Carlisle Companies Inc: Form 10-Q for the period ended Sep 30, 2023

Carlisle Companies Incorporated (“Carlisle”, the “Company”, “we”, “us” or “our”) is a leading manufacturer and supplier of innovative building envelope products and solutions for more energy efficient buildings. Through our building products businesses, Carlisle Construction Materials ("CCM") and Carlisle Weatherproofing Technologies ("CWT"), and family of leading brands, we deliver innovative, labor-reducing and environmentally responsible products and solutions to customers through the Carlisle Experience. Carlisle is committed to generating superior stockholder returns and maintaining a balanced capital deployment approach, including investments in our businesses, strategic acquisitions, share repurchases and continued dividend increases.

Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our financial statements with a narrative from the perspective of Company management. All references to "Notes" refer to our Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.

Executive Overview

The third quarter marked a significant milestone in Carlisle’s 105-year history. With CIT being reclassified to discontinued operations, we have effectively completed our restructuring of the Carlisle portfolio of businesses, with what we have referred to as the “Pivot”, and become a pure-play building products company.

In 2021, we made the strategic decision, as superior capital allocators, to focus our investments into our highest returning building products businesses. Our history of supplying premium products for the building envelope, experience in the construction markets, and deep understanding of the future drivers for this industry led us to believe that a pivot towards a more simplified and streamlined building products portfolio would provide our shareholders with the highest returns. We are also convinced that our new focus will reward our employees, customers and communities in many ways. We believe our strategic initiatives will leverage significant and positive trends in greenhouse gas reduction, support increased energy efficiency and demand for “green” products, especially ones that require less labor to install and less waste to produce.

The third quarter results reinforced our conviction that a focused building products portfolio is the correct strategic path forward. Our building products portfolio demonstrated our resilience and ability to deliver superior returns in a challenging environment. We are pleased by the Carlisle team’s strong margin results, achieving an operating margin of 23.8% and an adjusted EBITDA margin of 27.0% for the third quarter of 2023. This is a testament to our ability to sustain strong margins throughout economic cycles, and is a reflection of our team's unwavering dedication to providing the Carlisle Experience to end users and our commitment to continuous improvement through the Carlisle Operating System ("COS").

In the first nine months of 2023, we used cash generated from operations to return $119.3 million to stockholders in the form of cash dividends and repurchased $580.0 million of shares, adding to our cumulative share repurchases since 2017 of nearly $2.8 billion. As of September 30, 2023, we had 8.6 million shares available for repurchase under our share repurchase program. We also invested $106.3 million into our businesses in the form of capital expenditures to drive innovation and the Carlisle Experience.

Looking ahead to the fourth quarter, we acknowledge the headwinds that are present in the residential and non-residential construction markets, posed by the Federal Reserve’s tightening actions and a desire to reduce inflation. However, we remain confident in our long-term vision and strategies, and our strong positioning within the building products industry. Both CCM and CWT are poised to capitalize on the growing demand for green building solutions and energy-efficient systems, as well as the increasing need for innovative products that simplify installation processes and reduce labor costs.

Our Vision 2025 strategy has provided us with a clear direction, forming a solid foundation that has produced excellent results. With Vision 2025 largely complete, and the Pivot effectively finished, we now turn to Vision 2030, a strategic vision that will continue to build upon Vision 2025, but with a focus on building products. Vision 2030 will be released in December of 2023 and will provide comprehensive details about our path to further value creation for all our stakeholders. We are excited about the future of Carlisle, the many opportunities for continued growth and a strong path forward.

Summary of Financial Results

(in millions, except per share amounts and percentages)

(1) Adjusted EBITDA and adjusted EBITDA margin are intended to provide investors and others with information about Carlisle's and our segments' performance without the effect of items that, by their nature, tend to obscure core operating results due to potential variability across periods based on the timing, frequency and magnitude of such items. Refer to Non-GAAP Financial Measures in this MD&A for more information about, and a detailed reconciliation of, these items.

Revenues decreased in the third quarter and the first nine months of 2023 primarily reflecting lower sales in the non-residential construction and residential construction end market as project delays and uncertainty caused by higher interest rates has led to a broad market underperformance and distributors continued to adjust inventory to pre-pandemic levels.

The increase in operating margin in the third quarter primarily reflected lower cost of raw materials. The decrease in operating margin for the first nine months of 2023 primarily reflected lower sales at our CCM segment.

Diluted earnings per share from continuing operations decreased in the third quarter and the first nine months of 2023 primarily reflecting lower operating income performance ($0.35 per share in the third quarter and $3.81 per share for the first nine months of 2023) partially offset by reduced average shares outstanding ($0.22 per share in the third quarter and $0.33 per share for the first nine months of 2023) and lower interest expense and higher interest income ($0.06 per share in the third quarter and $0.28 per share for the first nine months of 2023).

We generated $812.4 million in operating cash flow in the first nine months of 2023 and utilized cash on hand and cash provided by operations to return capital to stockholders through share repurchases and dividends and to fund capital expenditures.

Consolidated Results of Operations

Revenues

(in millions, except percentages)

Revenues decreased in the third quarter and the first nine months of 2023 primarily reflecting lower sales in our non-residential construction end market of $194.8 million and $647.8 million, respectively, and residential construction end market of $33.9 million and $134.2 million, respectively, due to broad market underperformance from project delays and uncertainty caused by higher interest rates, and prolonged distributor destocking.

Gross Margin

(in millions, except percentages)

Gross margin percentage (gross margin expressed as a percentage of revenues) increased in the third quarter of 2023, driven by lower cost of raw materials. Gross margin percentage held constant in the first nine months of 2023, as lower costs of raw materials was offset by lower sales.

Selling and Administrative Expenses

(in millions, except percentages)

Selling and administrative expenses held constant in the third quarter of 2023 as an increase in employee benefits costs of $5.0 million was offset by a decrease in commissions expense as a result of lower sales.

The decrease in selling and administrative expenses for the first nine months of 2023 primarily reflected lower commissions expense as a result of lower sales.

Research and Development Expenses

(in millions, except percentages)

Research and development expenses were higher in the third quarter and the first nine months of 2023, primarily reflecting higher new product development expenses at our CCM segment ($1.5 million in the third quarter and $5.1 million for the first nine months of 2023) and CWT segment ($0.7 million in the third quarter and $1.4 million for the first nine months of 2023).

Other Operating (Income) Expense, net

(in millions, except percentages)

The change in other operating (income) expense, net, in the third quarter and the first nine months of 2023 primarily reflected intangible asset impairments of $18.6 million and fixed asset impairments of $6.2 million recorded in 2022 in our rubber asset group.

Operating Income

(in millions, except percentages)

Refer to Segment Results of Operations within this MD&A for further information related to segment operating income results.

Interest Expense, net

(in millions, except percentages)

Interest expense, net of capitalized interest, decreased in the third quarter and the first nine months of 2023 primarily reflecting lower long-term debt balances associated with the redemption of $350.0 million of our 3.75% unsecured senior notes in October 2022 and the redemption of $300.0 million of our 0.55% unsecured senior notes in September 2023. Refer to Note 11 for further information on our long-term debt.

Interest Income

(in millions, except percentages)

Interest income increased during the third quarter of 2023 primarily reflecting higher yields. Interest income increased during the first nine months of 2023 primarily reflecting higher yields and a higher invested cash balance.

Other Non-operating Expense (Income), net

(in millions, except percentages)

Other non-operating expense (income), net, decreased in the third quarter of 2023 primarily reflecting favorable changes in foreign currency. Other non-operating expense (income), net decreased in the first nine months of 2023 primarily reflecting $2.8 million in favorable changes in foreign currency and $0.7 million of unrealized gains on Rabbi Trust investments, compared with unrealized losses of $2.0 million in the first nine months of 2022.

Income Taxes

(in millions, except percentages)

The effective income tax rate on continuing operations for the first nine months of 2023 was 23.1%. The year-to-date provision for income taxes included taxes on earnings at an anticipated rate of 23.4% and a tax impact of $1.8 million of discrete activity primarily related to excess tax benefits from employee stock compensation.

The effective income tax rate on continuing operations for the first nine months of 2022 was 23.9%.

Income from Discontinued Operations

(in millions)

Income from discontinued operations for the third quarter and the first nine months of 2023 primarily reflects operating results from the CIT and CFT product lines. Included in the first nine months of 2023 is a goodwill impairment of $24.8 million related to CFT and a loss on classification to held for sale of $49.9 million.

Segment Results of Operations

Carlisle Construction Materials

This segment produces a complete line of premium energy-efficient single-ply roofing products and warranted roof systems and accessories for the commercial building industry, including EPDM, TPO and polyvinyl chloride (“PVC”) membrane, polyisocyanurate ("polyiso") insulation, and engineered metal roofing and wall panel systems for commercial and residential buildings.

(in millions)

(in millions, except percentages)

(1) Adjusted EBITDA and adjusted EBITDA margin are intended to provide investors and others with information about Carlisle's and our segments' performance without the effect of items that, by their nature, tend to obscure core operating results due to potential variability across periods based on the timing, frequency and magnitude of such items. Refer to Non-GAAP Financial Measures in this MD&A for more information about, and a detailed reconciliation of, these items.

CCM’s revenue decreased in the third quarter and the first nine months of 2023 primarily reflecting broad market underperformance from project delays and uncertainty caused by higher interest rates, and prolonged distributor destocking. CCM’s operating margin and adjusted EBITDA margin decrease in the third quarter and the first nine months of 2023 primarily reflected higher per unit cost as a result of lower volumes.

Carlisle Weatherproofing Technologies

This segment produces building envelope solutions that effectively drive energy efficiency and sustainability in commercial and residential applications. Products include high-performance waterproofing and moisture protection products, protective roofing underlayments, fully integrated liquid and sheet applied air/vapor barriers, sealants/primers and flashing systems, roof coatings and mastics, spray polyurethane foam and coating systems for a wide variety of thermal protection applications and other premium polyurethane products, block-molded expanded polystyrene insulation, and engineered products for HVAC applications.

(in millions)

25

(in millions, except percentages)

(1) Adjusted EBITDA and adjusted EBITDA margin are intended to provide investors and others with information about Carlisle's and our segments' performance without the effect of items that, by their nature, tend to obscure core operating results due to potential variability across periods based on the timing, frequency and magnitude of such items. Refer to Non-GAAP Financial Measures in this MD&A for more information about, and a detailed reconciliation of, these items.

CWT’s revenue decreased in the third quarter and the first nine months of 2023 primarily reflecting lower volumes from a slowdown in residential construction and project delays. CWT’s operating margin and adjusted EBITDA margin increase in the third quarter and the first nine months of 2023 primarily reflected operating efficiencies gained through targeted restructuring, strategic sourcing and realized synergies from the acquisition of ASP Henry Holdings, Inc. on September 1, 2021. Included in CWT's operating margin for the third quarter and the first nine months of 2022 are intangible asset impairments of $18.6 million and fixed asset impairments of $6.2 million.

Liquidity and Capital Resources

A summary of our cash and cash equivalents by region follows:

(in millions)

We maintain liquidity sources primarily consisting of cash and cash equivalents as well as availability under the Company's Fourth Amended and Restated Credit Agreement (as amended, the "Facility"). In the near term, cash on hand is our primary source of liquidity. The decrease in cash and cash equivalents compared to December 31, 2022, is primarily related to cash used on share repurchases, repayment of senior notes, capital expenditures and payment of dividends to stockholders partially offset by cash generated from operations.

In certain countries our cash is subject to local laws and regulations that require government approval for conversion of such cash to U.S. Dollars, as well as for transfer of such cash, both temporarily and permanently outside of that jurisdiction. In addition, upon permanent transfer of cash outside of certain jurisdictions, primarily in Canada, we may be subject to withholding taxes, and as such we have accrued $6.2 million in anticipation of those taxes as of September 30, 2023.

We believe we have sufficient cash on hand, availability under the Facility and operating cash flows to meet our anticipated business requirements for at least the next 12 months. At the discretion of management, the Company may use available cash on capital expenditures, dividends, common stock repurchases, acquisitions and strategic investments.

We also anticipate we will have sufficient cash on hand, availability under the Facility and operating cash flows to meet our anticipated long-term business requirements and to pay outstanding principal balances of our existing notes by the respective maturity dates. Another potential source of liquidity is access to public capital markets, subject to market conditions. We may access the capital markets for a variety of reasons, including to repay the outstanding balances of our outstanding debt and fund acquisitions. Refer to Note 11.

Sources and Uses of Cash and Cash Equivalents

(in millions)

Operating Activities

We generated operating cash flows of $812.4 million for the first nine months of 2023 (including working capital sources of $38.9 million), compared with $588.6 million for the first nine months of 2022 (including working capital uses of $416.0 million). Higher operating cash flows of $223.8 million for the first nine months of 2023 primarily reflected lower working capital uses of $454.9 million related to a decrease in accounts receivable of $146.0 million from collections and lower inventory investment of $340.4 million, partially offset by a reduction in accounts payable of $21.7 million and accrued expenses of $47.5 million, and lower income from continuing operations of $177.8 million.

Investing Activities

Cash used in investing activities of $86.7 million for the first nine months of 2023 primarily reflected capital expenditures of $106.3 million, partially offset by proceeds from the sale of equipment of $18.7 million. Cash used in investing activities of $10.7 million for the first nine months of 2022 primarily reflected capital expenditures of $130.5 million and the acquisition of MBTechnology for $24.7 million, partially offset by the proceeds of the contingent consideration from the earn out payment and sale of real estate associated with the 2021 sale of CBF of $132.0 million and proceeds from investment in securities of $10.3 million.

Financing Activities

Cash used in financing activities of $994.5 million in the first nine months of 2023 primarily reflected share repurchases of $580.0 million, repayment of senior notes of $300.0 million and cash dividend payments of $119.3 million, reflecting the increased quarterly dividend of $0.85 per share. Cash used in financing activities of $273.2 million during the first nine months of 2022 primarily reflected share repurchases of $201.1 million and cash dividend payments of $95.6 million.

Debt Instruments

Senior Notes

On September 1, 2023, we redeemed in full our outstanding $300.0 million aggregate principal amount pf 0.55% unsecured senior notes due September 1, 2023 (the "2023 Notes"). The 2023 Notes were redeemed at the redemption price of $300.8 million, consisting of the principal amount of $300.0 million and $0.8 million of interest.

Revolving Credit Facility

On June 15, 2023, the Company entered into a second amendment to the Facility administered by JPMorgan Chase Bank, N.A. to implement, effective as of July 1, 2023, a replacement of the benchmark interest rates following the cessation of certain LIBOR rates. The benchmark rate for loans denominated in (i) U.S. dollars is Term SOFR, (ii) Canadian dollars is CDOR, (iii) sterling is SONIA, (iv) euros is EURIBOR and (v) yen is TIBOR.

During the nine months ended September 30, 2023, borrowings and repayments under the Facility totaled $84.0 million with a weighted average interest rate of 6.61%. As of September 30, 2023 and December 31, 2022, the Facility had no outstanding balance and $1.0 billion available for use.

Debt Covenants

We are required to meet various covenants and limitations under our senior notes and Facility, including certain leverage ratios, interest coverage ratios and limits on outstanding debt balances held by certain subsidiaries. We were in compliance with all covenants and limitations as of September 30, 2023 and December 31, 2022.

Refer to Note 11 for further information on our debt instruments.

Non-GAAP Financial Measures

EBIT, Adjusted EBIT, Adjusted EBITDA and Adjusted EBITDA Margin

Earnings before interest and taxes ("EBIT"), adjusted EBIT, adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") and adjusted EBITDA margin are intended to provide investors and others with information about our performance and our segments' performance without the effect of items that, by their nature, tend to obscure core operating results due to potential variability across periods based on the timing, frequency and magnitude of such items. As a result, management believes that these measures enhance the ability of investors to analyze trends in our business and evaluate our performance relative to similarly-situated companies. This information differs from net income, operating income, and operating margin determined in accordance with GAAP and should not be considered in isolation or as a substitute for measures of performance determined in accordance with GAAP. Our and our segments' EBIT, adjusted EBIT, adjusted EBITDA and adjusted EBITDA margin follows. These non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies.

(in millions, except percentages)

28

(in millions)

(1) Includes other non-operating expense (income), net, which may be presented in separate line items on the Condensed Consolidated Statements of Income and Comprehensive Income.

(in millions)

(1) Includes other non-operating expense (income), net, which may be presented in separate line items on the Condensed Consolidated Statements of Income and Comprehensive Income.

(in millions, except percentages)

(1) Includes other non-operating expense (income), net, which may be presented in separate line items on the Condensed Consolidated Statements of Income and Comprehensive Income.

(in millions, except percentages)

(1) Includes other non-operating expense (income), net, which may be presented in separate line items on the Condensed Consolidated Statements of Income and Comprehensive Income.

Outlook

Our expectations for segment and total revenues for the fourth quarter of 2023, compared to 2022 follows:

For the fourth quarter of 2023, we expect:

• Corporate expenses of approximately $30 million;
• Depreciation and amortization expense of approximately $40 million;
• Capital expenditures of approximately $40 million;
• Interest expense, net of interest income, of approximately $13 million; and
• Base tax rate of approximately 23% to 24%.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally use words such as "expect," "foresee," "anticipate," "believe," "project," "should," "estimate," "will," "plans," "intends," "forecast," and similar expressions, and reflect our expectations concerning the future. Such statements are made based on known events and circumstances at the time of publication and, as such, are subject in the future to unforeseen risks and uncertainties. It is possible that our future performance may differ materially from current expectations expressed in these forward-looking statements, due to a variety of factors such as: increasing price and product/service competition by foreign and domestic competitors, including new entrants; technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; our mix of products/services; increases in raw material costs that cannot be recovered in product pricing; domestic and foreign governmental and public policy changes including environmental and industry regulations; the ability to meet our goals relating to our intended reduction of greenhouse gas emissions, including our net zero commitments; threats associated with and efforts to combat terrorism; protection and validity of patent and other intellectual property rights; the identification of strategic acquisition targets and our successful completion of any transaction and integration of our strategic acquisitions; our successful completion of strategic dispositions; the cyclical nature of our businesses; the impact of information technology, cybersecurity or data security breaches at our businesses or third parties; the outcome of pending and future litigation and governmental proceedings; the emergence or continuation of widespread health emergencies such as the COVID-19 pandemic, including, for example, expectations regarding their impact on our businesses, including on customer demand, supply chains and distribution systems, production, our ability to maintain appropriate labor levels, our ability to ship products to our customers, our future results, or our full-year financial outlook; and the other factors discussed in the reports we file with or furnish to the Securities and Exchange Commission from time to time. In addition, such statements could be affected by general industry and market conditions and growth rates, the condition of the financial and credit markets and general domestic and international economic conditions, including inflation and interest rate and currency exchange rate fluctuations. Further, any conflict in the international arena, including the Russian invasion of Ukraine and war in the Middle East, may adversely affect general market conditions and our future performance. Any forward-looking statement speaks only as of the date on which that statement is made, and we undertake no duty to update any forward-looking statement to reflect events or circumstances, including unanticipated events, after the date on which that statement is made, unless otherwise required by law. New factors emerge from time to time and it is not possible for management to predict all of those factors, nor can it assess the impact of each of those factors on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.

There have been no material changes in the Company’s market risk for the nine months ended September 30, 2023. For additional information, refer to "PART II—Item 7A. Quantitative and Qualitative Disclosures About Market Risk" of the Company’s 2022 Annual Report on Form 10-K.

a. Evaluation of disclosure controls and procedures. Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation and as of September 30, 2023, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

b. Changes in internal controls. During the third quarter of 2023, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

There have been no material changes in the Company's risk factors disclosed in "PART I—Item 1A. Risk Factors" in our 2022 Annual Report on Form 10-K.