SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x                  QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

 

OR

 

o                     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

Commission file number 1-9278

 

CARLISLE COMPANIES INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware

 

31-1168055

(State or other jurisdiction of
incorporation or organization)

 

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

 

13925 Ballantyne Corporate Place, Suite 400, Charlotte, North Carolina 28277

 

(704) 501-1100

(Address of principal executive office, including zip code)

 

(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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x    Accelerated filer o    Non-accelerated filer o

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

Shares of common stock outstanding at November 1, 2006: 30,847,406

 




 

Carlisle Companies Incorporated

Consolidated Statements of Earnings and Comprehensive Income
For the Three and Nine Months ended September 30, 2006 and 2005
(In thousands, except per share amounts)
(Unaudited)

 

 

Three Months Ended
September 30,

 

Nine Months ended
September 30,

 

 

 

2006

 

2005*

 

2006

 

2005*

 

Net Sales

 

$

648,446

 

$

545,389

 

$

1,960,990

 

$

1,673,522

 

 

 

 

 

 

 

 

 

 

 

Cost and expenses:

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

519,102

 

439,804

 

1,557,591

 

1,336,850

 

Selling and administrative expenses

 

59,559

 

51,346

 

180,622

 

161,357

 

Research and development expenses

 

3,726

 

3,874

 

11,311

 

11,607

 

Other income, net

 

(3,448

)

(2,518

)

(5,708

)

(1,753

)

Earnings before interest and income taxes

 

69,507

 

52,883

 

217,174

 

165,461

 

Interest expense, net

 

5,308

 

4,271

 

14,927

 

12,309

 

Earnings before income taxes

 

64,199

 

48,612

 

202,247

 

153,152

 

Income tax expense

 

20,819

 

12,586

 

64,590

 

46,156

 

Income from continuing operations

 

43,380

 

36,026

 

137,657

 

106,996

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

(6,778

)

(24,216

)

(2,752

)

(37,243

)

Income tax benefit

 

(1,946

)

(7,893

)

(865

)

(12,884

)

Loss from discontinued operations

 

(4,832

)

(16,323

)

(1,887

)

(24,359

)

Net Income

 

38,548

 

19,703

 

135,770

 

82,637

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Foreign currency translation, net of tax

 

22

 

382

 

7,054

 

(11,595

)

Minimum pension liability, net of tax

 

 

(799

)

 

(799

)

Gain (loss) on hedging activities, net of tax

 

(1,942

)

3,665

 

2,891

 

36

 

Other comprehensive income (loss)

 

(1,920

)

3,248

 

9,945

 

(12,358

)

Comprehensive income

 

$

36,628

 

$

22,951

 

$

145,715

 

$

70,279

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.41

 

$

1.18

 

$

4.50

 

$

3.47

 

Loss from discontinued operations

 

(0.15

)

(0.54

)

(0.06

)

(0.79

)

Earnings per share - basic

 

$

1.26

 

$

0.64

 

$

4.44

 

$

2.68

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - diluted

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.39

 

$

1.17

 

$

4.43

 

$

3.43

 

Loss from discontinued operations

 

(0.15

)

(0.53

)

(0.06

)

(0.78

)

Earnings per share - diluted

 

$

1.24

 

$

0.64

 

$

4.37

 

$

2.65

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

30,679

 

30,593

 

30,589

 

30,836

 

Effect of dilutive stock options and restricted stock

 

422

 

302

 

498

 

357

 

Diluted

 

31,101

 

30,895

 

31,087

 

31,193

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per share

 

$

0.270

 

$

0.250

 

$

0.770

 

$

0.710

 

 


* 2005 figures have been revised to reflect discontinued operations.  See notes 2 and 6.

See accompanying notes to Unaudited Condensed Consolidated Financial Statements

2




 

Carlisle Companies Incorporated

Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
(In thousands, except per share and share amounts)

 

 

 

September 30,
2006

 

December 31,
2005*

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

44,717

 

$

38,745

 

Trade receivables, less allowance of $9,704 in 2006 and $11,373 in 2005

 

396,867

 

162,959

 

Inventories

 

366,120

 

334,711

 

Deferred income taxes

 

34,553

 

35,172

 

Prepaid expenses and other current assets

 

29,608

 

21,946

 

Current assets held for sale

 

57,373

 

67,639

 

Total current assets

 

929,238

 

661,172

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation of $487,311 in 2006 and $456,111 in 2005

 

457,561

 

431,996

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Goodwill, net

 

317,551

 

323,588

 

Patents and other intangible assets, net

 

13,382

 

7,619

 

Investments and advances to affiliates

 

92,854

 

86,611

 

Notes receivable and other assets

 

6,025

 

5,826

 

Non-current assets held for sale

 

44,467

 

46,445

 

Total other assets

 

474,279

 

470,089

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,861,078

 

$

1,563,257

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term debt, including current maturities

 

$

177,699

 

$

57,993

 

Accounts payable

 

157,571

 

127,558

 

Accrued expenses

 

135,615

 

133,494

 

Deferred revenue

 

13,091

 

11,863

 

Current liabilities associated with assets held for sale

 

46,887

 

41,803

 

Total current liabilities

 

530,863

 

372,711

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Long-term debt

 

275,261

 

282,426

 

Deferred revenue

 

79,624

 

73,872

 

Other long-term liabilities

 

98,177

 

103,039

 

Non-current liabilities associated with assets held for sale

 

2,258

 

970

 

Total long-term liabilities

 

455,320

 

460,307

 

 

 

 

 

 

 

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; 30,705,056 outstanding in 2006 and 30,357,476 in 2005

 

39,331

 

39,331

 

Additional paid-in capital

 

69,598

 

53,081

 

Unearned compensation - includes restricted shares of 142,350 in 2006 and 108,960 in 2005

 

(4,282

)

(3,420

)

Cost of shares in treasury - 8,483,218 shares in 2006 and 8,864,188 shares in 2005

 

(166,529

)

(173,493

)

Accumulated other comprehensive income

 

12,762

 

2,815

 

Retained earnings

 

924,015

 

811,925

 

Total shareholders’ equity

 

874,895

 

730,239

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

1,861,078

 

$

1,563,257

 

 


* 2005 figures have been revised to reflect discontinued operations.  See notes 2 and 6.

See accompanying notes to Unaudited Condensed Consolidated Financial Statements

3




 

Carlisle Companies Incorporated

Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 2006 and 2005
(Dollars in thousands)

 

 

 

September 30,

 

 

 

2006

 

2005*

 

Operating activities

 

 

 

 

 

Net income

 

$

135,770

 

$

82,637

 

Reconciliation of net income to cash flows from operating activities:

 

 

 

 

 

Depreciation

 

41,563

 

41,545

 

Amortization

 

2,136

 

952

 

Non-cash compensation

 

5,478

 

1,529

 

Excess tax benefits from share based compensation

 

(4,141

)

 

Earnings in equity investments

 

(1,957

)

(389

)

Loss on investments, property and equipment, net

 

8,149

 

30,815

 

Deferred taxes

 

2,197

 

3,869

 

Foreign exchange loss

 

 

1,634

 

Changes in assets and liabilities, excluding effects of acquisitions and divestitures:

 

 

 

 

 

Current and long-term receivables

 

(87,630

)

(2,108

)

Receivables under securitization program

 

(137,900

)

2,900

 

Inventories

 

(31,221

)

(26,132

)

Accounts payable and accrued expenses

 

40,708

 

(24,187

)

Income taxes

 

(11,658

)

3,808

 

Long-term liabilities

 

5,447

 

3,636

 

Other operating activities

 

(1,170

)

(1,797

)

Net cash (used in) provided by operating activities

 

(34,229

)

118,712

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(72,871

)

(81,130

)

Acquisitions, net of cash

 

(1,875

)

(28,339

)

Proceeds from investments, property and equipment

 

3,993

 

18,676

 

Other investing activities

 

1,188

 

967

 

Net cash used in investing activities

 

(69,565

)

(89,826

)

Financing activities

 

 

 

 

 

Net change in short-term borrowings and revolving credit lines

 

(30,681

)

83,015

 

Proceeds from long-term debt and industrial development and revenue bonds

 

148,875

 

 

Reductions of long-term debt and industrial development and revenue bonds

 

(6,285

)

(1,762

)

Dividends

 

(23,680

)

(21,954

)

Proceeds from hedging activities

 

5,643

 

 

Excess tax benefits from share based compensation

 

4,141

 

 

 

Treasury shares and stock options, net

 

13,279

 

(31,530

)

Other financing activities

 

(1,238

)

1,486

 

Net cash provided by financing activities

 

110,054

 

29,255

 

Effect of exchange rate changes on cash

 

(288

)

(528

)

Change in cash and cash equivalents

 

5,972

 

57,613

 

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

38,745

 

25,018

 

End of period

 

$

44,717

 

$

82,631

 

 


* 2005 has been revised to combine cash flows of discontinued operations.  See Notes 2 and 6.

See accompanying notes to Unaudited Condensed Consolidated Financial Statements

4




 

Notes to Unaudited Consolidated Financial Statements
Three and Nine Months Ended September 30, 2006 and 2005

(1) Basis of Presentation

The accompanying unaudited 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 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 normal recurring adjustments, necessary to present fairly the financial statements for the interim periods presented herein.  Results of operations for the three and nine months ended September 30, 2006, are not necessarily indicative of the operating results for the full year.

While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the financial statements and notes included in the Company’s 2005 Form 10-K.

(2) Reclassifications and Restatements

Certain reclassifications have been made to the three and nine months ending September 30, 2005 information to conform to the current year’s presentation.

Consolidated Balance Sheets have been restated to reflect discontinued operations.

Consolidated Statements of Earnings and Comprehensive Income have been restated to reflect the effects of discontinued operations.  Segment information presented in note 14 has also been restated from prior year’s September 30, 2005 presentation to reflect the Company’s current segment reporting structure, discontinued operations and assets held for sale.  See notes 6 and 14 for additional detail regarding discontinued operations and the Company’s segment reporting structure, respectively.

Consolidated Statements of Cash Flows combine cash flows from discontinued operations with cash flows from continuing operations within each cash flow statement category, which at September 30, 2005 were reported on a combined basis as a single amount.

(3) New Accounting Pronouncements

New accounting standards adopted

In January 2006, the Company adopted SFAS No. 123(R) (“SFAS 123(R)”), Share Based Payment.  This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.  SFAS 123(R) requires the expensing of all share-based payments, including the issuance of stock options, based on the fair value of the award at the grant date.  Additionally, the new standard requires the use of a fair-value measurement methodology which takes into consideration the special nature of its awards, including early exercise provisions.  The new standard also specifies that excess income tax benefits related to

5




 

share-based compensation expense recognized directly in equity are considered financing rather than operating cash flow activities.

The Company adopted this standard using the modified prospective method as provided by SFAS 123(R).  This method requires the expensing of share-based awards issued on or after the date of adoption as well as the unvested portion of awards issued before the date of adoption (see note 4).  The Company is using the Black-Scholes method for measuring the fair value of new awards.

In January 2006, the Company adopted Statement of Financial Accounting Standard No. 151 (“SFAS 151”), Inventory Costs – An Amendment of ARB No. 43, Chapter 4.  This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage).  Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Adoption of this standard had no material impact on the Company’s statement of earnings or financial position.

In January 2006, the Company adopted SFAS No. 153 (“SFAS 153”), Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29.  SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.  Adoption of this standard had no material impact on the Company’s statement of earnings or financial position.

In January 2006, the Company adopted SFAS No. 154 (“SFAS 154”), Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle.  This statement applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.  SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Retrospective application is defined by the statement as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity.  This statement also requires that a change in the depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate affected by a change in accounting principle.  Adoption of this standard had no material impact on the Company’s statement of earnings or financial position.

New accounting standards

In February 2006, FASB issued SFAS No. 155 (“SFAS 155”), Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statement No. 133 and 140.  SFAS 155 permits hybrid financial instruments that have embedded derivatives to be valued as a whole, eliminating the need to bifurcate the derivative from its host, as previously required under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedge Accounting (“SFAS 133”). SFAS 155 also amends SFAS 133 by establishing a requirement to evaluate interests in securitized financial assets to determine whether they are free standing derivatives or whether they contain

6




 

embedded derivatives that require bifurcation. SFAS 155 is effective for all hybrid financial instruments acquired or issued by the Company on or after January 1, 2007.  Adoption of SFAS 155 is not expected to have a material effect on the Company’s statement of earnings or financial position.

In June 2006, the FASB issued FIN No. 48 Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109.  This interpretation clarifies the accounting and financial statement reporting for uncertainty in income taxes recognized by prescribing a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return.  The interpretation is effective for fiscal years beginning after December 15, 2006 and is required to be adopted by the Company as of January 1, 2007.  The Company has not yet completed its analysis of the effects of this interpretation.

In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), Fair Value Measurements.  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  It will be effective for fiscal years beginning after November 15, 2007.  Adoption of SFAS 157 is not expected to have a material effect on the Company’s statement of earnings or financial position.

In September 2006, the FASB issued SFAS No. 158 (“SFAS 158”), Employers Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).  SFAS 158 requires a Company to recognize the overfunded or underfunded status of its defined benefit postretirement plans (other than a multiemployer plans), measured as of the Company’s year end, as assets or liabilities in its statement of financial position and to recognize changes in that funded status, net of tax, in the year in which the changes occur through comprehensive income.  This Statement will require that the projected benefit obligation be used to measure unfunded liabilities instead of the accumulated benefit obligation for defined benefit plans.  Also, companies will be required to measure the unfunded liability for retiree medical plans using the accumulated postretirement benefit obligation while in the past there were no minimum liability requirements.  This Statement is effective for all fiscal years ending after December 15, 2006 and is required to be adopted by the Company in its year end financial statements. Adoption of SFAS 158 is expected to reduce the Company’s accumulated other comprehensive income by approximately $3.5 million and result in additional pension liabilities of approximately $5.7 million and a change in deferred taxes of approximately $2.2 million.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”).  SAB 108 expresses the staff’s views regarding the process of quantifying financial statement misstatements.  Based on SAB 108, prior year misstatements should be considered in quantifying misstatements in current year financial statements.  SAB 108 provides approaches to be used to quantify any misstatements.  It will be effective for fiscal years beginning after November 15, 2006.  Adoption of SAB 108 is not expected to have a material effect on the Company’s statement of earnings or financial position.

(4) Employee Stock-Based Compensation Arrangements

Stock Options

The Company adopted SFAS 123(R) as of January 1, 2006, and as such, accounts for awards of stock-based compensation based on the fair-value method.  Compensation expense related to the adoption of SFAS 123(R) and stock options granted resulted in expense of $0.6 million pre-tax, or $0.4 million after-tax ($0.01 per share, basic and diluted) for the three months ended September 30, 2006 and $3.0

7




 

million pre-tax, or $2.1 million after-tax ($0.07 per share, basic and diluted) for the nine months ended September 30, 2006.

Under SFAS 123(R), excess income tax benefits related to share-based compensation expense that must be recognized directly in equity are considered financing rather than operating cash flow activities.  The amount of financing cash flows for these benefits was $4.1 million for the nine months ended September 30, 2006.

Compensation cost for stock options granted during the nine months ended September 30, 2006, was estimated using the Black-Scholes model with the following assumptions:

 

2006

 

Expected dividend yield

 

1.4%

 

Expected life in years

 

5.65

 

Expected volatility

 

25.7%

 

Risk-free interest rate

 

4.6% - 5.0%

 

Weighted average fair value

 

$19.27

 

 

The expected life of options is based on the assumption that all outstanding options will be exercised at the midpoint of the valuation date and the option expiration date.  The expected volatility is based on historical volatility as well as implied volatility of the Company’s publicly traded options.  The risk free interest rate is based on rates of US Treasury issues with a remaining life equal to the expected life of the option.  The expected dividend yield is based on the projected annual dividend payment per share, divided by the stock price at the date of grant.

Stock options generally vest one-third upon grant and one-third upon each subsequent anniversary of the grant date.  Compensation expense for stock options is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award.  Unrecognized compensation cost related to stock options of $1.5 million at September 30, 2006 is to be recognized over a weighted- average period of 1.3 years.

The following table summarizes the stock option activity for the nine months ended September 30, 2006.

Options

 

Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contract
Term
(Years)

 

Aggregate
Intrinsic
Value

 

 

 

(In Thousands)

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding At January 1, 2006

 

1,149

 

$

48.23

 

 

 

 

 

Granted

 

189

 

$

68.99

 

 

 

 

 

Exercised

 

(343

)

$

40.71

 

 

 

 

 

Forfeited

 

(5

)

$

55.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2006

 

990

 

$

54.73

 

6.49

 

$

28,821

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2006

 

842

 

$

52.35

 

5.97

 

$

26,489

 

 

8




 

The total intrinsic value of options exercised during the nine months ended September 30, 2006 was $13.3 million.

Prior to 2006, the Company accounted for awards of stock-based employee compensation based on the intrinsic value method under the Accounting Principles Board Opinion 25.  As such, no stock-based compensation is recorded in the determination of Net Income, as options granted have an option price equal to the market price of the underlying stock on the grant date.  The following table illustrates the effect on Net Income and Earnings per share (“EPS”) had the Company applied the fair value method of accounting for stock-based employee compensation under SFAS 123, Accounting for Stock-Based Compensation.

In thousands (except per share data)

 

Three Months Ended
September 30,
2005

 

Nine Months Ended
September 30,
2005

 

Net Income, as reported

 

$

19,703

 

$

82,637

 

Less: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects

 

(790

)

(2,376

)

Proforma net income

 

$

18,913

 

$

80,261

 

 

 

 

 

 

 

Basic EPS (as reported)

 

$

0.64

 

$

2.68

 

Basic EPS (proforma)

 

$

0.62

 

$

2.60

 

 

 

 

 

 

 

Diluted EPS (as reported)

 

$

0.64

 

$

2.65

 

Diluted EPS (proforma)

 

$

0.61

 

$

2.57

 

 

The pro forma effect includes only the vested portion of options granted in and after 1995.  Compensation cost was estimated using the Black-Scholes model with the following assumptions:

 

2005

 

Expected dividend yield

 

1.4

%

Expected life in years

 

7

 

Expected volatility

 

28.2

%

Risk-free interest rate

 

4.0

%

Weighted average fair value

 

$

20.72

 

 

Restricted Stock

Compensation expense is recognized over the vesting period based on the closing stock prices on the grant date of the restricted stock.  As compensation expense is recognized, additional paid-in capital is increased in shareholders’ equity.  The restricted stock receives the same dividend as common shares outstanding.

Restricted shares awarded are generally released to the recipient after a period of three years.  The following table summarizes the restricted share activity for the nine months ended September 30, 2006.

9




 

 

Shares

 

Weighted Average
Grant Date Fair Value

 

 

 

(In thousands)

 

 

 

Nonvested at January 1, 2006

 

109

 

$

60.19

 

Granted

 

48

 

69.61

 

Forfeited

 

(5

)

65.42

 

Vested

 

(10

)

47.13

 

 

 

 

 

 

 

Nonvested at September 30, 2006

 

142

 

$

64.04

 

 

Compensation expense related to restricted stock awards of $1.0 million and $2.5 million was recognized for the three and nine months ended September 30, 2006, respectively, and $0.4 million and $1.5 million for the three and nine months ended September 30, 2005, respectively.

Unrecognized compensation cost related to restricted stock awards of $4.3 million at September 30, 2006 is to be recognized over a weighted-average period of 2.2 years.

(5) Acquisitions

In July 2005, the Company acquired the heavy-duty brake lining and brake shoe assets of Zhejiang Kete (“Kete”) located in Hangzhou, China, for approximately $34.2 million, resulting in goodwill of $26.5 million and identified intangible assets of $2.5 million, with a weighted-average life of 5.1 years.  Identified intangible assets consist primarily of customer relationships and distribution agreements valued at $1.5 million with a weighted-average life of 5 years, formulas valued at $0.7 million with a weighted-average life of 5.2 years, and other intangible assets valued at $0.3 million with a weighted-average life of 5 years.  Operating results for this operation since the acquisition date are included in the Specialty Products segment.  The goodwill from this acquisition is not deductible for tax purposes.

On October 7, 2005, the Company acquired the off-highway brake assets of ArvinMeritor, Inc. for approximately $39.0 million.  Operating results for this operation since the acquisition date are included in the Specialty Products segment. The acquisition includes manufacturing assets and inventory from the ArvinMeritor facilities in York, SC; Lexington, KY and Cwmbran, South Wales, U.K, which have been subsequently transferred to the Company’s off-highway braking systems and specialty friction operations.  Although the Company is continuing to evaluate the purchase price allocation, an initial allocation resulted in goodwill of approximately $22.5 million and identified intangible assets of $5.2 million with a weighted-average life of 6.2 years.  Identified intangible assets consist primarily of customer relationships valued at $4.3 million, with a weighted-average life of 6 years, and patents valued at $0.9 million with a weighted-average life of 7.3 years.  The goodwill from this acquisition is deductible for tax purposes.

(6) Discontinued Operations and Assets Held for Sale

In the fourth quarter 2005, the Company announced it was exiting the businesses of Carlisle Systems & Equipment which include Carlisle Process Systems and the Walker Group.  On April 10, 2006, Carlisle announced it had signed a definitive agreement to sell Carlisle Process Systems to Tetra Pak, a division of the Tetra Laval Group, a private industrial group headquartered in Switzerland.  The sale of the Carlisle Process Systems businesses is subject to regulatory approvals as well as other customary closing conditions and is expected to be completed by December 31, 2006.  On October 10, 2006, the Company announced the sale of the Walker Group.  The Company is in the process of determining its gain on the sale of this business, which will be recognized in the fourth quarter of 2006.  The Company also plans to exit the giftware business of Carlisle FoodService.  The sale of the giftware business is expected to be completed by September 30, 2007.

10




 

Discontinued operations also include the operations of Carlisle Engineered Products (the former Automotive Components segment), the plastics component of Carlisle Tire & Wheel and the pottery business of Carlisle FoodService. The plastics component and pottery business were sold in the second quarter of 2005, which resulted in a $1.1 million loss.

In the third quarter of 2005, the Company completed the sales of certain assets and liabilities of the Automotive Components segment, which resulted in loss of $16.4 million.  Not included in these transactions were certain assets of two small manufacturing facilities as well as certain trade receivables, which included amounts due from Delphi Corporation.  On October 8, 2005, Delphi Corporation filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.  Included in the results for the third quarter of 2005 were impairment charges totaling $8.2 million reflecting a reserve against the retained receivables owing from Delphi and reserves for losses associated with the liquidation of the remaining assets.  The Company had previously recorded a $13.0 million impairment charge against the fixed assets of this business in the second quarter of 2005.

The assets of these operations have met the criteria for, and have been classified as “held for sale” in accordance with SFAS 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.”  In addition, results of operations for these businesses, and any gains or losses recognized from their sale, are reported as “discontinued operations” in accordance with SFAS 144.

Total assets held for sale were as follows:

In thousands

 

September 30,
2006

 

December 31,
2005

 

Assets held for sale:

 

 

 

 

 

Carlisle Engineered Products

 

$

716

 

$

716

 

Carlisle Systems & Equipment

 

99,571

 

108,027

 

Giftware business of Carlisle FoodService

 

1,553

 

5,341

 

Total assets held for sale

 

$

101,840

 

$

114,084

 

 

The major classes of assets and liabilities held for sale included in the Company’s Consolidated Balance Sheets were as follows:

In thousands

 

September 30,
2006

 

December 31,
2005

 

Assets held for sale:

 

 

 

 

 

Receivables

 

$

23,635

 

$

30,024

 

Inventories

 

18,114

 

17,161

 

Prepaid expenses and other current assets

 

15,624

 

20,454

 

Total current assets held for sale

 

57,373

 

67,639

 

 

 

 

 

 

 

Property, plant and equipment, net

 

22,260

 

22,689

 

Goodwill, net

 

21,594

 

20,322

 

Patents and other intangible assets, net

 

69

 

566

 

Investments and advances to affiliates

 

400

 

2,672

 

Notes receivable and other assets

 

144

 

196

 

Total non-current assets held for sale

 

44,467

 

46,445

 

Total assets held for sale

 

$

101,840

 

$

114,084

 

 

11




 

In thousands

 

September 30,
2006

 

December 31,
2005

 

Liabilities associated with assets held for sale:

 

 

 

 

 

Short-tem debt, including current maturities

 

$

5

 

$

156

 

Accounts payable

 

39,017

 

33,676

 

Accrued expenses

 

6,926

 

7,022

 

Deferred revenue

 

939

 

949

 

Total current liabilities associated with assets held for sale

 

46,887

 

41,803

 

 

 

 

 

 

 

Long-term debt

 

 

871

 

Other long-term liabilities

 

2,258

 

99

 

Total non-current liabilities associated with assets held for sale

 

2,258

 

970

 

Total liabilities associated with assets held for sale

 

$

49,145

 

$

42,773

 

 

Net sales and income (loss) before income taxes from discontinued operations were as follows:

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

In thousands

 

2006

 

2005

 

2006

 

2005

 

Net sales:

 

 

 

 

 

 

 

 

 

Carlisle Engineered Products

 

$

 

$

14,809

 

$

370

 

$

117,802

 

Pottery business of Carlisle FoodService

 

 

 

 

245

 

Giftware business of Carlisle FoodService

 

671

 

663

 

1,936

 

1,864

 

Carlisle Systems & Equipment

 

51,949

 

55,068

 

153,012

 

164,009

 

Net sales for discontinued operations

 

$

52,620

 

$

70,540

 

$

155,318

 

$

283,920

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes:

 

 

 

 

 

 

 

 

 

Plastic components operation of Carlisle Tire & Wheel

 

$

 

$

(33

)

$

 

$

(413

)

Carlisle Engineered Products

 

(3,745

)

(27,752

)

(4,188

)

(44,174

)

Pottery business of Carlisle FoodService

 

 

 

 

(1,481

)

Giftware business of Carlisle FoodService

 

(3,451

)

(209

)

(4,327

)

(637

)

Carlisle Systems & Equipment

 

418

 

3,778

 

5,763

 

9,462

 

Loss before income taxes from discontinued operations

 

$

(6,778

)

$

(24,216

)

$

(2,752

)

$

(37,243

)

 

Results for the three and nine months ended September 30 for Carlisle Engineered Products primarily reflect certain lease obligations recorded as a result of the bankruptcy filing of the purchaser of this business.  Refer to footnote 12 for more details.  Results for the three and nine months ended September 30, 2006 for the Giftware business reflect the write-down of assets held for sale.

 (7) Inventories

Carlisle is a diversified manufacturing entity comprised of multiple domestic and foreign companies that operate as distinct businesses manufacturing different products.  Within the United States, similar types of inventory are accounted for using the same inventory valuation method within each unique operating business.  A different inventory valuation method may be used at certain foreign subsidiaries

12




 

where the respective country does not allow the inventory valuation method used within the United States.

The components of inventories are as follows:

In thousands

 

September 30,
2006

 

December 31,
2005

 

FIFO (approximates current costs):

 

 

 

 

 

Finished goods

 

$

261,932

 

$

236,097

 

Work-in-process

 

36,481

 

31,486

 

Raw materials

 

134,858

 

113,487

 

Reserves and variances - net

 

(5,932

)

8,827

 

 

 

427,339

 

389,897

 

Excess FIFO cost over LIFO value

 

(43,106

)

(38,025

)

Inventories associated with assets held for sale

 

(18,113

)

(17,161

)

Inventories

 

$

366,120

 

$

334,711

 

 

(8) Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2006 are as follows:

In thousands

 

Industrial
Components

 

Construction
Materials

 

General
Industry

 

Specialty
Products

 

Total

 

Balance as of January 1, 2006

 

$

155,244

 

$

32,112

 

$

79,544

 

$

56,688

 

$

323,588

 

Purchase accounting adjustments

 

 

 

 

(6,593

)

(6,593

)

Currency translation

 

94

 

444

 

 

18

 

556

 

Balance as of September 30, 2006

 

$

155,338

 

$

32,556

 

$

79,544

 

$

50,113

 

$

317,551

 

 

The Company’s other intangible assets as of September 30, 2006, are as follows:

In thousands

 

Acquired
Cost

 

Accumulated
Amortization

 

Net Book
Value

 

Assets subject to amortization

 

 

 

 

 

 

 

Patents

 

$

9,833

 

$

(7,959

)

$

1,874

 

Software licenses

 

1,800

 

(1,307

)

493

 

Customer Relationships

 

6,828

 

(1,298

)

5,530

 

Other

 

11,926

 

(10,441

)

1,485

 

Assets not subject to amortization

 

 

 

 

 

 

 

Trademarks

 

4,000

 

 

4,000

 

 

 

$

34,387

 

$

(21,005

)

$

13,382

 

 

Estimated amortization expense over the next five years is as follows: $0.5 million remaining in 2006, $2.1 million in 2007, $2.0 million in 2008, $1.6 million in 2009 and $1.5 million in 2010.

13




 

(9) Retirement Plans and Other Postretirement Benefits

Components of net periodic benefit cost are as follows:

 

Pension Benefits

 

Post-retirement Medical

 

 

 

Three Months Ended
September 30,

 

Nine months ended
Septembet 30,

 

Three Months Ended
September 30,

 

Nine months ended 
Septembet 30,

 

In thousands

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

Service costs

 

$

1,404

 

$

1,622

 

$

4,212

 

$

4,865

 

$

 

$

1

 

$

1

 

$

2

 

Interest cost

 

2,357

 

2,382

 

7,072

 

7,145

 

89

 

171

 

396

 

512

 

Expected return on plan assets

 

(2,464

)

(2,587

)

(7,392

)

(7,762

)

 

 

 

 

Amortization of :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss

 

383

 

93

 

1,149

 

278

 

35

 

36

 

159

 

110

 

Prior service costs

 

(47

)

(56

)

(142

)

(168

)

 

 

 

 

Unrecognized net obligation

 

 

 

 

 

55

 

55

 

165

 

165

 

Curtailment income

 

 

(942

)

 

(942

)

 

 

(5,654

)

 

Net periodic benefit costs

 

$

1,633

 

$

512

 

$

4,899

 

$

3,416

 

$

179

 

$

263

 

$

(4,933

)

$

789

 

 

The Company previously disclosed in its financial statements for the year ended December 31, 2005, that it expected to contribute $12.6 million to its pension plans in 2006.  The Company subsequently revised this estimate to $13.3 million. As of September 30, 2006, the Company has contributed $10.5 million to the plans and additional contributions of $2.8 million are expected for the remainder of 2006. The increase in contributions from the previous estimate allowed the Company to reduce its variable PBGC premiums.

The Company maintains defined contribution plans to which it has contributed $6.6 million during the nine months ended September 30, 2006.  Full year contributions are expected to approximate $8.7 million.

(10) Other Long-Term Liabilities

The components of other long-term liabilities are as follows:

 

September 30,

 

December 31,

 

In thousands

 

2006

 

2005

 

Pension and other post-retirement obligations

 

$

38,010

 

$

47,714

 

Deferred taxes

 

53,730

 

49,754

 

Long-term warranty obligations

 

2,253

 

2,535

 

Other

 

6,440

 

3,135

 

Non-current liabilities associated with assets held for sale

 

(2,256

)

(99

)

Other long-term liabilities

 

$

98,177

 

$

103,039

 

 

(11) Borrowings

On August 18, 2006, the Company issued $150 million in ten-year notes at an interest rate of 6.125% in anticipation of the Company’s 7.25% $150 million notes maturing January 15, 2007. The net proceeds of the August 2006 notes were used in the interim period to repay all amounts outstanding

14




 

under the Company’s uncommitted line of credit, to reduce the trade accounts receivable sold under the Company’s receivables facility, and for general corporate purposes.

The $150 million notes that mature on January 15, 2007, are included in Short-term debt.

(12) Commitments and Contingencies

For its continuing and discontinued operations, the Company is obligated under various noncancelable operating leases for certain facilities and equipment.  Future minimum payments under its various noncancelable operating leases in each of the next five years are approximately $4.1 million in 2006, $15.5 million in 2007, $12.2 million in 2008, $8.9 million in 2009, $7.4 million in 2010 and $30.5 million thereafter.

At September 30, 2006, letters of credit amounting to $48.4 million were outstanding, primarily to provide security under insurance arrangements and certain borrowings.

The Company has financial guarantee lines in place for certain of its operations in Asia and Europe to facilitate working capital needs, customer performance and payment and warranty obligations.  At September 30, 2006, the Company had issued guarantees of $10.7 million, of which $1.4 million represents amounts recorded in current liabilities or other long-term liabilities.  The fair value of these guarantees is estimated to equal the amount of the guarantees at September 30, 2006, due to their short-term nature.

During 2005, the Company sold certain assets and liabilities of its discontinued automotive components business which was part of a series of sales. At the time of the sale, the discontinued automotive components business was party to several lease contracts. As part of the sale, however, the Company was not released from its obligations under these contracts. In September 2006, the buyer filed bankruptcy and as a result, at September 30, 2006, the Company has recorded a liability of $3.5 million reflecting the obligation under these lease contracts. The expense associated with this liability is reflected in discontinued operations.  Further, the buyer also assumed certain real estate leases for which the Company has provided guarantees. However, these facilities were not included in the bankruptcy filing and continue to be utilized by the purchaser. The leases guaranteed by the Company expire in 2007 and 2011 and have total minimum lease payments of $2.6 million as of September 30, 2006. The Company believes that the purchaser will fulfill all obligations required by those lease agreements.

The Company offers various warranty programs on its installed roofing systems, braking products, truck trailers, refrigerated truck bodies, and cheese making equipment.  The change in the Company’s aggregate product warranty liabilities for the period ended September 30 is as follows:

In thousands

 

2006

 

2005

 

Beginning reserve at December 31

 

$

7,939

 

$

8,517

 

Current year provision

 

7,802

 

9,663

 

Current year claims

 

(8,034

)

(9,490

)

Ending reserve at September 30

 

$

7,707

 

$

8,690

 

 

The amount of extended product warranty revenues recognized was $3.7 million and $10.5 million for the three and nine months ended September 30, 2006, respectively, and $3.6 million and  $10.3 million for the three and nine months ended September 30, 2005.

15




 

The Company has entered into long-term purchase agreements expiring December 31, 2006 for certain key raw materials.  Commitments are variable based on changes in commodity price indices. Based on prices at September 30, 2006, commitments under these agreements total approximately $9.4 million.

The Company maintains self retained liabilities for workers’ compensation, medical, general liability and property claims up to applicable retention limits. Retention limits are between $0.5 million and $1.0 million per occurrence for general liability, $0.5 million per occurrence for workers’ compensation, $0.1 million per occurrence for property and up to $0.5 million for medical claims. 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, the ultimate outcome of such actions will not have a material adverse effect on the consolidated financial position of the Company, but may have a material impact on the Company’s results of operations for a particular period. As a result of the favorable resolution of certain legal actions, the Company recognized gains, net of legal fees, of $7.1 million for the nine months ended September 30, 2006, and $3.6 million for the nine months ended September 30, 2005 that were included in Other (income) expense, net.  In addition, the Company recognized in Other (income) expense, net, a charge of $2.5 million relating to an arbitration proceeding concerning the termination of a supply agreement for the nine months ended September 30, 2006.

(13) Derivative Instruments and Hedging Activities

The Company 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 treasury lock contracts and interest rate swaps to reduce volatility of cash flows, impact on earnings and to lower its cost of capital.  On June 15, 2005, the Company entered into treasury lock contracts with a notional amount of $150.0 million to hedge the cash flow variability on forecasted debt interest payments associated with changes in interest rates.  These contracts were designated as cash flow hedges and were deemed effective at the origination date.  On August 15, 2006, the Company terminated the treasury lock contracts resulting in a gain of $5.6 million ($3.5 million, net of tax), which will be amortized to reduce interest expense until August 2016, the term of the interest payments related to the $150.0 million in notes issued on August 18, 2006.  At September 30, 2006, the Company had a remaining unamortized gain of $5.6 million ($3.5 million, net of tax) which is reflected in accumulated other comprehensive income on the Company’s Consolidated Balance Sheet.

In April 2005, the Company terminated certain interest rate swaps entered into on April 11, 2003 with a notional amount of $75.0 million that hedged the market risk associated with the Company’s 7.25% senior notes. The termination of those contracts, which were designated as fair value hedges, resulted in a loss of $1.4 million, which will be amortized to interest expense until January 2007, the original termination date of the swap.  At September 30, 2006, the Company had a remaining unamortized loss of $0.3 million reflected in long-term debt.

In December 2001, the Company entered into a $150.0 million notional amount interest rate swap, which was designated as a fair value hedge, to hedge a portion of the exposure associated with its fixed rate debt.  This fair value hedge was deemed effective at the origination date. On July 16, 2002, the Company terminated $50.0 million notional amount of this fair value hedge resulting in a gain of $1.6 million, which is amortized to reduce interest expense until January 2007, the original termination date of the swap. On September 19, 2002, the Company terminated the remaining $100.0 million notional amount on the fair value hedge resulting in a gain of $7.3 million, which is amortized to reduce interest

16




 

expense until January 2007. At September 30, 2006, the Company had a remaining unamortized gain of $0.5 million reflected in long-term debt.

On April 27, 2006, the Company executed a currency hedge with a total notional amount of $5.9 million to hedge the fair value risk associated with fluctuations in the foreign exchange rate on the final settlement amount due related to the July 2005 acquisition of the heavy-duty brake lining and brake shoe assets of Kete. On July 19, 2006 the Company terminated the fair value hedge resulting in an immaterial loss.

On August 9, 2006, the Company executed an extension through October 10, 2006 of a currency hedge executed on July 21, 2005 with a total notional amount of $2.5 million to hedge the Company’s fair value risk associated with fluctuations in the foreign exchange rate on certain receivables denominated in Euros.  The fair value position of this contract as of September 30, 2006, was not material.

(14) Segment Information

While Carlisle manages its businesses under the three operating groups, Construction Materials, Industrial Components and Diversified Components, effective for the quarter ended September 30, 2006, Carlisle will present five financial reporting segments as set forth below.  The Construction Materials and Industrial Components financial reporting segments remain unchanged.  The Diversified Components group will be represented by the Specialty Products segment which contains the braking business, the Transportation Products segment which contains the specialty trailer business, and the General Industry segment (“All Other” segment) which contains the wire and cable, foodservice and refrigerated truck bodies businesses:

·                  Construction Materials:  the “construction materials” business;

·                  Industrial Components:  the “tire and wheel” business; and the “power transmission belt” business;

·                  Specialty Products:  the “motion control systems” business;

·                  Transportation Products:  the “specialty trailer” business; and

·                  General Industry (“all other”):  the “high-performance wire and cable business”; the “refrigerated truck bodies” business; and the “foodservice products” business.

The Specialty Products, Transportation Products and General Industry segments were previously reported in one segment, the Diversified Components segment.

Sales, earnings before interest and income taxes (“EBIT”) and assets for continuing operations by reportable segment are included in the following summary:

17




 

Three Months Ended September 30,

 

2006

 

2005(2)

 

In thousands

 

Sales(1)

 

EBIT

 

Sales(1)

 

EBIT

 

Construction Materials

 

$

311,796

 

$

52,488

 

$

235,142

 

$

42,576

 

Industrial Components

 

164,092

 

6,772

 

164,480

 

5,128

 

Specialty Products

 

44,790

 

2,618

 

33,716

 

1,190

 

Transportation Products

 

45,034

 

7,123

 

40,676

 

6,242

 

General Industry

 

82,734

 

7,734

 

71,375

 

4,165

 

Corporate

 

 

(7,228

)

 

(6,418

)

Total

 

$

648,446

 

$

69,507

 

$

545,389

 

$

52,883

 

 

Nine Months Ended September 30,

 

2006

 

2005(2)

 

In thousands

 

Sales(1)

 

EBIT

 

Assets

 

Sales(1)

 

EBIT

 

Assets

 

Construction Materials

 

$

832,633

 

$

131,384

 

$

610,415

 

$

634,583

 

$

96,024

 

$

407,710

 

Industrial Components

 

602,898

 

51,929

 

567,975

 

595,738

 

49,686

 

526,458

 

Specialty Products

 

144,696

 

13,018

 

181,820

 

110,088

 

8,549

 

112,792

 

Transportation Products

 

137,626

 

23,556

 

51,147

 

117,362

 

16,286

 

42,018

 

General Industry

 

243,137

 

20,981

 

251,274

 

215,751

 

16,475

 

239,061

 

Corporate

 

 

(23,694

)

96,607

 

 

(21,559

)

119,233

 

Total

 

$

1,960,990

 

$

217,174

 

$

1,759,238

 

$

1,673,522

 

$

165,461

 

$

1,447,272

 

 


(1)   Excludes intersegment sales

(2)   2005 figures have been revised to reflect discontinued operations and to conform with the 2006 segment presentation.

For all periods presented, interest expense, which is separately disclosed on the face of the income statement, is considered a corporate expense.

A reconciliation of assets reported above to total assets as presented on the Company’s Consolidated Balance Sheets is as follows:

 

2006

 

Assets per table above

 

$

1,759,238

 

Assets held for sale of discontinued operations

 

101,840

 

Total Assets per Consolidated Balance Sheets

 

$

1,861,078

 

 

(15) Income Taxes

The Company’s effective tax rate on continuing operations of 32% for the nine months ended September 30, 2006, varies from the statutory rate within the United States of 35% due primarily to tax benefits from U.S. export sales, the deduction attributable to U.S. production activities, and earnings in foreign jurisdictions taxed at rates different from the statutory U.S. federal rate.

18




 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

Carlisle Companies Incorporated (“Carlisle”, the “Company”, “we” or “our”) is a diversified manufacturing company focused on achieving profitable growth internally through new product development and product line extensions, and externally through acquisitions that complement the Company’s existing technologies, products and market channels.  While Carlisle manages and previously reported its businesses under the three operating groups, Construction Materials, Industrial Components and Diversified Components, effective as of and for the quarter ended September 30, 2006, the Company will present five financial reporting segments:

·                  Construction Materials:  the “construction materials” business;

·                  Industrial Components:  the “tire and wheel” business; and the “power transmission belt” business;

·                  Specialty Products:  the “motion control systems” business;

·                  Transportation Products:  the “specialty trailer” business; and

·                  General Industry (“all other”):  the “high-performance wire and cable business”; the “refrigerated truck bodies” business; and the “foodservice products” business.

The Construction Materials and Industrial Components financial reporting segments remain unchanged.  The Diversified Components group will be represented by the Specialty Products, Transportation Products and General Industry segments.

While Carlisle has offshore manufacturing operations, the markets served by the Company are primarily in North America.  Management focuses on continued year over year improvement in sales and earnings, return on invested capital and return on shareholders’ equity.  Resources are allocated among the operating companies based on management’s assessment of their ability to obtain leadership positions in the markets they serve.

For a more in-depth discussion of the results discussed in this “Executive Overview,” please refer to the discussion on “Operating Segments” presented later in “Management’s Discussion and Analysis.”

Net sales for the three months ended September 30, 2006 were $648.4 million, a $103.0 million, or 19% increase over net sales of $545.4 million for the three months ended September 30, 2005.  Organic growth (defined as the increase in net sales excluding the impact of acquisitions and divestitures within the last twelve months as well as the impact of changes in foreign exchange rates), primarily in the Construction Materials segment, and to a lesser extent, the General Industry segment, accounted for approximately $89.0 million or 86% of the improvement.  Acquisitions in the Specialty Products segment accounted for approximately $11.9 million or 12% of the improvement compared to the third quarter last year.  Income from continuing operations of $43.4 million, or $1.39 per diluted share in the third quarter of 2006 improved 20% over income from continuing operations of $36.0 million, or $1.17 per diluted share in the third quarter of 2005, reflecting improved performance across all business segments.

Net sales for the nine months ended September 30, 2006 were $1.961 billion, an increase of 17% over net sales of $1.674 billion in the first nine months of 2005.  Strong organic growth in the Construction Materials, General Industry and Transportation Products segments and acquisition growth in the Specialty Products segment were the primary contributing factors to the improvement.  Income from continuing operations for the nine months ended September 30, 2006 was $137.7 million or $4.43 per diluted share, a 29% improvement over income from continuing operations of $107.0 million, or $3.43 per diluted share in

19




 

the first nine months of 2005.  All segments increased earnings as compared to the prior year, with the Construction Materials segment accounting for the majority of the improvement.

Results from continuing operations for the three and nine months ended September 30, 2006 and 2005 included the following items:

 

 

Third Quarter

 

Nine Months

 

 

 

Pre-tax gain
(loss)

 

After-tax
gain (loss)

 

Earnings Per
Share

 

Pre-tax gain
(loss)

 

After-tax
gain (loss)

 

Earnings Per
Share

 

In millions, except per share data

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit related to U.S. Federal tax audit

 

$

 

$

 

$

 

$

3.0

 

$

 

$

0.10

 

$

 

$

 

$

1.1

 

$

3.0

 

$

0.04

 

$

0.10

 

Expensing of stock options

 

(0.6

)

 

(0.4

)

 

(0.01

)

 

(3.0

)

 

(2.0

)

 

(0.07

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction Materials

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds on legal actions initiated by Carlisle

 

 

 

 

 

 

 

5.6

 

 

3.8

 

 

0.12

 

 

Asset charges

 

(0.6

)

 

(0.4

)

 

(0.01

)

 

(1.8

)

 

(1.2

)

 

(0.04

)

 

Gain on sale of property

 

 

 

 

 

 

 

 

1.3

 

 

0.9

 

 

0.03

 

Gain on insurance proceeds

 

 

 

 

 

 

 

 

1.3

 

 

0.9

 

 

0.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial Components

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Curtailment gain on retiree medical benefits

 

 

 

 

 

 

 

5.6

 

 

3.7

 

 

0.12

 

 

Proceeds on legal actions initiated by Carlisle

 

 

 

 

 

 

 

1.5

 

3.6

 

1.0

 

2.5

 

0.03

 

0.08

 

Lease termination costs

 

 

 

 

 

 

 

(1.3

)

 

(0.9

)

 

(0.03

)

 

Asset charges on closed facility

 

 

 

 

 

 

 

(1.2

)

 

(0.8

)

 

(0.03

)

 

Gain on sale of property

 

0.6

 

 

0.4

 

 

0.01

 

 

0.6

 

 

0.4

 

 

0.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Industry

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Award for arbitration proceedings concerning termination of a supply agreement

 

 

 

 

 

 

 

(2.5

)

 

(1.7

)

 

(0.05

)

 

 

 

$

(0.6

)

$

 

$

(0.4

)

$

3.0

 

$

(0.01

)

$

0.10

 

$

3.5

 

$

6.2

 

$

3.4

 

$

7.3

 

$

0.10

 

$

0.24

 

 

On April 10, 2006, the Company announced the signing of a definitive agreement to sell Carlisle Process Systems to Tetra Pak, a division of the Tetra Laval Group, a private industrial group headquartered in Switzerland.  The sale is subject to regulatory approval in various jurisdictions, as well as other customary closing conditions, and is expected to close before December 31, 2006.

On October 10, 2006, the Company announced the sale of the Walker Group to Insight Equity of Southlake, Texas.

Refer to the “Discontinued Operations and Assets Held for Sale” section of Management’s Discussion and Analysis for more detail regarding these businesses.

Sales and Earnings

Consolidated Results of Continuing Operations

Net sales for the three months ended September 30, 2006 were $648.4 million, a 19% increase over net sales of $545.4 million for the three months ended September 30, 2005.  Organic growth, primarily in the Construction Materials segment, accounted for approximately $89.0 million or 86% of the increase.  Growth was primarily a result of increased sales volumes over prior year. Acquisitions within the Specialty Products segment contributed approximately $11.9 million or 12%.  The impact of changes in foreign currency rates was negligible.  Net sales of $1.961 billion for the nine months ended September 30, 2006 increased 17% over the prior year.  Organic growth in the Construction Materials, General Industry and Transportation Products segments accounted for $244.0 million or 85% of the improvement, while acquisitions contributed $36.8 million or 13% to the year-over-year growth.

20




 

Cost of goods sold of $519.1 million in the third quarter of 2006 was 18% higher than $439.8 million in the third quarter of 2005.  Cost of goods sold for the nine months ended September 30, 2006 was $1.558 billion, up 17% from $1.337 billion for the nine months ended September 30, 2005.  An increase in raw material costs, primarily driven by higher sales volumes, and to a lesser extent, higher raw material prices, was the primary contributor to the increase in the quarter and nine-month periods. Raw material costs accounted for approximately 72% of the Company’s cost of goods sold for the quarter and nine months ended September 30, 2006.

Gross margin (net sales less cost of goods sold expressed as a percent of net sales) of 20% in the third quarter of 2006 compared to gross margin of 19% in the third quarter last year.  For the nine months ended September 30, 2006, gross margin was 21% as compared to 20% in the same period in 2005.  The improvement was the result of increased sales, which offset the increase in cost of goods sold as previously discussed.  While cost of goods sold have generally increased relative to sales volume increases; price volatility in energy costs and petroleum based and commodity raw materials may cause cost of goods sold to increase disproportionately to sales volume.  The Company may not be able to recover all increases in cost of goods sold through selling price increases.

Selling and administrative expenses of $59.6 million for the quarter ended September 30, 2006 were 16% higher than $51.3 million in the third quarter of 2005. For the nine months ended September 30, 2006, selling and administrative expenses of $180.6 million represented a 12% increase over $161.4 million in the prior year.  The increase in the three and nine-month periods is primarily attributable to variable selling expenses, the most significant being sales commissions.  Such expenses typically increase or decrease with the level of sales.  The three and nine-month periods of 2006 were also impacted by the recording of stock option expense of $0.6 million and $3.0 million, respectively.  As a percent of net sales, selling and administrative expenses were 9% for the three months ended September 30, 2006 and 2005.  For the nine months ended September 30, 2006 and 2005, selling and administrative expenses were 9% and 10% of net sales, respectively.

Other income, net of $3.4 million for the three months ended September 30, 2006 compared to other income, net of $2.5 million for the same period in 2005.  Results for the 2006 period included income from the Company’s European roofing joint venture (“Icopal”) of $4.2 million and a gain of $0.6 million on the sale of property.  Offsetting these gains were $1.0 million in fees associated with the Company’s receivables securitization program and $0.6 million of asset charges.  Results in the second quarter of 2005 included equity income of $4.2 million from Icopal offset by fees of $1.2 million associated with the securitization program.

Other income, net of $5.7 million for the nine months ended September 30, 2006 compared to other income, net of $1.8 million in the prior year.  Results for the 2006 period included $7.1 million of proceeds received from legal actions initiated by the Company, $5.6 million related to the curtailment of certain retiree medical plans and $2.1 million of equity income from Icopal.  Offsetting these gains were expenses of $4.3 million associated with the securitization program, losses of $2.5 million related to an arbitration proceeding concerning the termination of a supply agreement, $1.3 million of lease termination costs, and $1.2 million of asset charges at a closed facility.  Results in the first nine months of 2005 included gains of $3.6 million related to proceeds received from legal actions initiated by the Company, $1.3 million of insurance proceeds, $1.3 million related to the sale of fixed assets and $0.6 million of equity income from Icopal.  Offsetting these gains were expenses of $2.9 million associated with the securitization program, and $1.5 million of foreign currency losses on subsidiary debt.

Earnings before interest and income taxes (“EBIT” or “earnings”) for the quarter ended September 30, 2006 were $69.5 million, a 31% improvement over $52.9 million recognized in 2005.  Earnings were up in

21




 

all segments, with the majority of the improvement occurring in the Construction Materials segment and to a lesser extent, the General Industry segment.

EBIT of $217.2 million in the first nine months of 2006 grew 31% over $165.5 million in the first nine months of 2005.  The Construction Materials segment posted the largest improvement and accounted for the majority of the year-over-year increase.  The Transportation Products, Specialty Products and General Industry segments also reported strong growth in the nine months ended September 30, 2006, while results in the Industrial Components segment were slightly above the prior year.

Interest expense, net of $5.3 million for the three months ended September 30, 2006 was 24% higher than interest expense, net of $4.3 million in the same period of 2005.  Interest expense for the quarter was impacted by the issuance of notes in August, 2006, which were used to pay down shorter-term debt resulting in a higher mix of fixed-rate to floating-rate debt as compared to the prior year.  The increase in interest expense was offset by higher interest income, reflecting higher short-term investments as compared to the prior year.  Interest expense, net, in the first nine months of 2006 was $14.9 million, a 21% increase as compared to the prior year.  The increase in the three and nine-month periods was due primarily to an increase in interest rates and a higher mix of fixed-rate verses floating-rate debt, which offset lower average borrowings as compared to the same periods in the prior year.  The increase in interest expense year-over-year was offset by higher interest income.

Income from continuing operations was $43.4 million, or $1.39 per diluted share, for the three months ended September 30, 2006, a 20% improvement over $36.0 million, or $1.17 per diluted share in the three months ended September 30, 2005.  Results for the 2005 quarter were favorably impacted by a gain of $3.0 million, or $0.10 per diluted share, reflecting the settlement of certain tax liabilities. Income from continuing operations for the first nine months of 2006 was $137.7 million, or $4.43 per diluted share, representing a 29% improvement over $107.0 million, or $3.43 per diluted share recognized in the first nine months of 2005.

Consolidated Results of Discontinued Operations

Loss from discontinued operations for the three months ended September 30, 2006 was $4.9 million, or $0.15 per diluted share, which compared to a loss from discontinued operations of $16.3 million, or $0.53 per diluted share for the same period in 2005.  Loss from discontinued operations for the nine months ended September 30, 2006 was $1.9 million, which compared to a loss of $24.4 million for the nine months ended September 30, 2005.  Results in the three and nine-month periods of 2006 reflect the operating results of the systems and equipment business, comprised of Carlisle Process Systems and the Walker Group, as well as the giftware business, a small operation within the foodservice products business placed in discontinued operations in the third quarter of 2006.  Results for the three and nine month periods of 2006 include after-tax expenses of $2.4 million recorded to reflect certain lease obligations resulting from the bankruptcy of Creative Engineered Polymer Products, the owner of the Company’s discontinued automotive business, as well as after-tax reserves of $2.0 million against the assets of the giftware business.

Results in the prior year quarter and year-to-date periods included an after-tax loss of $10.1 million on the sale of substantially all of the assets of the Company’s discontinued automotive business as well as after-tax reserves of $5.4 million recorded against the retained accounts receivable of the automotive business, related to the Chapter 11 bankruptcy filing of Delphi Corporation on October 8, 2006 and against the remaining assets to be liquidated.  Year-to-date results in 2005 also reflected an after-tax impairment charge of $8.2 million on the fixed assets of the automotive business.

22




 

In the fourth quarter of 2005, the Company announced it was exiting the businesses of Carlisle Systems & Equipment which include Carlisle Process Systems and the Walker Group.  On April 10, 2006, the Company announced the signing of a definitive agreement to sell Carlisle Process Systems to Tetra Pak, a division of the Tetra Laval Group, a private industrial group headquartered in Switzerland.  The sale is subject to regulatory approval in various jurisdictions, as well as other customary closing conditions, and is expected to close before December 31, 2006. On October 10, 2006, the Company announced the sale of the Walker Group to Insight Equity of Southlake, Texas.

Net Income of $38.5 million, or $1.24 per diluted share, for the quarter ended September 30, 2006 was 96% higher than $19.7 million, or $0.64 per diluted share, for the quarter ended September 30, 2005.  Net income for the nine months ended September 30, 2006 was $135.8 million, or $4.37 per diluted share, a 64% improvement over net income of $82.6 million, or $2.65 per diluted share, for the same period in 2005.

Acquisitions

In July 2005, the Company acquired the heavy-duty brake lining and brake shoe assets of Zhejiang Kete (“Kete”) located in Hangzhou, China, for approximately $34.2 million, resulting in goodwill of $26.5 million and identified intangible assets of $2.5 million.  Operating results for this operation since the acquisition date are included in the Specialty Products segment.

In October, 2005, the Company acquired the off-highway brake assets of ArvinMeritor, Inc. for approximately $39.0 million.  The acquisition included manufacturing assets and inventory from the ArvinMeritor facilities in York, SC; Lexington, KY and Cwmbran, South Wales, U.K.  These assets have been transferred to the Company’s off-highway braking systems and specialty friction operations reported in the Specialty Products segment.  The Company has preliminarily allocated the purchase price among the assets acquired, resulting in goodwill of approximately $22.5 million and identified intangible assets of $5.2 million. Operating results have been included in the Specialty Products segment since the acquisition date.

23




 

Operating Segments

The following table summarizes segment net sales and EBIT.  The amounts for each segment should be referred to in conjunction with the applicable discussion below.

In thousands, except

 

Three Months Ended
September 30,

 

Increase
(Decrease)

 

Nine Months Ended
September 30,

 

Increase
(Decrease)

 

percentages

 

2006

 

2005*

 

Amount

 

Percent

 

2006

 

2005*

 

Amount

 

Percent

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction Materials

 

$

311,796

 

$

235,142

 

$

76,654

 

32.6

%

$

832,633

 

$

634,583

 

$

198,050

 

31.2

%

Industrial Components

 

164,092

 

164,480

 

(388

)

-0.2

%

602,898

 

595,738

 

7,160

 

1.2

%

Specialty Products

 

44,790

 

33,716

 

11,074

 

32.8

%

144,696

 

110,088

 

34,608

 

31.4

%

Transportation Products

 

45,034

 

40,676

 

4,358

 

10.7

%

137,626

 

117,362

 

20,264

 

17.3

%

General Industry (All other)

 

82,734

 

71,375

 

11,359

 

15.9

%

243,137

 

215,751

 

27,386

 

12.7

%

Corporate

 

 

 

 

 

 

 

 

 

 

 

$

648,446

 

$

545,389

 

$

103,057

 

18.9

%

$

1,960,990

 

$

1,673,522

 

$

287,468

 

17.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Before Interest and Income Taxes