2012     Change
                      Net Income      $ 209.7   $ 270.2     -22.3 %
                      EPS
                      Basic           $  3.29   $  4.30
                      Diluted            3.22      4.22

The decline in net income from 2012 to 2013 was primarily due to losses incurred in discontinued operations at the Transportation Products business related to goodwill impairment partially offset by the after-tax gain recognized on the sale of the Transportation Products business to AIP in December 2013.

2012 Compared to 2011

Net Sales

                                                   Acquisition     Volume     Price       Product        Exchange
(in millions)     2012        2011      Change       Effect        Effect     Effect     Mix Effect     Rate Effect
Net Sales       $ 2,851.2   $ 2,492.4      14.4 %           6.4 %      4.6 %      3.6 %          0.3 %          -0.5 %


In 2012, we achieved net sales of $2.85 billion and an overall increase in sales over 2011 of 14.4%. Acquisitions in the Construction Materials and Interconnect Technologies segments contributed a total of $158.9 million to net sales in 2012. Refer to the discussion below on "Acquisitions".

We achieved organic sales growth of 8.5% during 2012 primarily driven by sales volume growth in the Construction Materials and Interconnect Technologies segments and higher selling price in the Construction Materials and Foodservice Products segments. Sales in the Interconnect Technologies segment grew organically by 23%, reflecting robust demand in the commercial aerospace market. The Construction Materials segment achieved organic growth of 10% in 2012, reflecting higher demand for re-roofing products and increased selling prices from pricing actions that started during 2011 and continued in 2012. During the second half of 2012, our organic growth was negatively impacted by reduced sales in the Brake & Friction segment from lower original equipment manufacturers ("OEM") demand in the global construction, mining, and agriculture markets.

     Sales by Geographic Area

              Country                          2012               2011
              United States              $ 2,206.0     77 % $ 1,997.6     80 %
              International:
              Europe                         315.9              233.5
              Asia                           117.3              104.4
. . .
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