10-K 1 csl-20161231x10k.htm 10-K csl_Current Folio_10K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10‑K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016

 

Picture 1

www.carlisle.com 

 

Commission file number 1‑9278

CARLISLE COMPANIES INCORPORATED

(Exact name of registrant as specified in its charter)

 

Delaware

    

31‑1168055

(State of incorporation)

 

(I.R.S. Employer I.D. No)

(480) 781-5000

(Telephone Number)

 

16430 North Scottsdale Road, Suite 400, Scottsdale, Arizona 85254

(Address of principal executive office)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

    

Name of each exchange on which registered

Common stock, $1 par value

 

New York Stock Exchange

Preferred Stock Purchase Rights, $1 par value

 

New York Stock Exchange

 

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   No 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non‑accelerated filer 

Smaller reporting company 

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes   No 

 

The aggregate market value of the shares of common stock of the registrant held by non‑affiliates was approximately $6.7 billion based upon the closing price of the common stock on the New York Stock Exchange on June 30, 2016.

 

As of February 9, 2017, 64,566,037 shares of common stock of the registrant were outstanding;

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 26, 2017 are incorporated by reference in Part III.

 

 


 

Table of Contents

 

Part I 

Item 1.  Business. 

Item 1A.  Risk Factors. 

Item 1B.  Unresolved Staff Comments. 

13 

Item 2.  Properties. 

13 

Item 3.  Legal Proceedings. 

13 

Item 4.  Mine Safety Disclosures. 

13 

 

 

Part II 

13 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 

13 

Item 6.  Selected Financial Data. 

15 

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

15 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk. 

41 

Item 8.  Financial Statements and Supplementary Data. 

43 

Report of Independent Registered Public Accounting Firm 

43 

Consolidated Statements of Earnings and Comprehensive Income 

45 

Consolidated Balance Sheets 

46 

Consolidated Statements of Cash Flows 

47 

Consolidated Statements of Shareholders’ Equity 

48 

Notes to Consolidated Financial Statements 

49 

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 

85 

Item 9A.  Controls and Procedures. 

85 

Item 9B.  Other Information. 

86 

 

 

Part III 

87 

Item 10.  Directors and Executive Officers of the Registrant. 

87 

Item 11.  Executive Compensation. 

88 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 

88 

Item 13.  Certain Relationships and Related Transactions. 

88 

Item 14.  Principal Accountant Fees and Services. 

88 

 

 

Part IV 

89 

Item 15.  Exhibits and Financial Statement Schedules. 

89 

 

 

Signatures 

92 

Exhibit 

 

 

 


 

Part I

 

Item 1.  Business.

Overview

 

Carlisle Companies Incorporated (“Carlisle”, the “Company”, “we”, “us” or “our”) was incorporated in 1986 in Delaware as a holding company for Carlisle Corporation, whose operations began in 1917, and its wholly‑owned subsidiaries. Carlisle is a diversified manufacturing company consisting of five segments that manufacture and distribute a broad range of products. Additional information is contained in Items 7 and 8.

 

Our executive offices are located at 16430 North Scottsdale Road, Suite 400, Scottsdale, Arizona 85254. The Company’s main telephone number is (480) 781‑5000. Our Company website is www.carlisle.com, through which (found in the “Investor Relations” link), we make available, free of charge, our Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q and Current Reports on Form 8‑K and all amendments to those reports, as soon as reasonably practicable after these reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).

 

Management Philosophy/Business Strategy

 

We strive to be the market leader of highly‑engineered products in the various markets we serve. We are dedicated to achieving low‑cost positions and providing service excellence based on, among other things, superior quality, on‑time delivery, and short cycle times.

 

The presidents of the various operating companies are given considerable autonomy and have a significant level of independent responsibility for their businesses and their performance. The Company believes that this structure encourages entrepreneurial action and enhances responsive decision making thereby enabling each operation to better serve its customers and react quickly to its customers’ needs.

 

Our executive management role is to (i) provide general management oversight and counsel, (ii) manage the Company’s portfolio of businesses including identifying acquisition candidates and assisting in acquiring candidates identified by the operating companies, as well as identifying businesses for divestiture in an effort to optimize the portfolio, (iii) allocate and manage capital, (iv) evaluate and motivate operating management personnel, and (v) provide selected other services.

 

The Company utilizes its Carlisle Operating System (“COS”), a manufacturing structure and strategy deployment system based on lean enterprise and six sigma principles, to drive operational improvements. COS is a continuous improvement process that defines the way the Company does business. Waste is eliminated and efficiencies improved enterprise wide, allowing us to increase overall profitability. Improvements are not limited to production areas, as COS is also driving improvements in new product innovation, engineering, supply chain management, warranty, and product rationalization. COS has created a culture of continuous improvement across all aspects of our business operations.

 

The Company has a long‑standing acquisition strategy. Traditionally, we have focused on strategic acquisitions or acquiring new businesses that can be added to existing operations. In addition, the Company considers acquiring new businesses that can operate independently from other Carlisle companies. Factors considered in making an acquisition include consolidation opportunities, technology, customer dispersion, operating capabilities, and growth potential. We acquired three businesses during 2016, which complement our existing Interconnect Technologies and Fluid Technologies segments, and acquisitions in 2017 that will expand our FoodService Products and Construction Materials segments. We have also pursued the sale of operating divisions when it is determined they no longer fit within the Company’s long‑term goals or strategy.

 

For more details regarding acquisitions of the Company’s businesses during the past three years, see “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisitions” and Note 3 to the Consolidated Financial Statements in Item 8.

 

3


 

Information on the Company’s revenues, earnings, and identifiable assets from continuing operations by segment for the last three fiscal years is as follows:

 

Financial Information about Segments

 

 

 

 

 

 

 

 

 

 

 

(in millions)

    

2016

    

2015

    

2014

Net Sales to Unaffiliated Customers

 

 

 

 

 

 

 

 

 

Carlisle Construction Materials

 

$

2,052.6

 

$

2,002.6

 

$

1,935.4

Carlisle Interconnect Technologies

 

 

834.6

 

 

784.6

 

 

669.1

Carlisle Fluid Technologies

 

 

269.4

 

 

203.2

 

 

 -

Carlisle Brake & Friction

 

 

268.6

 

 

310.2

 

 

355.3

Carlisle FoodService Products

 

 

250.2

 

 

242.6

 

 

244.2

Total

 

$

3,675.4

 

$

3,543.2

 

$

3,204.0

 

 

 

 

 

 

 

 

 

 

Earnings Before Interest and Income Taxes

 

 

 

 

 

 

 

 

 

Carlisle Construction Materials

 

$

430.5

 

$

351.1

 

$

268.8

Carlisle Interconnect Technologies

 

 

144.4

 

 

141.6

 

 

132.2

Carlisle Fluid Technologies

 

 

33.1

 

 

20.8

 

 

 -

Carlisle Brake & Friction (1)

 

 

(135.7)

 

 

17.3

 

 

26.8

Carlisle FoodService Products

 

 

31.5

 

 

27.3

 

 

29.6

Corporate (2)

 

 

(62.7)

 

 

(56.2)

 

 

(49.1)

Total

 

$

441.1

 

$

501.9

 

$

408.3

 

 

 

 

 

 

 

 

 

 

Identifiable Assets (3)

 

 

 

 

 

 

 

 

 

Carlisle Construction Materials

 

$

891.6

 

$

899.2

 

$

915.1

Carlisle Interconnect Technologies

 

 

1,446.3

 

 

1,264.0

 

 

1,296.3

Carlisle Fluid Technologies

 

 

640.9

 

 

659.5

 

 

 -

Carlisle Brake & Friction

 

 

389.9

 

 

553.0

 

 

591.3

Carlisle FoodService Products

 

 

206.1

 

 

199.0

 

 

198.4

Corporate (4)

 

 

391.0

 

 

376.2

 

 

753.8

Total

 

$

3,965.8

 

$

3,950.9

 

$

3,754.9

(1)

Includes $141.5 million goodwill and intangible asset impairment. See Note 10 to the Consolidated Financial Statements in Item 8.

(2)

Includes general corporate expenses.

(3)

Prior year amounts were reclassified to reflect the adoption of ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. See Note 1 to the Consolidated Financial Statements in Item 8.

(4)

Consists primarily of cash and cash equivalents, deferred taxes, and other invested assets.

 

Description of Businesses by Segment

 

Carlisle Construction Materials (“CCM” or “Construction Materials”)

 

The Construction Materials segment is a market leader in manufacturing and selling rubber (“EPDM”), thermoplastic polyolefin (“TPO”), and polyvinyl chloride membrane (“PVC”) roofing systems. In addition, CCM markets and sells accessories purchased from third party suppliers. CCM also manufactures and distributes energy‑efficient rigid foam insulation panels for substantially all roofing applications. Roofing materials and insulation are sold together in warranted systems or separately in non‑warranted systems to the new construction, re‑roofing and maintenance, general construction, and industrial markets. Through its coatings and waterproofing operation, this segment manufactures and sells liquid and spray‑applied waterproofing membranes, vapor and air barriers, and HVAC duct sealants and hardware for the commercial and residential construction markets. The majority of CCM’s products are sold through a network of authorized sales representatives and distributors.

 

4


 

CCM operates manufacturing facilities located throughout the United States, its primary market, and in Germany, the Netherlands, and Romania. Insulation facilities are located in Montgomery, New York; Franklin Park, Illinois; Lake City, Florida; Terrell, Texas; Smithfield, Pennsylvania; Tooele, Utah; and Puyallup, Washington. EPDM manufacturing operations are located in Carlisle, Pennsylvania; Greenville, Illinois; Kampen; the Netherlands; and in Hamburg and Waltershausen, Germany. TPO facilities are located in Senatobia, Mississippi, Tooele, Utah; and Carlisle, Pennsylvania. Coatings and waterproofing manufacturing operations include four production facilities in North America. Block molded expanded polystyrene (“EPS”) operations include nine production and fabrication facilities across the United States. CCM also has a PVC manufacturing plant in Greenville, Illinois.

 

Raw materials for this segment include EPDM polymer, TPO polymer, carbon black, processing oils, solvents, asphalt, methylene diphenyldiisocyanate, polyol, polyester fabric, black facer paper, oriented strand board, clay, and various packaging materials. Critical raw materials generally have at least two vendor sources to better assure adequate supply. For raw materials that are single sourced, the vendor typically has multiple processing facilities.

 

Sales and earnings for CCM tend to be somewhat higher in the second and third quarters due to increased construction activity during those periods.

 

The working capital practices for this segment include:

 

(i)

Standard accounts receivable payment terms of 45 days to 90 days.

(ii)

Standard accounts payable payment terms of 30 days to 60 days.

(iii)

Inventories are maintained in sufficient quantities to meet forecasted demand.

 

CCM serves a large and diverse customer base; however, in 2016 two distributor customers represented approximately 34% of this segment’s net sales, but neither customer represented 10% of the Company’s consolidated net sales. The loss of either of these customers could have a material adverse effect on this segment’s net sales and cash flows.

 

This segment faces competition from numerous competitors that produce roofing, insulation, and waterproofing products for commercial and residential applications. The level of competition within this market varies by product line. As one of four major manufacturers in the single‑ply industry, CCM competes through pricing, innovative products, long‑term warranties, and customer service. CCM offers separately‑priced extended warranty contracts on its installed roofing systems, ranging from five years to 40 years and, subject to certain exclusions, covering leaks in the roofing system attributable to a problem with the particular product or the installation of the product. In order to qualify for the warranty, the building owner must have the roofing system installed by an independent authorized roofing contractor trained by CCM to install its roofing systems.

 

Carlisle Interconnect Technologies (“CIT” or “Interconnect Technologies”)

 

The Interconnect Technologies segment is a market leader in designing and manufacturing high‑performance wire, cable, connectors, contacts, and cable assemblies for the transfer of power and data primarily for the aerospace, medical, defense electronics, test and measurement equipment, and select industrial markets. This segment operates manufacturing facilities in the United States, Switzerland, China, Mexico, and the United Kingdom, with the United States, Europe, and China being the primary target markets for sales. Sales are made by direct sales personnel and independent sales representatives.

 

Raw materials for this segment include gold, copper conductors that are plated with tin, nickel, or silver, polyimide tapes, polytetrafluoroethylene (“PTFE”) tapes, PTFE fine powder resin, thermoplastic resins, stainless steel, beryllium copper rod, machined metals, plastic parts, and various marking and identification materials. Key raw materials are typically sourced worldwide and have at least two supplier sources to better assure adequate supply.

 

Sales and earnings of the Interconnect Technologies segment are generally not seasonal in nature.

 

The working capital practices for this segment include:

 

(i)

Standard accounts receivable payment terms of 30 days to 60 days.

5


 

(ii)

Standard accounts payable payment terms of 30 days to 60 days.

(iii)

Inventories are maintained in sufficient quantities to meet forecasted demand. The majority of CIT’s sales are from made‑to‑order products, resulting in inventories purchased on demand.

 

CIT serves a large and diverse customer base; however, in 2016 one customer represented approximately 22% of this segment’s net sales, but did not represent 10% of the Company’s consolidated net sales. The loss of this customer could have a material adverse effect on this segment’s net sales and cash flows.

 

The Interconnect Technologies segment faces competition from numerous competitors within each of the markets it serves. While product specifications, certifications, and life cycles vary by market, the Interconnect Technologies segment primarily positions itself to gain design specification for customer platforms or products with long life cycles and high barriers to entry such as in the aerospace and medical markets that generally have high standards for product certification as deemed by the Federal Aviation Administration (“FAA”) and Food and Drug Administration (“FDA”), respectively. The Interconnect Technologies segment competes primarily on the basis of its product performance and its ability to meet its customers’ highly specific design, engineering, and delivery needs on a timely basis. Relative to many of its competitors that are large multi‑national corporations, the Interconnect Technologies segment retains the ability to remain agile and respond quickly to customer needs and market opportunities.

 

Carlisle Fluid Technologies (“CFT” or “Fluid Technologies”)

 

Acquired in April 2015, the Fluid Technologies segment is a market leader in designing, manufacturing, and selling highly‑engineered liquid and powder finishing equipment and system components primarily in the automotive, automotive refinishing, aerospace, agriculture, construction, marine, and rail industries. The business operates manufacturing and assembly facilities in the United States, Mexico, Brazil, the United Kingdom, Germany, Switzerland, China, and Japan, with approximately 60% of its sales outside the United States. The Fluid Technologies segment manufactures and sells products that are sold under the brand names of Binks®, DeVilbiss®, Ransburg®, BGK®, and MS Powder®. The majority of sales into these industries are made through a worldwide network of distributors, national accounts, integrators, and some direct to end‑user sales. These business relationships are managed primarily through direct sales personnel worldwide.

 

Key raw materials for this segment include carbon and various grades of stainless steel, brass, aluminum, copper, machined metals, carbide, machined plastic parts, and PTFE. Key raw materials are typically sourced worldwide and have at least two vendor sources to better assure adequate supply.

 

Approximately 20% to 25% of CFT’s annual net sales are for the development and assembly of large fluid handling or other application systems projects. Timing of these system sales can result in sales that are higher in certain quarters versus other quarters within the same calendar year. In addition, timing of system sales may cause significant year over year sales variances.

 

The working capital practices for this segment include:

 

(i)

Standard accounts receivable payment terms of 30 days to 90 days.

(ii)

Standard accounts payable payment terms of 30 days to 60 days.

(iii)

Inventories are maintained in sufficient quantities to meet forecasted demand.

 

CFT serves a large and diverse customer base. The loss of any single customer would not have a material adverse effect on this segment’s net sales and cash flows.

 

6


 

The Fluid Technologies segment competes against both regional and international manufacturers. Major competitive factors include innovative designs, the ability to provide customers with lower cost of ownership than its competitors, dependable performance, and high quality at a competitive price. Fluid Technologies’ ability to spray, mix, or deliver a wide range of coatings, applied uniformly in exact increments, is critical to the overall appearance and functionality of the finished product. The segment’s installed base of global customers is supported by a worldwide distribution network with the ability to deliver critical spare parts and other services. Brands that are well recognized and respected internationally, combined with a diverse base of customers, applications, and industries served, positions the Fluid Technologies segment to continue designing patented, innovative equipment and solutions for customers across the globe.

 

Carlisle Brake & Friction (“CBF” or “Brake & Friction”)

 

The Brake & Friction segment consists of off‑highway braking systems and friction products for off‑highway, on‑highway, aircraft, and other industrial applications. CBF also includes the performance racing group which markets and sells high‑performance motorsport braking products. The Brake & Friction segment manufactures and sells products which are sold under several brand names, such as Hawk®, Wellman®, and Velvetouch®. CBF’s products are sold by direct sales personnel to Original Equipment Manufacturers (“OEMs”), mass merchandisers, and various wholesale and industrial distributors around the world, including North America, Europe, Asia, South America, and Africa. Key markets served include construction, agriculture, mining, aircraft, heavy truck, and performance racing. Manufacturing facilities are located in the United States, the United Kingdom, Italy, China, Japan, and India, where we have established a light manufacturing presence.

 

The brake manufacturing operations require the use of various metal products such as castings, pistons, springs, and bearings. With respect to friction products, the raw materials used are fiberglass, phenolic resin, metallic chips, copper and iron powders, steel, custom‑fabricated cellulose sheet, and various other organic materials. Raw materials are sourced worldwide to better assure adequate supply, and critical raw materials generally have at least two vendor sources.

 

The working capital practices for this segment include:

 

(i)

Standard accounts receivable payment terms of 30 days to 60 days.

(ii)

Standard accounts payable payment terms of 30 days to 90 days.

(iii)

Inventories are maintained in sufficient quantities to meet forecasted demand.

 

CBF serves a large and diverse customer base; however, in 2016 one customer represented approximately 18% of this segment’s net sales, but did not represent 10% of the Company’s consolidated net sales. The loss of this customer could have a material adverse effect on this segment’s net sales and cash flows.

 

This segment strives to be a market leader by competing globally against regional and international manufacturers. Few competitors participate in all served markets. A majority participate in only a few of CBF’s served markets on a regional or global basis. Markets served are competitive and the major competitive factors include product performance, quality, product availability, and price. The relative importance of these competitive factors varies by market segment and channel.

 

7


 

Carlisle FoodService Products (“CFS” or “FoodService Products”)

 

The FoodService Products segment is a leading manufacturer, distributor, and seller of commercial foodservice and janitorial products with three main focus markets. CFS is a leading provider of (i) tabletop dining supplies, table coverings, and display serving ware, (ii) food preparation, storage and handling and transport supplies and tools, and (iii) cleaning and sanitation tools and waste handling for restaurants, hotels, hospitals, nursing homes, business and industry work sites, education, and government facilities. CFS’s Dinex brand business is a leading provider of healthcare meal delivery systems for in‑room and mobile dining for acute care hospital patients and senior assisted living residents. CFS’s Sanitary Maintenance Products group is the leading provider of Sparta brand cleaning brushes, floor care supplies, and waste handling for janitorial professionals managing commercial building, industrial, and institutional facilities cleaning and maintenance. On January 9, 2017, we acquired San Jamar, a leading provider of universal dispensing systems and food safety products for foodservice and hygiene applications. San Jamar designs and distributes dispensers for paper towels, tissue, soap and air purification as well as personal and food safety products for commercial and institutional foodservice and sanitary maintenance customers.

 

CFS operates manufacturing facilities in the United States and Mexico. Sales are primarily in North America. CFS’s product line is distributed from three primary distribution centers located in Charlotte, North Carolina; Oklahoma City, Oklahoma; and Batavia, Illinois, to wholesalers, distributors, and dealers. These distributor and dealer customers, in turn, sell to restaurant, hotel, and onsite foodservice operators and sanitary maintenance professionals. Distributors and dealer business relationships are managed through both direct sales personnel and subcontracted manufacturer representatives. With the acquisition of San Jamar, CFS added one additional distribution center in Elkhorn, WI. 

 

Raw materials used by the FoodService Products segment include polymer resins, stainless steel, and aluminum. Key raw materials are sourced nationally from recognized suppliers of these materials.

 

The working capital practices for this segment include:

 

(i)

Standard accounts receivable payment terms of 30 days to 60 days.

(ii)

Standard accounts payable payment terms of 30 days to 90 days.

(iii)

Inventories are maintained in sufficient quantities to meet forecasted demand.

 

The FoodService Products segment serves a large and diverse customer base; however, in 2016 three distributor customers together represented approximately 26% of this segment’s net sales, none of which represented 10% of the Company’s consolidated net sales. The loss of one of these customers could have a material adverse effect on this segment’s net sales and cash flows.

 

The FoodService Products segment is engaged in markets that are generally highly competitive and competes equally on price, service, and product performance.

 

Principal Products

 

The Company’s products are discussed above and in Note 2 to the Consolidated Financial Statements in Item 8.

 

Intellectual Property

 

The Company owns or holds the right to use a variety of patents, trademarks, licenses, inventions, trade secrets, and other intellectual property rights. The Company has adopted a variety of measures and programs to ensure the continued validity and enforceability of its various intellectual property rights.

 

Backlog

 

Backlog of orders generally is not a significant factor in most of the Company’s businesses, as most of the Company’s products have relatively short order‑to‑delivery periods. Backlog of orders was $421.2 million at December 31, 2016 and $389.6 million at December 31, 2015; however, not all of these orders are firm in nature.

 

8


 

Government Contracts

 

At December 31, 2016, the Company had no material contracts that were subject to renegotiation of profits or termination at the election of the U.S. government.

 

Research and Development

 

Research and development activities include the development of new product lines, the modification of existing product lines to comply with regulatory changes, and the research of cost efficiencies through raw material substitution and process improvements. The Company’s research and development expenses were $48.1 million in 2016 compared to $42.8 million in 2015 and $33.8 million in 2014.

 

Environmental Matters

 

See “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental” and Note 11 to the Consolidated Financial Statements in Item 8 for information regarding environmental matters.

 

Employees

 

As of December 31, 2016, the Company had approximately 12,000 employees and also had approximately 1,600 temporary workers. Certain international employees are subject to local work council or collective bargaining agreements. The Company believes the state of its relationship with its employees is generally good.

 

International

 

For foreign net sales and an allocation of the Company’s assets, see Note 2 to the Consolidated Financial Statements in Item 8.

 

NYSE Affirmation

 

On May 19, 2016, D. Christian Koch, the Company’s Chief Executive Officer, submitted to the New York Stock Exchange (the “NYSE”) the Annual CEO Certification and certified therein that he was not aware of any violation by the Company of the NYSE’s Corporate Governance listing standards.

 

Item 1A.  Risk Factors.

 

The Company’s business, financial condition, results of operations, and cash flows can be affected by a number of factors including but not limited to those set forth below, those set forth in our “Forward Looking Statements” disclosure in Item 7, and those set forth elsewhere in this Annual Report on Form 10‑K, any one of which could cause the Company’s actual results to vary materially from recent results or from anticipated future results.

 

Several of the market segments that the Company serves are cyclical and sensitive to domestic and global economic conditions.

 

Several of the market segments in which the Company sells its products are, to varying degrees, cyclical, and may experience periodic downturns in demand. For example, the Brake & Friction segment is susceptible to downturns in the construction, agriculture, and mining industries, the Interconnect Technologies segment is susceptible to downturns in the commercial airline industry, and the Construction Materials segment is susceptible to downturns in the commercial construction industry. In addition, both the Interconnect Technologies segment and the Brake & Friction segment may be negatively impacted by reductions in military spending.

 

9


 

Current uncertainty regarding global economic conditions may have an adverse effect on the businesses, results of operations, and financial condition of the Company and its customers, distributors, and suppliers. Among the economic factors which may affect performance are: manufacturing activity, commercial and residential construction, difficulties entering new markets, and general economic conditions such as inflation, deflation, interest rates, and credit availability. These effects may, among other things, negatively impact the level of purchases, capital expenditures, and creditworthiness of the Company’s customers, distributors, and suppliers, and therefore, the Company’s results of operations, margins, and orders. The Company cannot predict if, when, or how much worldwide economic conditions will fluctuate. These conditions are highly unpredictable and beyond the Company’s control. If these conditions deteriorate, however, the Company’s business, financial condition, results of operations, and cash flows could be materially adversely affected.

 

The Company’s growth is partially dependent on the acquisition and successful integration of other businesses.

 

The Company has a long standing acquisition program and expects to continue acquiring businesses. Typically, the Company considers acquiring small companies in similar industries. Acquisitions of this type involve numerous risks, which may include potential difficulties integrating the business into existing operations; a failure to realize expected growth, synergies, and efficiencies; increasing dependency on the markets served by certain businesses, increased debt to finance the acquisitions or the inability to obtain adequate financing on reasonable terms.

 

The Company also considers the acquisition of businesses that may operate independent of existing operations and could increase the possibility of diverting management’s attention from its existing operations. See “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for acquisition information.

 

The successful integration of our acquired businesses is dependent upon the realization of efficiencies and synergies. If these integration initiatives do not occur, there may be a negative effect on the Company’s business, financial condition, results of operations, and cash flows.

 

If the Company is unable to successfully integrate any acquired business or realize the growth, synergies, and efficiencies that were expected when determining the purchase price, goodwill and other intangible assets acquired may be considered impaired, resulting in an adverse impact on the Company’s results of operations. See “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” for a discussion of factors considered in the subsequent valuation of the Company’s acquired goodwill and intangible assets.

 

The Company has significant concentrations in the commercial construction market.

 

For the year ended December 31, 2016, approximately 56% of the Company’s revenues, and approximately 85% of its EBIT (excluding Corporate expenses and including impairment charges of $141.5 million) were generated by the Construction Materials segment. Construction spending is affected by economic conditions, changes in interest rates, demographic and population shifts, and changes in construction spending by federal, state, and local governments. A decline in the commercial construction market could adversely affect the Company’s business, financial condition, results of operations, and cash flows. Additionally, adverse weather conditions such as heavy or sustained rainfall, cold weather and snow can limit construction activity and reduce demand for roofing materials. Weather conditions can also be a positive factor, as demand for roofing materials may rise after harsh weather conditions due to the need for replacement materials.

 

The Construction Materials segment competes through pricing, among other factors. Increased competition in this segment has, and could, continue to place negative pressure on operating results in future periods.

 

10


 

The Company is subject to risks arising from international economic, political, legal, and business factors.

 

The Company has increased, and anticipates that it will continue to increase, its presence in global markets. Approximately 23% of the Company’s revenues in 2016 were generated outside the United States. The Company expects this percentage will grow as the Company continues to expand its international sales efforts. In addition, to compete globally, all of the Company’s segments have operations outside the United States.

 

The Company’s increasing reliance on international revenues and international manufacturing bases exposes its business, financial condition, operating results, and cash flows to a number of risks, including price and currency controls; government embargoes or foreign trade restrictions; extraterritorial effects of U.S. laws such as the Foreign Corrupt Practices Act; expropriation of assets; war, civil uprisings, acts of terror, and riots; political instability; nationalization of private enterprises; hyperinflationary conditions; the necessity of obtaining governmental approval for new and continuing products and operations, currency conversion, or repatriation of assets; legal systems of decrees, laws, taxes, regulations, interpretations, and court decisions that are not always fully developed and that may be retroactively or arbitrarily applied; cost and availability of international shipping channels; and customer loyalty to local companies.

 

The loss of, or a significant decline in business with, one or more of the Company’s key customers could adversely affect the Company’s business, financial condition, results of operations, and cash flows.

 

The Company operates in several specialty niche markets in which a large portion of the segment’s revenues are attributable to a few large customers. See “Item 1. Business—Overview—Description of Businesses by Segment” for a discussion of customer concentrations by segment. A significant reduction in purchases by one or more of these customers could have a material adverse effect on the business, financial condition, results of operations, or cash flows of one or more of the Company’s segments.

 

Some of the Company’s key customers enjoy significant purchasing power that may be used to exert pricing pressure on the Company. Additionally, as many of the Company’s businesses are part of a long supply chain to the ultimate consumer, the Company’s business, financial condition, results of operations, or cash flows could be adversely affected if one or more key customers elects to in‑source or find alternative suppliers for the production of a product or products that the Company currently provides.

 

Raw Material costs are a significant component of the Company’s cost structure and are subject to volatility.

 

The Company utilizes petroleum‑based products, steel, and other commodities in its manufacturing processes. Raw materials, including inbound freight, accounted for approximately 59% of the Company’s cost of goods sold in 2016. Significant increases in the price of these materials may not be recovered through selling price increases and could adversely affect the Company’s business, financial condition, results of operations, and cash flows. The Company also relies on global sources of raw materials, which could be adversely impacted by unfavorable shipping or trade arrangements and global economic conditions.

 

If the Company or its business partners are unable to adequately protect the Company’s information assets from cyber‑based attacks or other security incidents, the Company’s operations could be disrupted.

 

The Company is increasingly dependent on information technology, including the internet, for the storage, processing, and transmission of its electronic, business‑related, information assets. Cybersecurity incidents are increasing in frequency, evolving in nature and include, but are not limited to, installation of malicious software, unauthorized access to data and other electronic security breaches that could lead to disruptions in our systems, unauthorized release of confidential or otherwise protected information and the corruption of data. The Company leverages its internal information technology infrastructures, and those of its business partners, to enable, sustain, and protect its global business interests. In the event that the Company or its business partners are unable to prevent, detect, and remediate cyber‑based attacks or other security incidents in a timely manner, the Company’s operations could be disrupted or the Company may incur financial or reputational losses arising from the theft, alteration, misuse, unauthorized disclosure, or destruction of its information assets.

11


 

 

Currency fluctuation could have a material impact on the Company’s reported results of business operations.

 

The Company’s global net sales and other activities are translated into U.S. Dollars for reporting purposes. The strengthening or weakening of the U.S. Dollar could result in unfavorable translation effects as the results of transactions in foreign countries are translated into U.S. Dollars. In addition, sales and purchases in currencies other than the U.S. Dollar expose the Company to fluctuations in foreign currencies relative to the U.S. Dollar. Increased strength of the U.S. Dollar will decrease the Company’s reported revenues or margins in respect of sales conducted in foreign currencies to the extent the Company is unable or determines not to increase local currency prices. Likewise, decreased strength of the U.S. Dollar could have a material adverse effect on the cost of materials and products purchased overseas. Many of the Company’s sales that are exported by its U.S. subsidiaries to foreign countries are denominated in U.S. Dollars, reducing currency exposure. However, increased strength of the U.S. Dollar may decrease the competitiveness of our U.S. subsidiaries’ products that are sold in U.S. Dollars within foreign locations.

 

The Company has entered into foreign currency forward contracts to mitigate the exposure of certain of our results of operations and cash flows to such fluctuations. See “Part II—Item 8. Financial Statements and Supplementary Data—Note 19 – Foreign Currency Forward Contracts” for a discussion of these contracts.

 

Dispositions, failure to successfully complete dispositions, or restructuring activities could negatively affect the Company.

 

From time to time, the Company, as part of its commitment to concentrate on its core business, may dispose of all or a portion of certain businesses. Such dispositions involve a number of risks and present financial, managerial, and operational challenges, including diversion of management attention from the Company’s core businesses, increased expense associated with the dispositions, potential disputes with the customers or suppliers of the disposed businesses, potential disputes with the acquirers of the disposed businesses, and a potential dilutive effect on the Company’s earnings per share. If dispositions are not completed in a timely manner there may be a negative effect on the Company’s cash flows and/or the Company’s ability to execute its strategy. 

 

Additionally, from time to time, the Company may undertake consolidation and other restructuring projects in an effort to reduce costs and streamline its operations. Such restructuring activities may divert management attention from the Company’s core businesses, increase expenses on a short‑term basis, and lead to potential disputes with the employees, customers or suppliers of the affected businesses. If restructuring activities are not completed in a timely manner or if anticipated cost savings, synergies, and efficiencies are not realized there may be a negative effect on the Company’s business, financial condition, results of operations, and cash flows.

 

During 2016, the Company implemented cost reduction plans and incurred restructuring and severance charges of $15.5 million, primarily resulting from a reduction in workforce, facility consolidation and relocation, and lease termination costs associated with our Interconnect Technologies segment, Fluid Technologies segment and Corporate office. See “Part II—Item 8. Financial Statements and Supplementary Data—Note 4 – Restructuring” for a discussion of these restructuring programs.

 

The Company’s operations are subject to regulatory risks.

 

Certain products manufactured by our businesses operating in the aerospace and medical markets are subject to extensive regulation by the FAA and FDA, respectively. It can be costly and time‑consuming to obtain and maintain regulatory approvals as well as maintain certifications to supply our products to OEM aerospace customers and to obtain regulatory approvals to market medical devices. Product approvals subject to regulations might not be granted for new devices on a timely basis, if at all. Proposed new regulations or changes to regulations could result in the need to incur significant additional costs to comply. Continued government scrutiny, including reviews of the FDA medical device pre‑market authorization and post‑market surveillance processes, may impact the requirements for our medical device interconnect components. Failure to effectively respond to changes to applicable laws and regulations or comply with existing and future laws and regulations may have a negative effect on the Company’s business, financial condition, results of operations, and cash flows.

 

12


 

 

Item 1B.  Unresolved Staff Comments.

 

None.

 

Item 2.  Properties.

 

The number, location, and size of the Company’s principal properties as of December 31, 2016 are shown on the following chart, by segment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square Footage

 

 

Location

 

 

 

(in millions)

 

 

North

 

 

 

 

 

 

 

No. of

 

 

 

 

Segment

    

America

    

Europe

    

Asia

    

Other

    

Facilities

    

Owned

    

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carlisle Construction Materials

 

21

 

6

 

 -

 

 -

 

27

 

4.3

 

0.8

Carlisle Interconnect Technologies

 

13

 

2

 

3

 

 -

 

18

 

0.7

 

1.0

Carlisle Fluid Technologies

 

7

 

3

 

2

 

2

 

14

 

0.6

 

0.2

Carlisle Brake and Friction

 

4

 

2

 

6

 

 -

 

12

 

0.8

 

0.5

Carlisle FoodService Products

 

8

 

 -

 

 -

 

 -

 

8

 

0.2

 

0.8

Totals

 

53

 

13

 

11

 

2

 

79

 

6.6

 

3.3

 

In addition to the manufacturing plants and warehousing facilities listed above, we lease our corporate offices in Scottsdale, Arizona and in Shanghai, China. We consider our principal properties, as well as the related machinery and equipment, to be well maintained and suitable and adequate for their intended purpose.

 

Item 3.  Legal Proceedings.

 

Information pertaining to legal proceedings can be found in Note 11 to the Consolidated Financial Statements included in this Annual Report, and is incorporated by reference herein.

 

Item 4.  Mine Safety Disclosures.

 

Not applicable.

 

Part II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

The Company’s common stock is traded on the New York Stock Exchange. At December 31, 2016, there were 1,292 shareholders of record.

 

13


 

Quarterly cash dividends paid and the high and low prices of the Company’s stock on the New York Stock Exchange in 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

    

First

    

Second

    

Third

    

Fourth

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.30

 

$

0.30

 

$

0.35

 

$

0.35

Stock Price

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$

99.79

 

$

105.68

 

$

108.49

 

$

115.96

Low

 

$

77.82

 

$

98.38

 

$

98.85

 

$

101.57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

    

First

    

Second

    

Third

    

Fourth

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.25

 

$

0.25

 

$

0.30

 

$

0.30

Stock Price

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$

95.10

 

$

102.26

 

$

104.60

 

$

92.70

Low

 

$

86.79

 

$

91.87

 

$

86.91

 

$

84.11

 

 

The following table summarizes the Company’s purchases of its common stock for the quarter ended December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

Period

    

(a)
Total Number
of Shares
Purchased

    

(b)
Average Price
Paid Per Share

    

(c)
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs

    

(d)
Maximum Number
(or Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
(1)

 

 

 

 

 

 

 

 

 

 

October 2016

 

42,000

 

$

104.04

 

42,000

 

4,919,689

November 2016

 

42,000

 

$

110.87

 

42,000

 

4,877,689

December 2016

 

42,000

 

$

112.64

 

42,000

 

4,835,689

Total

 

126,000

 

 

 

 

126,000

 

 


(1)

Represents the number of shares that can be repurchased under the Company’s stock repurchase program. The stock repurchase program was originally approved on November 3, 1999, and was reactivated on August 17, 2004. At the time of the adoption, the Company had the authority to purchase 741,890 split‑adjusted shares of common stock. The Board of Directors authorized the repurchase of an additional 2,500,000 shares, 1,400,000 shares, and 4,100,000 shares of the Company’s common stock on August 1, 2007, February 12, 2008, and September 12, 2016, respectively.

 

The Company may also reacquire shares outside of the repurchase program from time to time in connection with the forfeiture of shares in satisfaction of tax withholding obligations from the vesting of share‑based compensation. There were no shares reacquired in transactions outside the repurchase program during the three months ended December 31, 2016.

 

 

14


 

Item 6.  Selected Financial Data.

 

Five‑Year Summary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions except for per share data)

    

2016

    

2015

    

2014

    

2013

    

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

3,675.4

 

$

3,543.2

 

$

3,204.0

 

$

2,943.0

 

$

2,851.2

Gross margin

 

 

1,157.3

 

 

1,006.7

 

 

819.5

 

 

745.6

 

 

767.0

Selling & administrative expenses

 

 

532.0

 

 

461.9

 

 

379.0

 

 

353.7

 

 

356.6

Research & development expenses

 

 

48.1

 

 

42.8

 

 

33.8

 

 

29.3

 

 

26.1

Earnings before interest and income taxes

 

 

441.1

 

 

501.9

 

 

408.3

 

 

366.8

 

 

371.9

Income from continuing operations

 

 

250.8

 

 

319.6

 

 

251.7

 

 

235.2

 

 

228.7

Basic earnings per share

 

$

3.87

 

$

4.89

 

$

3.89

 

$

3.69

 

$

3.64

Diluted earnings per share

 

$

3.83

 

$

4.82

 

$

3.83

 

$

3.61

 

$

3.57

Net income

 

 

250.1

 

 

319.7

 

 

251.3

 

 

209.7

 

 

270.2

Basic earnings per share

 

$

3.86

 

$

4.89

 

$

3.89

 

$

3.29

 

$

4.30

Diluted earnings per share

 

$

3.82

 

$

4.82

 

$

3.82

 

$

3.22

 

$

4.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets (1)

 

$

3,965.8

 

$

3,950.9

 

$

3,754.9

 

$

3,488.5

 

$

3,452.2

Long-term debt (1)

 

 

596.4

 

 

595.6

 

 

746.0

 

 

746.5

 

 

747.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

$

84.5

 

$

72.3

 

$

61.2

 

$

53.7

 

$

48.0

Per share

 

$

1.30

 

$

1.10

 

$

0.94

 

$

0.84

 

$

0.76

 

(1)Prior year amounts were reclassified to reflect the adoption of ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. See Note 1 to the Consolidated Financial Statements in Item 8.

 

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

 

Executive Overview

 

We are a multi‑national company that designs, manufactures and sells a wide range of products principally throughout North America, Western Europe, and the Asia Pacific region via the following segments:

 

·

Carlisle Construction Materials (“CCM” or “Construction Materials”);

·

Carlisle Interconnect Technologies (“CIT” or “Interconnect Technologies”);

·

Carlisle Fluid Technologies (“CFT” or “Fluid Technologies”);

·

Carlisle Brake & Friction (“CBF” or “Brake & Friction”); and

·

Carlisle FoodService Products (“CFS” or “FoodService Products”).

 

We are focused on achieving profitable growth in these segments both organically, through new product development, product line extensions, and entering new markets, and through acquisitions of businesses that complement our existing technologies, products, and market channels. We focus on obtaining profitable growth through:

 

·

Year‑over‑year improvement in sales, earnings before interest and income taxes (“EBIT”) margins, net earnings and return on invested capital (“ROIC”);

·

Reduction of working capital (defined as receivables, plus inventories, net of accounts payable) as a percentage of net sales;

·

Globalization; and

15


 

·

Maintenance of a strong and flexible balance sheet.

 

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.

 

A key philosophy in how we drive profitable growth is the Carlisle Operating System (“COS”). COS is a manufacturing structure and strategy deployment system based on lean enterprise and six sigma principles and is a continuous improvement process that defines the way we do business. Waste is eliminated and efficiencies improved enterprise wide. Improvements are not limited to production areas, as COS also drives improvements in new product innovation, engineering, supply chain management, warranty, and product rationalization. COS creates a culture of continuous improvement across all aspects of the Company’s business operations.

 

Another key strategy in driving profitable growth is through acquisitions. We typically acquire businesses that are complementary to our existing segments and can be integrated into them. However, from time to time we may acquire new businesses that operate independently from other segments. Factors we consider in making an acquisition include the ability of the acquired businesses to drive profitable growth in the future by increasing our EBIT margins, operating cash flows, and net earnings. We may also pursue the sale of businesses when it is determined they no longer fit within the Company’s long‑term goals or strategy.

 

Acquisitions

 

On January 31, 2017, we acquired 100% of the equity of Arbo Holdings Limited (“Arbo”) for an estimated cash consideration of $8.9 million. Arbo is a leading provider of sealants, coatings, and membrane systems used for waterproofing and sealing buildings and other structures. The results of operations of the acquired business will be reported within the Construction Materials segment beginning in the first quarter of 2017.

 

On January 9, 2017, we acquired 100% of the equity of San Jamar, Inc., (“San Jamar”), for estimated cash consideration of $217.7 million, subject to a working capital settlement. San Jamar is a leading provider of universal dispensing systems and food safety products for foodservice and hygiene applications. San Jamar enhances the improved operating performance at FoodService Products by adding innovative new products, opportunities to expand our presence in complementary sales channels and adding a history of profitable growth. The results of operations of the acquired business will be reported within the FoodService Products segment beginning in the first quarter of 2017.

 

On October 3, 2016, we acquired 100% of the equity of Star Aviation, Inc. (“Star Aviation”), for total consideration of $82.4 million, net of cash acquired, inclusive of a working capital settlement.  Star Aviation is a leading provider of design and engineering services, testing and certification work and manufactured products for in-flight connectivity applications on commercial, business and military aircraft. Star Aviation complements CIT’s highly specialized engineering and design capabilities in the in-flight connectivity market, where we expect further growth opportunities from the demand for retro-fit and line-fit for satellite connectivity, as well as, development in emerging connectivity technologies. The results of operations of the acquired business are reported within the Interconnect Technologies segment. 

 

On June 10, 2016, we acquired 100% of the equity of Micro-Coax, Inc., and Kroll Technologies, LLC, (collectively “Micro-Coax”) for total consideration of $95.1 million, net of cash acquired, inclusive of a working capital settlement. The acquired business is a provider of high-performance, high frequency coaxial wire and cable, and cable assemblies to the defense, satellite, test and measurement, and other industrial markets.  The results of operations of the acquired business are reported within the Interconnect Technologies segment. 

 

On February 19, 2016, we acquired 100% of the equity of MS Oberflächentechnik AG (“MS Powder”), a Swiss-based developer and manufacturer of powder coating systems and related components, for total consideration of CHF 12.3 million, or $12.4 million, including the estimated fair value of contingent consideration of CHF4.3 million, or $4.3 million. The results of operations of MS Powder are reported within the Fluid Technologies segment.

 

16


 

On April 1, 2015, we acquired the Finishing Brands business from Graco Inc. (“Graco”) for total cash consideration of $598.9 million.  We added a reportable segment, Fluid Technologies, to reflect the acquisition of Finishing Brands. CFT is a global manufacturer and supplier of finishing equipment and systems serving diverse end markets for paints and coatings, including original equipment (“OE”) automotive, automotive refinishing, aerospace, agriculture, construction, marine, rail, and other industrial applications. 

 

We generated $531.2 million in operating cash flows during 2016.  We utilized cash on hand and cash provided by operations to fund acquisitions.

 

Summary of Consolidated Financial Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions, except per share amounts)

    

2016

    

2015

    

Change

    

2015

    

2014

    

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

3,675.4

 

$

3,543.2

 

3.7

%

$

3,543.2

 

$

3,204.0

 

10.6

%

EBIT

 

$

441.1

 

$

501.9

 

(12.1)

%

$

501.9

 

$

408.3

 

22.9

%

EBIT margin

 

 

12.0

 

14.2

%

(220)

bps 

 

14.2

 

12.7

150

bps

Income from continuing operations

 

$

250.8

 

$

319.6

 

(21.5)

%

$

319.6

 

$

251.7

 

27.0

%

Diluted EPS from continuing operations

 

$

3.83

 

$

4.82

 

(20.5)

%

$

4.82

 

$

3.83

 

25.8

%

 

2016 Compared to 2015

 

Net sales increased primarily due to higher net sales volume at Construction Materials, reflecting favorable commercial roofing market conditions, full year sales from the acquired Finishing Brands business and higher sales from Interconnect Technologies, reflecting higher sales volume and contribution from acquisitions. These increases were partially offset by lower net sales at Brake & Friction. Brake & Friction’s results are consistent with reported significant sales declines in the construction, mining and aircraft off-highway equipment sectors.

 

The decrease in EBIT and EBIT margin primarily reflected the impairment of goodwill and other intangible assets at our Brake & Friction segment of $141.5 million. Refer to “Critical Accounting Estimates” in this Management Discussion and Analysis for further discussion. This reduction was partially offset by $79.4 million EBIT growth from the Construction Materials segment due to favorable raw material and pricing dynamics and higher sales volume, and the contribution of a full year of the acquired Finishing brands business within the Fluid Technologies segment.

 

Matters Impacting Future Results

 

For 2017, we expect total net sales growth to be in the high-single digit percent range, led by the performance of our CCM, CIT and CFT segments. Net sales growth is expected to be primarily driven by growth related to strength in the domestic commercial roofing market at the Construction Materials segment, higher demand for aerospace and medical connector applications at the Interconnect Technologies segment, and new products and sales penetration initiatives at the Fluid Technologies segment.

 

2015 Compared to 2014

 

Net sales increased primarily due to a full year of sales from the acquired Finishing Brands and LHi businesses. From the period beginning April 1, 2015 through December 31, 2015, Fluid Technologies contributed net sales of $203.2 million and EBIT of $20.8 million to the Company’s 2015 results. Our organic net sales growth (defined as net sales excluding both sales from acquired businesses within the last twelve months, and the impact of changes in foreign exchange rates) primarily reflected increased sales volumes at Construction Materials and Interconnect Technologies, partially offset by lower sales volume at Brake & Friction and lower selling price. Foreign currency fluctuations had a negative impact to net sales of 1.8%.

 

17


 

EBIT increased primarily due to lower raw material costs, particularly at Construction Materials related to materials that are tied to crude oil as well as related lower energy costs, lower labor and material usage costs from COS, lower per unit costs resulting from higher capacity utilization driven by higher net sales volume, and the aforementioned acquisitions. These positive impacts were partially offset by lower selling price. Our overall EBIT margin increased primarily reflecting lower raw material costs and lower labor and material usage costs from COS. Included in EBIT in 2015 was $10.7 million in costs related to the acquisition of Finishing Brands. By comparison, included in EBIT in 2014 was $9.0 million in plant startup costs at Construction Materials and $3.5 million in costs related to the acquisition of LHi.

 

Results of Operations

 

For a more in-depth discussion of the results discussed in “Executive Overview” and “Summary of Consolidated Financial Results,” please refer to “Financial Reporting Segments” presented later in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

2016 Compared to 2015

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition

 

Volume

 

Price

 

Exchange

 

(in millions)

    

2016

    

2015

    

Change

    

Effect

    

Effect

    

Effect

    

Rate Effect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

3,675.4

 

$

3,543.2

 

3.7

%  

2.6

%  

2.9

%  

(1.6)

%  

(0.2)

%

 

The increase in net sales primarily resulted from higher sales volume at Construction Materials and Interconnect Technologies, partially offset by lower sales volume at Brake & Friction.  The negative impact of price to net sales primarily resulted from lower selling price at Construction Materials and Interconnect Technologies. The increase in net sales from acquired businesses primarily resulted from contribution of $66.6 million from the 2015 acquisition of Finishing Brands and the 2016 acquisition of MS Powder in the Fluid Technologies segment.

2015 Compared to 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition

 

Volume

 

Price

 

Exchange

 

(in millions)

    

2015

    

2014

    

Change

    

Effect

    

Effect

    

Effect

    

Rate Effect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

3,543.2

 

$

3,204.0

 

10.6

%  

8.8

%  

5.0

%  

(1.4)

%  

(1.8)

%

 

The increase in net sales primarily reflected growth due to acquisitions and increased sales volume at Construction Materials and Interconnect Technologies. The acquisition of the Finishing Brands business, reported in the Fluid Technologies segment, contributed $203.2 million, and the acquisition of LHi, reported in the Interconnect Technologies segment, contributed $79.0 million. Organic net sales growth in 2015 reflected higher net sales volume, primarily at Construction Materials, partially offset by lower selling price also from Construction Materials and within Interconnect Technologies. The negative impact from fluctuations in foreign exchange was primarily attributable to the weaker Euro and Canadian Dollar versus the U.S. Dollar, impacting the Construction Materials segment, and the weaker Euro and British Pound versus the U.S. Dollar, impacting the Brake & Friction segment.

 

18


 

Net Sales by Geographic Area

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Region

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

2016

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

    

$
2,835.7

    

77%

    

$
2,659.4

    

75%

 

    

$
2,441.7

    

76%

International:

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

381.8

 

 

 

384.4

 

 

 

 

357.4

 

 

Asia

 

241.9

 

 

 

225.5

 

 

 

 

136.0

 

 

Canada

 

77.2

 

 

 

114.9

 

 

 

 

117.1

 

 

Mexico and Latin America

 

76.1

 

 

 

81.6

 

 

 

 

82.0

 

 

Middle East and Africa

 

42.6

 

 

 

55.7

 

 

 

 

48.7

 

 

Other

 

20.1

 

 

 

21.7

 

 

 

 

21.1

 

 

Total International

 

839.7

 

23%

 

883.8

 

25%

 

 

762.3

 

24%

Net sales

 

$
3,675.4

 

 

 

$
3,543.2

 

 

 

 

$
3,204.0

 

 

 

2016 Compared to 2015

 

Total net sales to customers located outside the United States (“U.S.”) decreased primarily due to reduction of international sales by Construction Materials, largely reflecting declining Canadian sales as a result of reduced construction activity as compared to prior year. Partially offsetting this decline in international sales is the contribution of international sales from the acquisition of the Finishing Brands business reported in the Fluid Technologies segment. The increase of net sales into Asia in 2016 was primarily attributable to Fluid Technologies. Approximately 33% of Fluid Technologies’ net sales were to customers in Asia in 2016.

 

2015 Compared to 2014

 

Total net sales to customers located outside the United States increased primarily due to contribution from the acquisition of the Finishing Brands business reported in the Fluid Technologies segment of $118.7 million. The increase in net sales to customers outside the United States also reflected higher sales volumes at Interconnect Technologies and contribution from the LHi acquisition. These increases were partially offset by the negative impact of foreign exchange fluctuations primarily at Construction Materials and Brake & Friction and lower net sales volume at Brake & Friction and Foodservice Products. The 66% increase in net sales into Asia in 2015 was primarily attributable to the aforementioned acquisitions. Approximately 30% of Fluid Technologies’ net sales were to customers in Asia in 2015.

 

Gross Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

    

2016

    

2015

    

Change

    

2015

    

2014

    

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

$

1,157.3

 

$

1,006.7

 

15.0

%  

$

1,006.7

 

$

819.5

 

22.8

%

Gross margin

 

 

31.5

%  

 

28.4

%  

 

 

 

28.4

%  

 

25.6

%  

 

 

 

2016 Compared to 2015

 

In 2016, the increase in gross margin (gross profit expressed as a percentage of net sales) was primarily driven by lower raw material costs at Construction Materials, savings from COS, and lower per unit costs related to higher capacity utilization driven by higher sales volume. These positive impacts were partially offset by lower selling prices at Construction Materials and Interconnect Technologies. Included in gross profit and gross margin in 2016 was $2.0 million in additional cost of goods sold associated with the fair valuation of acquired inventory in the Interconnect Technologies segment.

 

19


 

2015 Compared to 2014

 

In 2015, the increase in gross margin was primarily driven by lower raw material costs at Construction Materials, lower labor and material usage costs from COS and lower per unit costs related to higher capacity utilization driven by higher sales volume. These positive impacts were partially offset by lower selling prices. Included in gross profit and gross margin in 2015 was $8.6 million in additional cost of goods sold associated with the fair valuation of acquired inventory in the Fluid Technologies segment. Included in gross profit and gross margin in 2014 was $1.6 million in cost of goods sold related to the fair valuation of acquired inventory for the LHi acquisition in the Interconnect Technologies segment, $9.0 million in plant startup and product line closing costs at Construction Materials related to startup of its PVC manufacturing operations and new TPO manufacturing facility, and $0.9 million in expense to discontinue production of Construction Materials’ Insulfoam product line at its Smithfield, Pennsylvania facility.

 

Selling and Administrative Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

    

2016

    

2015

    

Change

    

2015

    

2014

    

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

$

532.0

 

$

461.9

 

15.2

%  

$

461.9

 

$

379.0

 

21.9

%

As a percentage of net sales

 

 

14.5

%  

 

13.0

%  

 

 

 

13.0

%  

 

11.8

%  

 

 

 

2016 Compared to 2015

 

Selling and administrative expense increased primarily due to a full year of expenses from the acquired Finishing Brands business, higher selling costs primarily at Construction Materials on higher net sales volume, higher staffing and performance-based incentive compensation costs at Construction Materials and Interconnect Technologies, and expenses related to our exit and disposal plans during 2016 (refer to Note 4 in Item 8 for further discussion). During 2016, Interconnect Technologies incurred employee termination costs of $7.6 million related to planned growth opportunities and enhancements in its long-term cost competitiveness within certain international operations. Expenses to close certain facilities and relocate administrative functions at Fluid Technologies and Corporate were $4.1 million and $3.8 million, respectively. These increases were partially offset by reduced expenses at the Brake & Friction segment.

 

Selling and administrative expense, as a percentage of sales, increased primarily due to incremental administrative expenses from acquired businesses, principally the Finishing Brands business, as well as exit and disposal costs at Interconnect Technologies, Fluid Technologies, and Corporate.

 

2015 Compared to 2014

 

Selling and administrative expenses increased primarily due to $67.0 million of expense from the acquired Finishing Brands and LHi businesses, higher selling costs primarily at Construction Materials on higher net sales volume, higher expense from increased staffing and performance‑based incentive compensation costs at Construction Materials, and increased Corporate expenses. These increased expenses were partially offset by lower selling and administrative expense costs at Brake & Friction due to lower net sales volume and cost reduction efforts. During 2015, the Company incurred $2.1 million in transaction costs related to the Finishing Brands acquisition, of which $0.7 million was allocated to the Fluid Technologies segment and the remaining $1.4 million allocated to Corporate. By comparison, in 2014, the Company incurred $1.9 million in transaction expenses for the acquisition of LHi in the Interconnect Technologies segment.

 

Selling and administrative expense as a percentage of net sales increased as a result of the Fluid Technologies segment having a higher ratio of selling and administrative expense to net sales versus the other segments, in part due to the amortized cost of acquired intangible assets.

 

20


 

Research and Development Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

    

2016

    

2015

    

Change

    

2015

    

2014

    

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

48.1

 

$

42.8

 

12.4

%  

$

42.8

 

$

33.8

 

26.6

%

As a percentage of net sales

 

 

1.3

%  

 

1.2

%  

 

 

 

1.2

%  

 

1.1

%  

 

 

 

2016 Compared to 2015

 

The increase in research and development expenses reflected increased activities related to new product development, primarily at the Interconnect Technologies segment. The increase also reflected contribution from the acquired Finishing Brands as well as increased new product development activities at the Fluid Technologies segment. These increases were partially offset by reduced expenses at the Brake & Friction segment.

 

2015 Compared to 2014

 

The increase in research and development expenses reflected $4.3 million of expense from acquired operations, as well as, increased activities related to new product development, primarily in the Interconnect Technologies and Construction Materials segments.

 

Impairment of Goodwill and Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

    

2016

    

2015

    

Change

    

2015

    

2014

    

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment of assets

 

$

141.5

 

$

 -

 

n/a

 

$

 -

 

$

 -

 

n/a

As a percentage of net sales

 

 

3.8

%  

 

 -

%  

 

 

 

 -

%  

 

 -

%  

 

 

Our Brake & Friction segment’s net sales continued to decline due to continued weakness in off-highway equipment markets tied to lower demand for commodities.  Recent indicators point to a longer period before Brake & Friction’s markets are expected to recover. Therefore, we recognized impairment charges of $141.5 million in the third quarter of 2016.  Refer to “Critical Accounting Estimates” in this Management Discussion and Analysis for further discussion.

 

Other (Income) Expense, Net