CHARLOTTE, N.C.—Carlisle Companies Inc. wants to leave its historic roots as a tire maker, and is exploring the potential sale of its Transportation Products segment because it doesn't meet the company's profit margin targets.
Carlisle, in its second quarter financial results released July 23, said it has engaged SunTrust Robinson Humphrey Inc. of Atlanta as financial adviser to assist in evaluating strategic alternatives for the business unit. Though Carlisle officials didn't say the business definitely will be jettisoned, stock analysts project such a sale could bring the Charlotte-based firm a price in the range of $350 million to $450 million.
Included in the Carlisle Trans¬por¬tation Products division are the company's tire and wheel business and power transmission belting unit. The segment's second-quarter sales dropped 2.7 percent to $203.5 million, with first-half revenue off 4.5 percent to $430 million. It posted an $86.8 percent loss on earnings before interest and income taxes for the quarter, and a $72.3 million loss for the last six months.
The EBIT numbers, however, were skewed because Carlisle took a non-cash pretax loss of $100 million in the quarter to account for "goodwill impairment," reflecting management's decision to reduce the unit's estimated fair value based on the recent increase in interest rates.
During 2012, Transportation Products had sales of $778.2 million, with EBIT of $52.4 million, or a 6.7-percent earnings margin. That compares to the 15-percent target that David Roberts, Carlisle chairman, CEO and president, outlined as the firm's standard during a conference call with analysts.
Carlisle was founded in 1917 in Carlisle, Pa., as a tire manufacturer. The firm's tire and wheel product line includes bias-ply, steel-belted radial trailer tires, stamp¬- ed or roll-formed steel wheels, non-automotive rubber tires, and tire and wheel assemblies. The power transmission product line includes industrial belts and related components.
"I just want to say the decision to retain an investment banker to explore strategic alternative for Transportation Products was not an easy decision," Roberts said in the conference call. "Carlisle owes our very existence to the tire manufacturing business. … Despite our origins being embedded in the tire business, our strategic objectives have changed for the business over the past six years."
Carlisle has invested considerable resources in the division in recent years and results have improved, he said, but still not to the extent hoped for. The restructuring dates back to 2009, when it consolidated 19 distribution centers in the U.S. and Canada into nine. It also merged its three wheel manufacturing plants in California into one.
Other efforts included consolidating tire manufacturing operations into a new facility in Jackson, Tenn.; and closing its Buji, China, plant, moving tire production at the site to a facility in Meizhou, China, and belt manufacturing back to existing factories in Kansas and Missouri.
"We've invested in CTP and given it every opportunity to be a core business, but it just doesn't have the characteristics that fit with our overall corporate goals," Roberts said.
Despite the fact that it no longer fits into Carlisle's future plans, the CEO said he still believes it has a strong future.
"Our replacement tire business will be the main driver of sales, and earnings should be similar to our profitability in the past in the second half of the year," he said. "I believe that 2014 will be a good year for CTP."
But he still doesn't see it as a business that likely ever will post a margin above 9-10 percent. "And frankly, as I said, that just doesn't meet the criteria that we expect out of our businesses," Ro¬berts said. "It's a good tire business. It's just not a good business for what our expectations are at Carlisle."
Process going forward
The Carlisle executive said the firm has had some inquiries about the business, but thinks the process with SunTrust Robinson Humphrey could take up to nine months to complete. He is, however, optimistic that a buyer for the business can be found.
"It is time to think about a new home for the business," Roberts said. "I am confident there is a strategic or private equity buyer out there that will benefit from the hard work that the Transportation Products management team has put into this business."
Roberts said with the investments Carlisle has made, the plants are in stellar condition and the unit is on "its road to recovery."
After the $100 million write-down, Car¬lisle placed the "book value" on the business at about $350 million, according to Chief Financial Officer Steven Ford.
Neil Frohnapple, a securities analyst with Northcoast Research, said he could see the CTP business bringing in from $350 million to $400 million, with the most likely buyer a private equity firm. He based his estimate on multiples of five to six times EBITA that other firms brought in recent mergers and acquisitions activity.
"They'll try to get at least book value," he said. "It generates solid cash."
Company officials have been somewhat disappointed that its restructuring efforts didn't do a better job of boosting the unit's margins, Frohnapple said, so now is a good time to shop it with the business showing some financial improvement.
"The time to sell and monetize the assets is when things are improving," he said, noting that the transportation business would make it difficult for Carlisle as a whole to meet its objective of a 15-percent profit margin.
Ivan Marcuse, analyst with KeyBanc Capital Markets, estimated that Car¬lisle could get $400 million to $450 million for CTP, according to a note he published after the conference call. He based the projection on the 5.5 times EBITA that Apollo Tyres Ltd. has agreed to pay for Cooper Tire & Rubber Co.
He said Carlisle's "more modern and non-union factories coupled with its market position in its niche specialty tire markets and improving outlook makes it a more attractive asset than Cooper."
Asked during the conference call about the possibility of selling the unit's tire, wheel and belting businesses separately, Roberts said: "At this point, we would want to sell the entire business. I don't think we'd ever separate wheels and tires.
"There's been some conversation about could we sell the belt business separately. It is a free-standing business compared to the tire business. That's an option for us. But as of today, we want to market the entire business."
If Carlisle is successful in finding a buyer, Roberts said the first option for the proceeds would be to reinvest in another core business that would have similar characteristics to its Construction Materials, Interconnect Technologies, and Brake and Friction segments. The Construction Materials unit, which includes its rubber roofing business, is by far the company's largest, with its $490.5 million in second-quarter sales representing nearly half of revenues.
"If we are unsuccessful in finding a new core business in the short term, we will consider other alternatives that will create shareholder value, which would include share repurchases," he said.
Bruce Davis of Tire Business contributed to this report.