Carlisle Companies Inc: Form 10-Q for the period ended Sep 30, 2024

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

Carlisle delivered another quarter of strong performance, despite a continued decline in residential markets along with the impact of weather-related and port strike events, which negatively impacted shipping days, contractor days on the roof and manufacturing output. We continued to execute on our Vision 2030 strategies, and we are pleased with our third quarter performance against our 2030 goals.

CCM continued its strong momentum with its 2024 accomplishments into the third quarter, driven by healthy contractor backlogs, robust re-roofing activity, and excellent margin performance. CCM sales were up 9% year-over-year assisted by the inventory normalization in the channel and the acquisition of MTL Holdings LLC ("MTL"). CCM's 30.4% operating margin and 32.8% adjusted EBITDA margin in the third quarter reflected strong volume leverage, a positive raw material environment, and excellent operating execution through the Carlisle Operating System (COS).

As we look at CWT’s performance, while we were pleased with progress on share gain initiatives within CWT, a higher interest rate environment, low housing turnover, and affordability challenges resulted in a further slowing of housing activity in the quarter. For the quarter, these challenges impacted sales and drove a decline of 3% year-over-year. Despite the near-term challenges facing CWT, we remain pleased and optimistic about the prospects for this segment.

We continue to be encouraged by the positive long-term outlook in the North American building products markets and the strength of the Carlisle business model. Our pivot to a “pure play” building products company is delivering the expected outcomes and demonstrating our commitment to being superior capital allocators. Additionally, we believe that leveraging the megatrends around energy efficiency and labor savings, along with growing re-roof demand, and our introduction of innovative new products, are creating additional catalysts for growth. Similar to Vision 2025, we believe Vision 2030 positions us well to drive above-market growth and earn a premium in the marketplace.

Carlisle remains committed to generating superior shareholder returns through our balanced capital deployment approach. This quarter, we repurchased 1.1 million shares of our common stock for $466.1 million and increased our dividend 18%, marking the 48th consecutive annual dividend increase.

We are excited about our recent agreement to acquire PFB Holdco, Inc. ("Plasti-Fab"), which aligns with our Vision 2030 strategy to enhance our “best-in-class” building envelope product portfolio following the completion of our pivot to a “pure play” building products company earlier this year. The acquisition of Plasti-Fab establishes Carlisle as a leading manufacturer in the $1.5 billion North American expanded polystyrene insulation market and provides vertically integrated polystyrene capabilities to our Insulfoam business while adding scale, supporting retail channel growth, and filling key geographic gaps in the U.S. and Canada.

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.

Consolidated Results of Operations

Revenues

(in millions, except percentages)

Revenues increased in the third quarter and the first nine months of 2024, primarily reflecting higher sales in our non-residential construction end market of $102.2 million and $452.6 million, respectively, as continued inventory normalization and growing re-roof activity led to increased construction activity in the quarter and the year to date period.

Gross Margin

(in millions, except percentages)

Gross margin as a percentage of revenues increased in the third quarter and the first nine months of 2024, driven primarily by volume leverage on strong sales growth in our CCM segment.

Selling and Administrative Expenses

(in millions, except percentages)

Selling and administrative expenses increased in the third quarter of 2024, primarily driven by higher wage and benefit expenses of $11.6 million, increased sales and marketing expenses of $7.0 million due to increased commissions expense as a result of higher sales volumes and increased amortization expense of $4.6 million primarily from the acquisition of MTL.

Selling and administrative expenses increased in the first nine months of 2024, primarily driven by higher wage and benefit expenses of $34.2 million, increased sales and marketing expenses of $19.6 million due to increased commissions expense as a result of higher sales volumes and increased amortization expense of $8.9 million primarily from the acquisition of MTL.

Research and Development Expenses

(in millions, except percentages)

Research and development expenses were higher in the third quarter and the first nine months of 2024, primarily reflecting higher new product development expenses at our CCM segment ($0.6 million in the third quarter and $5.0 million in the first nine months of 2024) and CWT segment ($0.3 million in the third quarter and $0.9 million in the first nine months of 2024). The increase in research and development expenses is consistent with a key pillar of Vision 2030 to drive innovation, with a commitment to investing in the creation of new products and solutions that add value through advancements in sustainability and energy and labor efficiencies.

Other Operating Income, net

(in millions, except percentages)

Other operating income, net, decreased in the third quarter of 2024, primarily driven by a $1.5 million loss from litigation settlements in the third quarter of 2024.

Other operating income, net, increased in the first nine months of 2024, primarily driven by a $5.0 million gain from an insurance settlement received in the second quarter of 2024.

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 2024, primarily reflecting lower long-term debt balances associated with the redemption of $300.0 million of our 0.55% unsecured senior notes in September 2023. Refer to Note 12 for further information on our long-term debt.

Interest Income

(in millions, except percentages)

Interest income increased during the third quarter and the first nine months of 2024, primarily reflecting higher yields and a higher invested cash balance due to proceeds from the sale of Carlisle Interconnect Technologies ("CIT") in the second quarter of 2024.

Other Non-operating (Income) Expense, net

(in millions, except percentages)

Other non-operating (income) expense, net, increased in the third quarter of 2024, primarily reflecting favorable changes to Rabbi Trust investments of $1.2 million and to foreign currencies against the U.S. Dollar of $0.7 million, partially offset by unfavorable changes to pension assets of $0.3 million.

Other non-operating (income) expense, net, increased in the first nine months of 2024, primarily reflecting favorable changes to Rabbi Trust investments of $1.2 million, partially offset by unfavorable changes to pension assets of $0.8 million.

Income Taxes

(in millions, except percentages)

The increase in provision for income taxes on continuing operations for the first nine months of 2024, primarily reflected higher pre-tax income. The year-to-date provision for income taxes included taxes on earnings at an anticipated rate of 23.7% and a tax benefit of $9.2 million of discrete activity primarily related to excess tax benefits from employee stock compensation.

(Loss) Income from Discontinued Operations

(in millions)

(Loss) income from discontinued operations for the third quarter of 2024 primarily reflected legal matters related to Carlisle Interconnect Technologies ("CIT") and Carlisle Fluid Technologies ("CFT"), which were sold in May 2024 and October 2023, respectively, compared to full operating results from CIT and CFT product lines in 2023.

(Loss) income from discontinued operations for the first nine months of 2024 primarily reflected the pre-tax gain on sale of the CIT business of $457.3 million and operating results of $56.2 million compared to the pre-tax loss on sale of the CFT business of $47.2 million, partially offset by operating results of $53.9 million from CIT and $17.5 million from CFT in the first nine months of 2023.

Refer to Note 5 for further information on our discontinued operations.

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 ethylene propylene diene monomer

("EPDM"), thermoplastic polyolefin ("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 increase in the third quarter and the first nine months of 2024 primarily reflected higher sales in the non-residential end market of $82.4 million and $412.1 million, respectively, driven by inventory normalization and growing re-roof activity benefiting from pent-up demand. CCM’s operating margin and adjusted EBITDA margin increase in the third quarter and the first nine months of 2024 primarily reflected volume leverage on higher sales.

Carlisle Weatherproofing Technologies

This segment produces building envelope solutions that 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, engineered products for HVAC applications, and premium products for a variety of industrial and surfacing applications.

(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.

CWT’s revenue decrease in the third quarter and the first nine months of 2024 primarily reflected lower sales in the residential end market of $31.9 million and $59.9 million, respectively, partially offset by higher sales in the non-residential end market of $19.8 million and $40.5 million, respectively.

CWT’s operating margin and adjusted EBITDA margin decrease in the third quarter of 2024 primarily reflected higher operating costs to support longer term growth initiatives. CWT's operating margin and adjusted EBITDA margin stayed relatively flat in the first nine months of 2024.

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 our credit facilities. In the near term, cash on hand is our primary source of liquidity. The increase in cash and cash equivalents compared to December 31, 2023, is primarily related to proceeds from our sale of CIT and cash generated from operations, partially offset by cash used on share repurchases, the purchase of MTL, payment of dividends to stockholders and capital expenditures.

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 $6.3 million in anticipation of those taxes as of September 30, 2024.

We believe we have sufficient cash on hand, availability under our credit facilities 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, acquisitions, strategic investments or repurchases, redemptions or retirements of securities, including our common stock.

We also anticipate we will have sufficient cash on hand, availability under our credit facilities 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 12 for information on our long-term debt.

Sources and Uses of Cash and Cash Equivalents

(in millions)

Operating Activities

We generated operating cash flows of $659.7 million for the first nine months of 2024 (including working capital uses of $200.6 million), compared to $812.4 million for the first nine months of 2023 (including working capital uses of $4.3 million). Lower operating cash flows of $152.7 million for the first nine months of 2024 primarily reflected lower operating cash provided by discontinued operations of $152.3 million and higher working capital uses of $196.3 million, partially offset by higher income from continuing operations of $175.5 million.

The increase in working capital uses related to a decrease in cash from higher inventory investments in 2024 of $220.9 million, reflecting the end of destocking of inventory experienced in 2023 and increased construction activity, and accounts receivable of $11.8 million, reflecting higher sales volumes. The increase in working capital uses was partially offset by an increase in cash from accounts payable of $17.1 million, related to higher inventory investments, and in accrued expenses of $30.4 million, reflecting lower payments in the year for customer incentives, rebates and cash bonuses related to 2023 performance.

Investing Activities

Cash provided by investing activities of $1,508.9 million for the first nine months of 2024 primarily reflected proceeds from the sale of CIT, net of cash disposed, of $1,998.0 million, offset by the purchase of MTL for $414.3 million, net of cash acquired, and capital expenditures of $76.7 million. 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 the sale of equipment of $18.7 million.

Financing Activities

Cash used in financing activities of $1,242.9 million in the first nine months of 2024 primarily reflected share repurchases of $1,166.1 million and cash dividend payments of $127.4 million, reflecting the increased quarterly dividend of $1.00 per share, partially offset by net proceeds of $55.4 million from the exercising of stock options. Cash used in financing activities of $994.5 million during the first nine months of 2023 primarily reflected share repurchases of $580.0 million, the repayment of senior notes of $300.0 million and cash dividend payments of $119.3 million.

Debt Instruments

Revolving Credit Facility

On April 3, 2024, the Company and Carlisle, LLC, as co-borrowers, entered into a Fifth Amended and Restated Credit Agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. as administrative agent, and the lenders party thereto. The Revolving Credit Agreement provides for a $1.0 billion unsecured revolving line of credit with a maturity date of April 3, 2029 and amends and restates the Company's Fourth Amended and Restated Credit Agreement, which was scheduled to expire on February 5, 2025 (the "Prior Credit Agreement"). Refer to Note 12 for further information on the Credit Agreement.

During the nine months ended September 30, 2024, borrowing and repayments under the Credit Agreement totaled $22.0 million with a weighted average interest rate of 8.50%. As of September 30, 2024 and December 31, 2023, the Company had no outstanding balance and $1.0 billion available for use under the Credit Agreement and Prior Credit Agreement, respectively.

Debt Covenants

We are required to meet various covenants and limitations under our senior notes and credit facilities, 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, 2024 and December 31, 2023.

Refer to Note 12 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)

30

(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 2024 follows:

32

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, 2024. For additional information, refer to "PART II—Item 7A. Quantitative and Qualitative Disclosures About Market Risk" of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 ("2023 Annual Report on Form10-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 Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation and as of September 30, 2024, 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 2024, 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 2023 Annual Report on Form 10-K.