CARLISLE COMPANIES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

Commission file number 1-9278

CARLISLE COMPANIES INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		31-1168055 (I.R.S. Employer Identification No.)
13925 Ballantyne Corporate Place, Suite 400, Charlotte, NC 28277 (Address of principal executive office, including zip code)		704-501-1100 (Telephone Number)

Indicate by check mark whether 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 ý No o

Shares of common stock outstanding at May 1, 2003: 30,644,663

CARLISLE COMPANIES INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings and Comprehensive Income
Three Months ended March 31, 2003 and 2002
(dollars in thousands, except per share amounts)
(unaudited)

		Three Months Ended March 31,
		2003		2002 (Restated)
Net sales		$	475,688	$	455,101
Cost and expenses:
	Cost of goods sold		385,520		371,720
	Selling and administrative expenses		51,941		51,844
	Research and development expenses		4,805		5,160
	Other (income) and expense, net		3,088		1,639

Earnings before interest and income taxes			30,334		24,738
	Interest expense, net		4,630		5,149

Earnings before income taxes and cumulative effect of change in accounting principle			25,704		19,589
Income taxes			8,611		6,758

Income before cumulative effect of change in accounting principle			17,093		12,831
Cumulative effect of change in accounting principle, net of taxes of $12,072			—		(43,753	)

Net income (loss)		$	17,093	$	(30,922	)
Other comprehensive income (loss)
	Foreign currency translation		1,254		(1,373	)
	Gain on hedging activities, net of tax		574		251

Other comprehensive income (loss)			1,828		(1,122	)

Comprehensive income (loss)		$	18,921	$	(32,044	)

Earnings per share—basic
	Income before cumulative effect of change in accounting principle	$	0.56	$	0.42
	Cumulative effect of change in accounting principle		—		(1.44	)

Net income (loss)		$	0.56	$	(1.02	)

Earnings per share—diluted
	Income before cumulative effect of change in accounting principle	$	0.56	$	0.42
	Cumulative effect of change in accounting principle		—		(1.44	)

Net income (loss)		$	0.56	$	(1.02	)

Weighted average common shares outstanding
	Basic		30,608		30,292
	Effect of dilutive stock options		97		142

Diluted			30,705		30,434

Dividends declared and paid per share		$	0.215	$	0.210

See accompanying notes to interim financial statements.

CARLISLE COMPANIES INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2003 and December 31, 2002
(Dollars in thousands)

			March 31, 2003			December 31, 2002
			(unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	28,776		$	34,768
	Receivables, less allowances of $8,137 in 2003 and $9,263 in 2002			181,457			142,622
	Inventories			274,609			248,801
	Deferred income taxes			29,369			29,208
	Prepaid expenses and other current assets			37,165			37,836

		Total current assets		551,376			493,235

Property, plant and equipment, net				444,997			447,986

Other assets:
	Patents, goodwill and other intangible assets, net			303,544			305,624
	Investments and advances to affiliates			59,234			62,123
	Receivables and other assets			18,139			18,659

		Total other assets		380,917			386,406

			$	1,377,290		$	1,327,627

Liabilities and Shareholders' Equity
Current liabilities:
	Short-term debt, including current maturities			79,032		$	53,038
	Accounts payable			157,872			148,608
	Deferred revenue			17,582			15,631
	Accrued expenses			120,423			118,712

		Total current liabilities		374,909			335,989

Long-term liabilities:
	Long-term debt			292,248			293,124
	Deferred revenue			64,109			64,957
	Other liabilities			79,612			80,480

		Total long-term liabilities		435,969			438,561

Commitments and contingencies
Shareholders' equity:
	Preferred stock, $1 par value. Authorized and unissued 5,000,000 shares
	Common stock, $1 par value. Authorized 100,000,000 shares; 39,330,624 shares issued; 30,636,155 outstanding in 2003 and 30,597,869 outstanding in 2002			39,331			39,331
	Additional paid-in capital			23,168			22,908
	Accumulated other comprehensive loss			(7,865	)		(9,691	)
Retained earnings				631,821			621,291
	Cost of shares in treasury—8,694,469 shares in 2003 and 8,732,755 shares in 2002			(120,043	)		(120,762	)

		Total shareholders' equity		566,412			553,077

			$	1,377,290		$	1,327,627

See accompanying notes to interim financial statements.

CARLISLE COMPANIES INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three Months ended March 31, 2003 and 2002
(Dollars in thousands)
(unaudited)

				March 31,
				2003			2002 (Restated)
Operating activities
	Net earnings (loss)			$	17,093		$	(30,922	)
	Reconciliation of net earnings to cash flows:
		Depreciation			14,769			14,986
		Amortization			489			420
		Loss on equity investments			2,635			1,567
		Deferred taxes			—			166
		Goodwill transitional impairment, net of tax			—			43,753
		Gain on sales of property and equipment			—			(27	)
		Changes in assets and liabilities, excluding effects of acquisitions and divestitures:
			Current and long-term receivables		(37,342	)		(20,424	)
			Receivables under securitization program		—			(13,362	)
			Inventories		(24,597	)		2,184
			Accounts payable and accrued expenses		3,603			(8,973	)
			Income taxes		10,068			7,475
			Long-term liabilities		(2,691	)		(215	)
			Other		580			(2,426	)

		Net cash used in operating activities			(15,393	)		(5,798	)

Investing activities
	Capital expenditures				(9,982	)		(10,757	)
	Acquisitions, net of cash				(1,494	)		(1,026	)
	Proceeds from sale of property, equipment and business				—			47
	Other				1,322			(1,798	)

		Net cash used in investing activities			(10,154	)		(13,534	)

Financing activities
	Net change in short-term borrowings and revolving credit lines				25,991			10,865
	Reductions of long-term debt				(855	)		(379	)
	Dividends				(6,560	)		(6,358	)
	Treasury shares and stock options, net				979			1,975

		Net cash provided by financing activities			19,555			6,103

Change in cash and cash equivalents					(5,992	)		(13,229	)
Cash and cash equivalents
	Beginning of period				34,768			32,978

	End of period			$	28,776		$	19,749

See accompanying notes to interim financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2003 and 2002

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Carlisle Companies Incorporated and its wholly-owned subsidiaries (together, the "Company"). Intercompany transactions and balances have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with Article 10 01 of Regulation S X of the Securities and Exchange Commission and, as such, do not include all information required by generally accepted accounting principles for annual financial statements. However, in the opinion of the Company, these financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the financial statements for the interim periods presented herein. Results of operations for the three months ended March 31, 2003, are not necessarily indicative of the operating results for the full year.

While the Company believes that the disclosures presented are adequate to not make the information misleading, it is suggested that these financial statements be read in conjunction with the financial statements and notes included in the Company's 2002 Annual Report to Shareholders and 2002 Form 10 K.

(2) Reclassifications

Certain reclassifications have been made to prior year's information to conform to the current year's presentation. In December 2002, $11.7 million of cash in transit has been reclassified to Accounts Payable. Reclassifications have also been made to the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2002, to display separately the effects of the accounts receivable securitization program (a reduction of $13.4 million), losses in equity investments ($1.6 million), and deferred taxes ($.1 million).

(3) Recently Adopted Accounting Standards

In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates the disclosure requirements to be made by a guarantor in its financial statements about obligations under certain guarantees that it has issued and requires a guarantor to recognize, at inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has adopted the measurement provisions of this interpretation as of January 1, 2003.

(4) Employee Stock-Based Compensation Arrangements

The following table illustrates the effect on Net Income and Earnings Per Share had the Company applied the fair value method of accounting for stock-based employee compensation under Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation.

	Quarter Ended March 31,
In thousands, except per share amounts	Quarter Ended March 31,
In thousands, except per share amounts	2003			2002
Net Income (loss), as reported	$	17,093		$	(30,922	)
Less: Total stock-based employee compensation expense determined under fair value method for all awards net of tax		(1,294	)		(825	)

Proforma net income (loss)	$	15,799		$	(31,747	)

Basic EPS (as reported)	$	0.56		$	(1.02	)

Basic EPS (pro forma)	$	0.52		$	(1.05	)

Diluted EPS (as reported)	$	0.56		$	(1.02	)

Diluted EPS (pro forma)	$	0.51		$	(1.05	)

The pro forma effect includes only the vested portion of options. Options vest over a two year period. Compensation expense was estimated using the Black-Scholes model utilizing the following assumptions: expected dividend yield of 2.3% in 2003 and 2002; an expected life of 7 years; expected volatility of 28.7% in 2003 and 28.6% in 2002; and risk free interest rate of 3.8% in 2003 and 5.2% in 2002. The weighted-average fair value of those stock options granted in 2003 and 2002 was $11.31 and $10.58, respectively.

(5) Inventory

The components of inventories are as follows:

In thousands	March 31 2003			December 31 2002
FIFO (approximates current costs):
Finished goods	$	183,377		$	162,213
Work in process		23,942			21,004
Raw materials		79,385			77,776

		286,704			260,993
Excess FIFO cost over LIFO value		(12,095	)		(12,192	)

	$	274,609		$	248,801

(6) Goodwill and Other Intangible Assets

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. The provisions of this standard required the Company to cease the amortization of goodwill and other intangible assets with indefinite lives and instead test such assets, on at least an annual basis, for impairment. Based on the initial review of its reporting units, in the fourth quarter of 2002, the

Company recognized an after tax impairment loss of $43.8 million retroactive to January 1, 2002, shown as cumulative effect of a change in accounting principle. Original reported results of operations in the first quarter of 2002 did not include this charge. Based on the requirements of SFAS 142, the Condensed Consolidated Statement of Earnings and Comprehensive Income and the Condensed Consolidated Statement of Cash Flows have been restated.

The changes in the carrying amount of goodwill for the quarter ended March 31, 2003, are as follows:

In thousands	Industrial Components		Construction Materials			Automotive Components		Transportation Products		Specialty Products		General Industry			Total
Balance as of
January 1, 2003	$	130,368	$	33,113		$	40,277	$	—	$	2,732	$	90,207		$	296,697
Purchase accounting
adjustments		—		(1,815	)		—		—		—		—			(1,815	)
Other adjustments		116		236			—		—		22		(354	)		20

Balance as of
March 31, 2003	$	130,484	$	31,534		$	40,277	$	—	$	2,754	$	89,853		$	294,902

The Company's acquired other intangible assets as of March 31, 2003, are as follows:

In thousands		Acquired Cost		Accumulated Amortization			Net Book Value
Assets subject to amortization
	Patents	$	9,462	$	(7,377	)	$	2,085
	Software license		1,800		(407	)		1,393
	Tradename		1,500		(475	)		1,025
	Other		10,990		(10,851	)		139
Assets not subject to amortization
	Trademark		4,000		—			4,000

		$	27,752	$	(19,110	)	$	8,642

Estimated amortization expense for each of the next five years is as follows: $1.0 million in 2003, $0.9 million in 2004, $0.7 million in 2005, $0.6 million in 2006, and $0.4 million in 2007.

(7) Commitments and Contingencies

The Company is obligated under various noncancelable operating leases for certain facilities and equipment. Future minimum lease payments under these arrangements in each of the next five years are approximately $9.8 million remaining in 2003, $11.2 million in 2004, $9.7 million in 2005, $8.6 million in 2006, $6.6 million in 2007, and $19.7 million thereafter.

At March 31, 2003, letters of credit amounting to $34.1 million were outstanding, primarily to provide security under insurance arrangements and certain borrowings.

The Company has financial guarantees in place for certain of its operations in Asia and Europe to facilitate working capital needs, customer performance and payment and warranty obligations. At

March 31, 2003, the Company had guaranteed $6.2 million which is included in current liabilities in the Company's Condensed Consolidated Balance Sheet. The fair value of these guarantees is estimated to equal the amount of the guarantees at March 31, 2003, due to their short term nature.

The change in the Company's aggregate product warranty liabilities for March 31, 2003 is as follows:

In thousands
In thousands
Beginning reserve	$	9,045
Current year provision		2,377
Current year claims		(3,033	)

Ending reserve	$	8,389

The Company maintains self retained liabilities for workers' compensation, medical and dental, general liability, property, and product liability claims up to applicable retention limits. The Company is insured for losses in excess of these limits.

The Company may be involved in various legal actions from time to time arising in the normal course of business. In the opinion of management, there are no matters outstanding that would have a material adverse effect on the consolidated financial position or results of operations of the Company.

(8) Derivative Instruments and Hedging Activities

Carlisle is exposed to the impact of changes in interest rates and market values of its debt instruments, changes in raw material prices and foreign currency fluctuations. From time to time, the Company may manage its interest rate exposure through the use of interest rate swaps to reduce volatility of cash flows, impact on earnings and to lower its cost of capital. As of March 31, 2003, the Company had no derivative contracts outstanding to hedge this risk. On April 11, 2003, the Company executed $75 million notional amount interest rate swaps, which have been designated as fair value hedges. The purpose of these contracts is to hedge the market risk associated with its fixed rate debt. These fair value hedges have been deemed effective at the origination date.

(9) Segment Information

Beginning in the first quarter 2003, Carlisle's custom molder of thermoset plastic components operation was included in the Specialty Products segment to reflect the change in reporting responsibility and the realignment of manufacturing processes. This operation was previously included in the General Industry (All Other) segment. Prior year information has been revised to reflect this change. The first quarter 2002 financial information for this operation included: net sales, $4.6 million; EBIT (Earnings Before Interest & Taxes), $.1 million; and assets, $10.2 million.

Financial information for operations by reportable business segment is included in the following summary:

March 2003—YTD Segment Information Table

In thousands	Sales		EBIT			Assets
Industrial Components	$	165,270	$	19,112		$	460,663
Construction Materials		98,439		6,312			266,619
Automotive Components		56,336		3,147			122,421
Specialty Products		31,615		1,349			85,844
Transportation Products		28,087		916			54,956
General Industry (All other)		95,941		4,997			310,721
Corporate		—		(5,499	)		76,066

	$	475,688	$	30,334		$	1,377,290

March 2002—YTD Segment Information Table

In thousands	Sales		EBIT			Assets
Industrial Components	$	158,463	$	16,758		$	514,851
Construction Materials		84,941		7,792			240,483
Automotive Components		62,796		4,138			137,637
Specialty Products		30,513		(25	)		89,863
Transportation Products		27,560		239			58,876
General Industry (All other)		90,828		756			315,161
Corporate		—		(4,920	)		34,871

	$	455,101	$	24,738		$	1,391,742

Management's Discussion and Analysis of
Financial Condition and Results of Operations

Carlisle reported first quarter net earnings of $17.1 million, or $.56 per share (diluted) on record first quarter net sales of $475.7 million, a 5% increase over $455.1 million reported last year and 3% above the previous first quarter net sales record of $463.2 million in 2001. First quarter 2003 net earnings were 33% above the $12.8 million, or $.42 per share (diluted), realized in the first quarter 2002, before the impact of a change in accounting principle required under SFAS 142. The implementation of SFAS 142 in 2002 resulted in a $43.8 million (net of income tax) reduction in the carrying value of goodwill and a charge to net earnings of $1.44 per share (diluted). The change in accounting principle, which was effective January 1, 2002, resulted in a net loss of $(30.9) million or $(1.02) per share in the first quarter 2002.

The $20.6 million growth in net sales in the first quarter 2003 included $18.1 million of organic net sales growth, primarily in the Industrial Components and General Industry segments. Acquisitions, primarily in the Construction Materials segm