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| Notes to Financial Statements |
Note 1 - Summary of Accounting Policies
Nature of Business
Carlisle Companies Incorporated, its wholly-owned subsidiaries and their divisions or subsidiaries, referred to herein as the "Company" or "Carlisle," manufacture and distribute a wide variety of products across a broad range of industries, including, among others, roofing, construction, trucking, foodservice, industrial equipment, lawn and garden and aircraft manufacturing. The Company markets its products both as a component supplier to original equipment manufacturers, as well as directly to end-users.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. Investments in affiliates where the Company does not have control but exercises significant influence are accounted for under the equity method. Equity income related to such investments is recorded in Other (income) and expense, net on the Company's Consolidated Statements of Earnings and Comprehensive Income. All material intercompany transactions and accounts have been eliminated. The Company's fiscal year-end is December 31, however certain foreign locations and joint ventures report on a one-month lag.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("United States" or "U.S.") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Debt securities with a maturity of three months or less when acquired are cash equivalents. Cash and cash equivalents are stated at cost, which approximates market value.
Revenue Recognition
A substantial majority of the consolidated revenues are recognized when persuasive evidence of an arrangement exists, goods have been shipped (or services have been rendered), the customer takes ownership and assumes risk of loss, collection is probable, and the sales price is fixed or determinable. A portion of revenues are recognized based on the percentage-of-completion method. Revenue recognized under this method amounted to 7% of total revenues in 2004, 6% in 2003 and 7% in 2002. At December 31, 2004, the Company's current assets included $12.8 million of costs in excess of billings and its current liabilities included $19.0 million of billings in excess of costs related to long-term construction contracts.
Provisions for discounts and rebates to the customers and other adjustments are provided for at the time of sale as a deduction to revenue.
Allowance for Doubtful Accounts
Carlisle performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by the review of their credit information. Allowances for doubtful accounts are estimated based on the evaluation of potential losses related to customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. Changes in economic conditions in specific markets in which the Company operates could have an effect on reserve balances required.
Inventories
Inventories for continuing and discontinued operations are valued at the lower of cost or market. Cost of inventories includes raw materials, direct labor and manufacturing overhead based on practical capacity. In 2004, 53% of the cost of inventories was determined by the last-in, first-out ("LIFO") method as compared to 54% in 2003. The remainder is determined by the first-in, first-out ("FIFO") method.
Deferred Revenue and Extended Product Warranty
The Company offers extended warranty contracts on sales of certain products; the most significant being those offered on its installed roofing systems within the Construction Materials segment. The life of these warranties range from five to thirty years. All revenue for the sale of these contracts is deferred and amortized on a straight-line basis over the life of the contracts. Current costs of services performed under these contracts are expensed as incurred. The Company also records a loss and a corresponding reserve if the total expected costs of providing services under the contract exceed unearned revenues. The Company estimates total expected warranty costs using standard quantitative measures based on historical claims experience and management judgment. See Note 16.
Pre-Production Costs Related to Long-Term Supply Arrangements
The Company incurs costs to develop and design products and molds, dies and other tools under certain long-term supply agreements. Current assets are recognized as costs are incurred for pre-production design and development costs and for molds, dies and other tools for which the Company will be reimbursed under its long-term supply agreements. At December 31, 2004 and 2003, the Company had recorded $5.6 and $11.3 million, respectively, in current assets for these reimbursable costs. The majority of these assets are recorded for the Company's automotive business, which is included in discontinued operations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Costs allocated to property, plant and equipment of acquired companies are based on estimated fair value at the date of acquisition. Depreciation is principally computed on the straight-line basis over the estimated useful lives of the assets. Asset lives are 20 to 40 years for buildings, 5 to 15 years for machinery and equipment and 3 to 10 years for leasehold improvements.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In accordance with this standard, the Company performs impairment tests on its long-lived assets, excluding goodwill and other intangible assets, when circumstances indicate that their carrying amounts may not be recoverable. If required, recoverability is tested by comparing the estimated future undiscounted cash flows of the asset or asset group to its carrying value. If the carrying value is not recoverable, the asset or asset group is written down to market value.
Patents, Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under the provisions of this pronouncement, the Company is no longer amortizing goodwill or other intangible assets with indefinite lives, but such assets will be subject to periodic testing of impairment. As required by SFAS 142, the Company completed an initial review of its reporting units for goodwill impairment as of January 1, 2002 and determined the fair value of goodwill in two segments, the Transportation Products and General Industry segments, was less than its book value. All business valuations were performed using discounted cash flow models. The impairment loss of $43.8 million is shown as a cumulative effect of a change in accounting principle, net of tax, on the Consolidated Statements of Earnings and Comprehensive Income. See Note 5 - Goodwill and Other Intangible Assets. The Company uses an annual valuation date of October 1 to assess the fair value of goodwill.
Patents and other intangible assets, recorded at cost, amounted to $7.3 million and $7.9 million at December 31, 2004 and 2003, respectively (net of accumulated amortization of $19.7 million and $18.9 million). Intangible assets that are subject to amortization are amortized on a straight-line basis over their useful lives. The carrying value of intangible assets with indefinite useful lives is not subject to amortization but is tested at least annually for impairment. Costs allocated to patents and other intangible assets of acquired companies are based on estimated fair value at the date of acquisition. See Note 5 - Goodwill and Other Intangible Assets.
Self Insurance Retention
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 estimates these retention liabilities utilizing actuarial methods and loss development factors. The Company's historical loss experience is considered in the calculation. The Company is insured for losses in excess of these limits. See Note 16.
Pension and Other Post Retirement Benefits
Carlisle maintains defined benefit retirement plans for the majority of its employees. Benefits are based on years of service and employees' compensation prior to retirement. The annual net periodic expense and benefit obligations of these programs are determined on an actuarial basis. The cost of this program is being funded currently.
Carlisle also has a limited number of unfunded post-retirement benefit programs that provide certain retirees with medical and prescription drug coverage. The annual net periodic expense and benefit obligations of these programs are also determined on an actuarial basis.
Derivative Financial Instruments
The Company accounts for derivative financial instruments under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which requires that all derivatives be recorded at fair value on the balance sheet and establishes criteria for designation and effectiveness of derivative transactions for which hedge accounting is applied. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If a fair value hedge is terminated before maturity, the adjusted carrying amount of the hedged asset or liability remains as a component of the carrying amount of that asset or liability until it is disposed. If the hedged item is an interest-bearing financial instrument, the adjusted carrying amount is amortized into earnings over the remaining life of the instrument. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.
The Company is subject to market risk from exposures to changes in interest rates due to its financing, investing and cash management activities. The Company uses interest rate swap agreements, from time to time, to manage the interest rate risk of its floating and fixed rate debt portfolio. The Company, on a periodic basis, assesses the initial and ongoing effectiveness of its hedging relationships.
The Company's international operations are exposed to translation risk when the local currency financial statements are translated into U.S. Dollars. Carlisle monitors this risk, but at December 31, 2004 had no contracts in place for hedging net investment risk.
Currency valuation risk is considered minimal; however, at December 31, 2004 the Company had currency hedges in place with a total notional amount of $6.9 million for the purpose of hedging cash flow risk associated with certain customer payment schedules. Less than 13% of the Company's 2004 revenues are in currencies other than the U.S. Dollar.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences of the differences between financial statement carrying amounts of assets and liabilities and their respective tax basis. These balances are measured using enacted tax rates expected to apply to taxable income in the years in which such temporary differences are expected to be recovered or settled. If a portion or all of a deferred tax asset is not expected to be realized, a valuation allowance is recognized.
Employee Stock-based Compensation Arrangements
The Company accounts 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 had the Company applied the fair value method of accounting for stock-based employee compensation under SFAS 123, Accounting for Stock-Based Compensation.
The pro forma effect includes only the vested portion of options granted in and after 1995. Options vest over a two-year period. Compensation cost was estimated using the Black-Scholes model with the following assumptions:
Earnings Per Share
Basic earnings per share excludes the dilutive effects of potentially dilutive options, warrants and convertible securities. Diluted earnings per share reflects the potential dilution that would occur if options, warrants or other convertible securities were exercised. Restricted shares are considered options for purposes of calculating earnings per share. Differences between basic and diluted earnings per share of the Company are the effect of dilutive stock options and restricted shares. Stock options to purchase approximately 163,000 shares in 2003, and 508,000 shares in 2002 were excluded from the calculation of potentially dilutive options as such options had exercise prices in excess of the average market value of the Company's common stock during these periods. No such exclusion was made in 2004 as all options had exercise prices below the average market value of the Company's common stock.
Foreign Currency Translation
The Company has determined that the local currency is the functional currency for its subsidiaries outside the United States. Assets and liabilities of these operations are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of shareholders' equity in Accumulated other comprehensive income (loss). Gains and losses from foreign currency transactions are included in Other (income) expense, net.
Reclassifications
Certain reclassifications have been made to 2003 and 2002 information to conform to the current year's presentation. The Consolidated Statements of Earnings and Comprehensive Income and Consolidated Statements of Cash Flows have been revised to reflect the effects of discontinued operations. As well, the Consolidated Balance Sheets have been revised to show separately assets held for sale and the liabilities associated with those assets. Segment information presented in Note 21 has also been revised from prior year's presentation to reflect discontinued operations and assets held for sale. See Note 17 for more detail regarding these operations.
New Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46(R) ("FIN 46R"), Consolidation of Variable Interest Entities. This interpretation addresses the consolidation of Variable Interest Entities ("VIE") as defined by FIN 46R. VIEs are entities to which the usual condition of consolidation (ownership of a majority voting interest) does not apply. This interpretation focuses on financial interests that indicate control. It concludes that in the absence of clear control through voting interests, a company's exposure (variable interest) to the economic risks and potential rewards from the variable interest entity's assets and activities are the best evidence of control. Variable interests are rights and obligations that convey economic gains or losses from changes in the values of the VIE's assets and liabilities. Variable interests may arise from financial instruments, service contracts, nonvoting ownership interests and other arrangements. If a company holds a majority of the variable interests of an entity, it would be considered the primary beneficiary. The primary beneficiary would be required to include assets, liabilities and the results of operations of the VIE in its financial statements. The Company was required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For VIEs created prior to January 1, 2004, the Company was required to adopt the provisions of this announcement by March 31, 2004. The adoption of this pronouncement did not have an impact on the Company's statement of earnings or financial position.
In May 2004, FASB issued FASB Staff Position ("FSP") No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. In December 2003, the President of the United States (the "President") signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"). The Act provides for a 28% tax-free subsidy on certain prescription drug claims for sponsors of retiree health care plans with drug benefits that are at least actuarially equivalent to those to be offered under Medicare Part D. Because of existing caps on employer costs for the majority of the groups participating in its postretirement medical plan, the Company does not anticipate it will be eligible for this subsidy. Due to the size of the liability for those groups that may be eligible, any reduction in the liability as a result of the Act is not expected to be material.
In November 2004, FASB issued Statement of Financial Accounting Standard No. 151 ("SFAS 151"), Inventory Costs - An Amendment of ARB No. 43, Chapter 4. This statement amends Accounting Research Bulletin No. 43 ("ARB 43"), Chapter 4, "Inventory Pricing", to clarify 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. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by the Company as of January 1, 2006. The Company is currently evaluating the impact of this standard, but its adoption is not expected to have a material impact on the Company's statement of earnings or financial position.
In December 2004, FASB issued SFAS No. 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. Currently, for presentation of the pro-forma effect on Net Income of stock-based compensation arrangements as required by SFAS 123, the Company estimates the fair value of its awards using the Black-Scholes method.
The Company is required to adopt this standard as of July 1, 2005 and will elect to expense its share-based awards 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. The Company is currently evaluating alternatives for measuring the fair value of new awards. The pretax amount of unvested awards as calculated under the Black-Scholes method as of December 31, 2004 to be expensed upon adoption is $0.3 million in 2005 and less than $0.1 million in 2006. As previously discussed, the Company has not yet determined the methodology it will use in estimating fair value of new awards; however, it expects the expense per option granted to be lower than that presented in current pro-forma disclosures under SFAS 123.
In December 2004, FASB issued SFAS No. 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. The Company is required to adopt this standard as of January 1, 2006 and does not expect its adoption to have a material impact on the Company's statement of earnings or financial position.
On October 22, 2004, the American Jobs Creation Act ("the Act") was signed into law by the President. This Act includes a tax deduction of up to 9% (when fully phased-in) of the lesser of (a) "qualified production activities income," as defined in the Act, or (b) taxable income (after the deduction for the utilization of any net operating loss carryforwards). This tax deduction is limited to 50 percent of W-2 wages paid by the taxpayer. The Act also provides for a special one-time tax deduction of 85 percent of certain foreign earnings that are repatriated (as defined in the Act) in either an enterprise's last tax year that began before the enactment date, or the first tax year that begins during the one-year period beginning on the date of enactment.
In December 2004 FASB issued FASB Staff Position No. FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. The FSP would require that the tax deduction be accounted for as a special deduction in the period earned, not as a tax-rate reduction.
In December 2004, FASB also issued FASB Staff Position FAS 109-2 ("FSP 109-2"), Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (the "Act"). FSP No. 109-2 provides guidance under FASB Statement No. 109, Accounting for Income Taxes ("SFAS 109"), with respect to recording the potential impact of the repatriation provisions of the Act on income tax expense and deferred tax liability. The FSP permits an enterprise time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Company has not yet completed its evaluation of the impact of the repatriation provisions and accordingly has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Act; however, the range of possible amounts of undistributed earnings being evaluated for repatriation was between $25 million and $35 million as of December 31, 2004. The incremental U.S. tax, after accounting for the dividend received deduction as provided by section 965 of the Internal Revenue Code, is estimated to be between $1.0 million and $1.5 million.
Note 2 - Receivables Facility
The Company maintains an agreement (the "Receivables Facility") with a financial institution whereby it sells on a continuous basis an undivided interest in certain eligible trade accounts receivable. Pursuant to the Receivables Facility, the Company formed a wholly-owned, special purpose, bankruptcy-remote subsidiary ("SPV"). The financial position and results of operations of the SPV are consolidated with the Company. The SPV was formed for the sole purpose of buying and selling receivables generated by the Company. Under the Receivables Facility, the Company, irrevocably and without recourse, transfers all applicable trade accounts receivables to the SPV. The SPV, in turn, has sold and, subject to certain conditions, may from time to time sell an undivided interest in these receivables and is permitted to receive advances of up to $125.0 million from the multi-seller conduit administered by an independent financial institution for the sale of such an undivided interest.
The Company accounts for its transfers of receivables to the SPV, together with the SPV's sale of undivided interests in the SPV's receivables to the conduit, as sales under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The interest rate paid to the conduit on amounts outstanding under the Receivables Facility is equal to the conduit's pooled commercial paper rate, which was 2.28% and 1.12% at December 31, 2004 and December 31, 2003, respectively. The Company's loss on the sales of these receivables is reported in Other income and expense, net, and amounted to $1.8 million during 2004, $1.5 million during 2003 and $1.6 million in 2002.
At December 31, 2004, the outstanding balance of receivables serviced by the SPV was $250.5 million compared to $228.1 million as of December 31, 2003, and $161.9 million as of December 31, 2002. Of this balance, the SPV had sold $120.0 million of undivided interest to the conduit as of December 31, 2004, compared to $67.0 million as of December 31, 2003, and $100.0 million at December 31, 2002. The Company's retained interest in the SPV's receivables is classified in receivables in the Company's consolidated financial statements at its relative fair value and amounted to $129.8 million as of December 31, 2004 compared to $160.5 million as of December 31, 2003, and $59.9 million as of December 31, 2002. This retained interest is subordinate to, and provides credit enhancement for, the conduit's ownership interest in the SPV's receivables, and is available to the conduit to pay any fees or expenses due to the conduit, and to absorb all credit losses incurred on any of the SPV's receivables.
Note 3 - Inventories
Note 4 - Property, Plant and Equipment
During 2004 and 2003, the Company capitalized interest in the amount of $1.2 million and $0.8 million, respectively.
Note 5 - Goodwill and Other Intangible Assets
The Company's other intangible assets as of December 31, 2004, are as follows:
The Company's other intangible assets as of December 31, 2003, are as follows:
Estimated amortization expense over the next five years is as follows: $0.8 million in 2005, $0.7 million in 2006, $0.5 million in 2007, $0.4 million in 2008 and $0.2 million in 2009.
Note 6 - Investments and Advances to Unconsolidated Affiliates
Investments and advances to unconsolidated affiliates are as follows:
The Company has exposure to exchange rate movement relative to its investment in foreign operations. Fluctuations in foreign currencies result in an unrealized gain or loss recorded as an adjustment to the investment and as a component of accumulated other comprehensive income or loss.
Continuing and discontinued operations combined unaudited summarized financial information for the Company's unconsolidated affiliates is as follows:
Note 7 - Borrowings
In June 2003, the Company's revolving credit facilities that provided for borrowings of up to $375.0 million were replaced with a $250.0 million three-year syndicated revolving credit facility (the "Facility"). As of December 31, 2004, $246.5 million was available under the Facility. The Facility provides for interest at the Euro-Dollar rate plus a margin of 0.375% to 1.70%. The specific rate of the Facility is based on the Company's long-term debt rating as determined by certain rating agencies and the amount of outstanding borrowings. The one-month Euro-Dollar rate was 2.32% at December 31, 2004.
The Company also maintains with various financial institutions $25.0 million in committed lines of credit and a $55.0 million uncommitted line of credit. As of December 31, 2004, $55.8 million was available under these lines. At December 31, 2004, $5.0 million was available under the Company's $125.0 million receivables facility. At December 31, 2004, letters of credit amounting to $45.6 million were outstanding primarily to provide security under insurance arrangements and certain borrowings.
Under the Company's various debt and credit facilities, the Company is required to meet various restrictive covenants and limitations, including certain net worth and cash flow ratios, all of which were complied with in 2004 and 2003.
The industrial development and revenue bonds are collateralized by letters of credit, Company guarantees and/or by the facilities and equipment acquired through the proceeds of the related bond issuances. The weighted average interest rates on the revenue bonds for 2004 and 2003 were 1.63% and 1.77%, respectively. The Company estimates the fair value of its industrial development and revenue bonds approximates their carrying value. Although the Company has no current expectations it will settle these bonds before their stated maturity, the bonds have been classified as Short-term debt on the Company's Consolidated Balance Sheets due to certain remarketing and reimbursement provisions. In prior years, these bonds were classified as Long-term debt; accordingly, $26.8 million has been reclassified to Short-term debt in the prior year Consolidated Balance Sheet.
Other borrowings for 2004 and 2003 include capital lease obligations of $7.8 million and $9.2 million, respectively, for the funding of production facility expansions. Interest rates on these borrowings ranged from 4.25% to 18.00% in 2004.
Cash payments for interest were $18.8 million in 2004, $19.3 million in 2003, and $22.5 million in 2002. Interest expense, net, includes interest income of $1.9 million in 2004, $3.1 million in 2003, and $3.5 million in 2002.
The aggregate amount of short-term and long-term debt maturing in each of the next five years is approximately $34.2 million in 2005, $0.4 million in 2006, $150.1 million in 2007, $112.9 million in 2008, $0.2 million in 2009, and $18.3 million thereafter.
The fair value of the Company's senior notes is based on current year yield rates plus the Company's estimated credit spread available for financings with similar terms and maturities. As of December 31, 2004, the fair value of the Company's 6.70% senior notes is approximately $108.4 million. The fair value of the Company's 7.25% senior notes is approximately $162.0 million at December 31, 2004.
Note 8 - Derivative Financial Instruments
On April 11, 2003, the Company executed $75.0 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 the Company's fixed rate debt. These fair value hedges have been deemed effective at the origination date and at December 31, 2004. The valuation of these contracts at December 31, 2004 resulted in a liability of $ 0.8 million, included in other long-term liabilities on the Company's Consolidated Balance Sheet, and a corresponding decrease in the fair value of the Company's 7.25% senior notes, 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 expense until January 2007. At December 31, 2004, the Company had a remaining unamortized gain of $4.1 million reflected in long-term debt.
Also in December 2001, the Company entered into a $150.0 million notional amount interest rate swap, designated as a cash flow hedge, to hedge the cash flows for a portion of its variable rate debt. The cash flow hedge was deemed effective at the origination. On July 16, 2002, the cash flow hedge was terminated, resulting in a loss of $1.6 million, which was amortized to interest expense until June 2003, the original termination date of the swap.
The Company has also executed certain currency hedges with a total notional amount of $6.9 million. These currency contracts serve to hedge the Company's cash flow risk associated with certain customer payment schedules. The change in the fair value position of these hedge contracts as of December 31, 2004 was not material.
Note 9 - Acquisitions
On June 30, 2004, the Company acquired the specialty tire and wheel business of Trintex Corporation for $32.5 million. The operating results for this business since the acquisition date are included in the Industrial Components segment. The Company has preliminarily allocated the purchase price among the acquired assets and liabilities assumed, resulting in goodwill of $24.9 million, of which the entire amount is deductible for tax purposes. Preliminary allocations among other major asset and liability classes were not material. The Company is in the process of fully evaluating these assets and as a result, the purchase price allocation may change. The purchase agreement contains an earnout provision based on operating performance over the next four years. Any future amounts payable under this provision will be treated as a portion of the purchase price and allocated among the acquired assets and liabilities.
On May 30, 2003, the Company acquired Flo-Pac Corporation for approximately $32.0 million. The operating results for this business since the acquisition date are included in the General Industry segment. The Company has completed the allocation of the purchase price among the acquired assets and liabilities assumed, resulting in goodwill of $7.9 million, none of which is deductible for tax purposes. Purchase accounting adjustments in 2004 resulted in an increase to goodwill of $1.9 million, primarily due to a contingent payment based on the sale of certain property acquired during the acquisition. Final allocations did not have a material impact on any major asset or liability captions presented on the Company's Consolidated Balance Sheet.
On October 3, 2002, the Company acquired the MiraDri division of Nicolon Corporation for approximately $26.2 million. MiraDri provides waterproofing solutions for commercial and residential roofing applications. The operating results for this business since the acquisition date are included in the Construction Materials segment. The Company has completed the allocation of the purchase price among the acquired assets and assumed liabilities, resulting in goodwill of $17.4 million, of which the entire amount is deductible for tax purposes. The impact on other major asset and liability captions presented on the Company's Consolidated Balance Sheet was not material.
On February 25, 2002, the Company purchased the remaining minority interest in an unconsolidated investment. Results of operations for this business, which have been included in the Construction Materials segment, did not have a material effect on the results of this segment or on the Company's consolidated results.
Note 10 - Shareholders' Equity
The Company has a Shareholders' Rights Agreement that is designed to protect shareholder investment values. A dividend distribution of one Preferred Stock Purchase Right (the "Rights") for each outstanding share of the Company's common stock was declared, payable to shareholders of record on March 3, 1989. The Rights are attached to the issued and outstanding shares of the Company's common stock and will become exercisable under certain circumstances, including the acquisition of 25% of the Company's common stock, or 40% of the voting power, in which case all rights holders except the acquirer may purchase the Company's common stock at a 50% discount.
If the Company is acquired in a merger or other business combination, and the Rights have not been redeemed, rights holders may purchase the acquirer's shares at a 50% discount. On August 7, 1996, the Company amended the Shareholders' Rights Agreement to, among other things, extend the term of the Rights until August 6, 2006.
Common shareholders of record on May 30, 1986 are entitled to five votes per share. Common stock acquired subsequent to that date entitles the holder to one vote per share until held four years, after which time the holder is entitled to five votes per share.
Note 11 - Employee and Non-Employee Stock Options & Incentive Plan
The Company maintains an Executive Incentive Program (the "Program") for executives and certain other employees of the Company and its operating divisions and subsidiaries. On April 20, 2004, the Program was amended by shareholder approval to allow for awards of stock options, restricted stock, stock appreciation rights, performance shares and units or other awards based on Company stock. As of December 31, 2004, 2,511,684 shares were available for grant under this plan; however, only 2,073,570 shares of this amount were available for the issuance of restricted and performance shares. The Company also maintains a stock option plan for its non-employee directors. With the exception of certain awards issued December 1, 1999 (the "December 1999 Grant"), options issued under both these plans vest one-third upon grant, one-third on the first anniversary of grant and the remaining one-third on the second anniversary of grant. Vesting for the December 1999 Grant was as follows: 10% on March 1, 2001; 30% on March 1, 2002; 60% on March 1, 2003; and 100% on March 1, 2004. As of December 31, 2004, 132,000 shares were available for grant under this plan.
Restricted shares awarded under the Program are released to the recipient after a period of three years. At December 31, 2004, under the Company's restricted stock plan, 70,055 non-vested shares were outstanding. The number and weighted average grant-date fair value of restricted shares issued in each of the last three years was as follows: In 2004, 33,110 shares were issued at a weighted average fair value of $57.07; In 2003, 33,690 shares were issued at a weighted average fair value of $55.70; and in 2002, 7,235 shares were issued at a weighted average fair value of $36.98.
Stock option activity under the Company's employee and non-employee stock-based plans was as follows:
The following tables summarize information regarding stock options outstanding as of December 31, 2004:
At December 31, 2003 and December 31, 2002, 785,414 and 1,017,466 options were exercisable at a weighted average price of $37.54 and $38.43, respectively.
Note 12 - Other Comprehensive Income (Loss)
The tables below present the pre-tax, tax and after-tax components of other comprehensive income (loss) for the three-year period ended December 31, 2004:
Note 13 - Retirement Plans
The following disclosures include both continuing and discontinued operations.
Carlisle maintains defined benefit retirement plans for the majority of its employees. Benefits are based primarily on years of service and earnings of the employee. The plans' weighted-average asset allocation at December 31, 2004 and 2003, by asset category was as follows:
Carlisle employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. From time to time, the Company will target asset allocation to enhance total return. The established target allocation is 65% equity securities and 35% fixed income securities. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. Equity investments are diversified across U.S. and international stocks, as well as growth, value, and large and small capitalizations. Investment risk is measured and monitored on an ongoing basis through periodic investment portfolio reviews, annual liability measures and periodic asset/liability studies.
The Company includes accrued pension costs in Other long-term liabilities on the Company's Consolidated Balance Sheets.
The accumulated benefit obligation for all defined benefit pension plans was $158.2 million and $160.0 million at December 31, 2004 and 2003, respectively.
Carlisle expects to contribute $5.2 million to its pension plans during 2005.
The curtailment charge of $0.4 million in 2004 was due to the Company's amendment of the Director Retirement Plan. The 2003 curtailment charge of $0.3 million resulted primarily from the Company's closure of its Carlisle Engineered Products' Erie-Bundy Park, Pennsylvania plant which was part of the Automotive Components segment. The 2002 curtailment charge of $0.8 million resulted from the Company's closure of its Motion Control Ridgway, Pennsylvania plant which was part of the Specialty Products segment.
Carlisle used an assumed discount rate of 6.0% for the 2004 valuation. The Company changed its assumption for the 2004 valuation regarding the discount rate to be based on a projected yield curve which provides a better matching of the expected future retirement plan cash flows with projected yields. The 2003 discount rate was based on the Moody's Aa Corporate Bond Yield.
The Company considers several factors in determining the long-term rate of return for plan assets. Current market factors such as inflation and interest rates are evaluated and consideration is given to the diversification and rebalancing of the portfolio. The Company also looks to peer data and historical returns for reasonability and appropriateness.
The 2004 and 2003 pension plan disclosures were determined using a September 30 measurement date. The Company recorded an intangible asset of $2.6 million as of December 31, 2004 and 2003, primarily for unamortized prior service costs, which is recorded in notes receivable and other assets. The change in the minimum liability included in other comprehensive income (loss), pre-tax, for 2004, 2003 and 2002 was $11.4 million, $(13.9) million and $(7.4) million, respectively.
Additionally, the Company maintains retirement savings plans covering a significant portion of its employees. Expenses for these plans were approximately $8.1 million in 2004, $7.9 million in 2003 and $7.2 million in 2002. The Company also sponsors an employee stock ownership plan ("ESOP") as part of one of its existing savings plans. Costs for the ESOP are included in the previously stated expenses. The ESOP is available to eligible domestic employees and represents a match in the Company's common stock of contributions made by plan participants to the savings plan up to a maximum of 4.00% of a participant's eligible compensation. Participants are not allowed to direct their contributions to the savings plan to investment in the Company's common stock. A breakdown of shares held by the ESOP at December 31 is as follows:
The Company also has a limited number of unfunded post-retirement benefit programs. Carlisle's liability for post-retirement medical benefits is limited to a maximum obligation; therefore, the Company's liability is not materially affected by an assumed health care cost trend rate.
The Company's 2004 and 2003 disclosures for its post-retirement benefit programs are determined based on a September 30 measurement date.
The Company includes accrued benefit costs for its post-retirement program in Other long-term liabilities on the Company's Consolidated Balance Sheets.
Company contributions in 2005 are estimated to be consistent with contributions made in 2004.
The Company's post-retirement benefit obligations were determined using an assumed discount rate of 6.00%, and 6.10% for years ended December 31, 2004 and 2003, respectively. The Company changed its assumption for the 2004 valuation regarding the discount rate to be based on a projected yield curve which provides a better matching of the expected future retirement plan cash flows with projected yields. The 2003 discount rate was based on the Moody's Aa Corporate Bond Yield.
The curtailment gain of $1.5 million in 2003 was due primarily to the Company's closure of its Carlisle Engineered Products' Erie-Bundy Park, Pennsylvania plant which was part of the Automotive Components segment.
The Company's post-retirement medical benefit cost for 2004, 2003 and 2002 was determined using an assumed discount rate of 6.10%, 6.75% and 7.25%, respectively.
The following is a summary of estimated future benefits to be paid for the Company's defined benefit pension plan and post-retirement medical plan as of December 31, 2004. Benefit payments are estimated based on the same assumptions used in the valuation of the projected benefit obligation:
Note 14 - Income Taxes
The foreign loss carryforwards for 2004 include $2.8 million of prior year foreign losses that were reclassified from the current tax liability account during the current year.
In assessing whether deferred tax assets are realizable, the Company considers if it is more likely than not that they will be realized. Realization of deferred tax assets is dependant upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company has not recorded any deferred tax valuation allowances in any of the years presented. The Company has not recognized deferred tax benefits on certain state tax attributes as realization of these benefits is uncertain. Based on historical levels of taxable income and projections of future taxable income over the periods in which deferred tax assets are deductible, the Company believes it is more likely than not the benefits of remaining deductible differences will be realized.
A reconciliation of taxes from continuing operations computed at the statutory rate to the tax provision is as follows:
Cash payments for income taxes were $51.8 million, $20.1 million and $12.7 million in 2004, 2003 and 2002, respectively.
The Company's income before tax from U.S. and non-U.S. operations amounted to $93.3 million and $17.3 million, respectively, for the year ended December 31, 2004, $129.6 million and $2.1 million for 2003 and $95.5 million and $15.0 million for 2002. The Company has not provided U.S. tax on cumulative undistributed earnings of non-U.S. subsidiaries where such earnings are considered indefinitely reinvested. The Company has provided U.S. tax on cumulative undistributed earnings of non-consolidated foreign subsidiaries, where such earnings are not considered indefinitely reinvested. Below is a chart of unrepatriated earnings for the most current three years.
Note 15 - Other Long-Term Liabilities
Note 16 - Commitments and Contingencies
For its continuing and discontinued operations, the Company is obligated under various noncancelable operating leases for certain facilities and equipment. Rent expense was $18.3 million, $12.7 million and $17.4 million in 2004, 2003 and 2002, respectively. Future minimum payments under its various noncancelable operating leases in each of the next five years are approximately $16.5 million in 2005, $13.5 million in 2006, $11.6 million in 2007, $9.3 million in 2008, $7.9 million in 2009 and $36.2 million thereafter.
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 December 31, 2004, the Company had issued guarantees of $17.3 million, of which $10.8 million represents amounts recorded in current liabilities. The fair value of these guarantees is estimated to equal the amount of the guarantees at December 31, 2004, due to their short-term nature.
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 December 31, 2004 and 2003 was as follows:
The amount of extended product warranty revenues recognized was $14.3 million for the years ended December 31, 2004 and 2003, and $14.4 million for the year ended December 31, 2002.
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 December 31, 2004, commitments under these agreements total approximately $39.8 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.
At December 31, 2004, approximately 14% of the Company's employees were covered by collective bargaining agreements. Collective bargaining agreements that will expire in 2005 cover approximately 7% of the Company's employees. It is uncertain at this time whether agreements will be reached without interruption of production, and the terms of the agreements ultimately reached could result in higher wage and benefit costs.
Note 17 - Discontinued Operations and Assets Held for Sale
In 2004, in ongoing efforts to streamline its businesses, the Company identified two operations and a segment it plans to exit. The two operations included the plastic components operation of Carlisle Tire & Wheel Company in the Industrial Components segment and the pottery business of Carlisle FoodService in the General Industry segment. Additionally, the Company decided to exit its automotive business consisting entirely of Carlisle Engineered Products in the Automotive Components segment. The Company is actively marketing these operations and conducting other actions required to complete the sale of these operations in 2005. All operations met the criteria in accordance with Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets."
Total assets held for sale by segment at December 31 were as follows:
The major classes of assets and liabilities held for sale at December 31 included in the Company's Consolidated Balance Sheets were as follows:
Net sales and (loss) income before income taxes from discontinued operations by segment were as follows:
In 2004, the Industrial Components segment included a $1.8 million charge related to a customer settlement and a $2.1 million write-down to fair value of assets held for sale. The settlement related to products produced at the plastic components operation of Carlisle Tire and Wheel Company. The settlement is final and no further costs are anticipated with this issue.
In 2004, the Automotive Components segment included a $40.3 million write-down for the impairment of its entire balance of goodwill based on management's estimate of fair value at December 31, 2004. Additionally, the Automotive Components segment included a $4.4 million write-down of an investment in a joint venture. The General Industry segment included a $0.6 million write-down to fair value of assets held for sale.
In 2003, the General Industry segment included a $0.9 million impairment charge recorded in accordance with SFAS 144.
Note 18 - Exit and Disposal Activities
The following table represents the effects of exit and disposal activities not related to discontinued operations on the Company's Consolidated Statements of Earnings for the years ended December 31:
Exit and disposal activities by type of charge for the years ended December 31 were as follows:
Liabilities were substantially paid in the period incurred and no significant liabilities remained as of December 31, 2004 related to these activities.
Exit and disposal activities by segment were as follows:
Industrial Components - Approximately $0.2 million of the 2004 exit and disposal costs, and all of 2003 costs for the Industrial Components segment relate to the consolidation of the management teams of Carlisle Tire & Wheel Company and Carlisle Power Transmission and a plant closure. Activities under this plan included employee terminations of $0.7 million and relocation costs of $0.2 million.
The remaining $0.7 million of exit and disposal costs in 2004 related to the write-down of impaired fixed assets related to an upcoming facility closure. The Company estimates it will spend an additional $1.3 million related to this closure for a total expected cost of $2.0 million. These remaining costs will consist mainly of relocation and termination benefits.
Specialty Products - Exit and disposal activities in the Specialty Products segment in 2004 relate primarily to the Company's Ridgway, Pennsylvania facility, closed in the first quarter 2002. The total cost of this closure through December 31, 2004 was $2.4 million; of which $2.3 million was incurred in 2002 and the remaining $0.1 million in 2004. Of the total amount incurred, $1.5 million was paid for moving and relocation expenses and $0.9 million related to pension and other costs. The Company believes these activities are complete and does not expect to incur additional costs.
Other exit and disposal activities during 2004 and 2003 of $0.3 million and $0.6 million, respectively, included the closure of a testing facility and warehouse, costs associated with the sale of its spring brake business in December 2003, and termination benefits associated with the consolidation of the management teams of Carlisle Industrial Brake and Friction and Carlisle Motion Control. The Company believes these activities are complete and does not expect to incur additional costs.
General Industry - Exit and disposal activities in the General Industry segment in 2004 related primarily to the consolidation of the Flo-Pac operations, acquired in May 2003, into Carlisle FoodService and the relocation of a textile operation within the Carlisle FoodService organization. The plan to purchase Flo-Pac included the sale of real property acquired, the termination of employees, and the relocation of equipment and employees to other facilities. The total cost of $2.0 million included $0.9 million which was recorded as goodwill in accordance with Emerging Issues Task Force ("EITF") 95-3, Recognition of Liabilities in Connection with a Business Combination. Of the remaining $1.1 million, $0.6 million was incurred in 2003 and $0.5 million was spent in 2004 through the project's completion in the second quarter. The majority of the costs not applicable to EITF 95-3, related to relocation costs and severance of employees at existing locations. The relocation of the manufacturing equipment at a textile operation in Carlisle FoodService was completed in 2004 at a cost of $0.4 million. The costs related primarily to termination benefits, moving expenses and training costs.
The remaining exit and disposal activities in 2004 in the General Industry segment related primarily to the consolidation of operations within Carlisle Process Systems.
Exit and disposal activities of $3.2 million in 2003 in the General Industry segment included expenses associated with the aforementioned acquisition of Flo-Pac, the consolidation of operations within Carlisle Process Systems and Carlisle FoodService, the shut down of a Tensolite facility in Mexico and remaining costs associated with closing Tensolite's Vermont facility initiated in 2001. The majority of these costs related to termination benefits of $1.3 million, contract termination costs of $1.0 million, fixed asset write-downs of $0.5 million, and rent payments of $0.3 million.
The $4.6 million of exit and disposal activities in the General Industry segment in 2002 related to the closing of a Tensolite cable plant in Andover, Massachusetts. The majority of the costs related to the write-off of inventory and fixed assets totaling $2.1 million and $1.5 million, respectively. Additional costs of $1.0 million related to moving and relocation expenses and termination benefits.
Note 19 - Divestiture of Business
On December 30, 2002, the Company sold the European operations of its Carlisle Power Transmission business. In 2002, these operations contributed $33.3 million in net sales to the Industrial Components segment. As a result of this transaction, the Company recognized a loss before income taxes of $0.8 million, which is included in Other income and expense, net. Carlisle Power Transmission and the buyer of this business will manufacture and supply various products to each other on an ongoing basis.
Note 20 - Fair Value of Financial Instruments
The Company estimates that the carrying amounts of its cash and cash equivalents, receivables, short-term debt and accounts payable approximate fair value due to their short maturity. See Note 7 regarding the fair market value of the Company's senior notes.
Note 21 - Segment Information
The Company's reportable segments have been organized around differences in products and services, and operating segments have been aggregated. The accounting policies of the segments are the same as those described in the summary of accounting policies. The chief operating decision maker evaluates segment performance by earnings before interest and income taxes. The Company's operations are reported in the following segments:
Industrial Components---the principal products of this segment are bias-ply, non-automotive rubber tires, stamped and roll-formed wheels, industrial transmission belts and accessories. Primary markets include lawn and garden - consumers, lawn and garden - commercial, golf cart, home appliance, power equipment, trailer, all terrain vehicle, power sports/recreational vehicles, agriculture, and the related aftermarkets.
Construction Materials---the principal products of this segment are rubber (EPDM), FleeceBACK® and thermoplastic polyolefin (TPO) roofing membranes used predominantly on non-residential low-sloped roofs, related roofing accessories, including flashings, fasteners, sealing tapes, coatings and waterproofing and insulation products. The markets served include new construction, re-roofing and maintenance of low-sloped roofs, water containment, HVAC sealants, and coatings and waterproofing.
Specialty Products---the principal products of this segment are heavy-duty friction blocks, disc linings, braking systems parts, brake shoe remanufacturing and relining for on-highway Class 6, 7 and 8 trucks, braking systems for on-highway and industrial equipment, specialty friction products, and brake actuation systems for on-highway towed vehicles. Customers include manufacturers of heavy-duty trucks, trailers, brakes and axles, heavy-duty equipment and truck dealers and replacement part and aftermarket distributors.
Transportation Products---the principal products of this segment are open-deck construction trailers, dump trailers for the material hauling, specialized trailers for large-capacity multi-unit trailers, over-the-road commercial trailers and stainless steel trailers. Customers include heavy equipment and truck dealers and commercial haulers.
General Industry (All Other)---the principal products of this group include: (i) cheese, whey and milk powder systems, stainless steel vessels and process equipment for customers in the dairy, food processing, pharmaceutical, and fine chemical and industrial industries. (ii) commercial and institutional foodservice permanentware, table coverings, cookware, catering equipment, fiberglass and composite material trays and dishes, industrial brooms, brushes, mops, rotary brushes and carpet care products for commercial and non-commercial foodservice operators and sanitary maintenance professionals, (iii) high performance wire, cable, connectors and cable assemblies, including RF/microwave connectors and cable assemblies primarily for the aerospace, business aircraft, defense electronics, test and measurement equipment and wireless infrastructure equipment industries, and (iv) insulated temperature/climate-controlled truck bodies and trailers for customers in warehouse-to-retail store delivery and home food delivery.
Corporate---includes general corporate expenses. Corporate assets consist primarily of cash and cash equivalents, facilities, and other invested assets.
Geographic Area Information---sales are attributable to the United States and to all foreign countries based on the country in which subsidiaries are domiciled. Sales by country for the years ended December 31 were as follows (in thousands):
Long-lived assets, comprised of net property, plant and equipment, goodwill and other intangible assets, investments and other long-term assets, located in the United States and foreign countries are as follows (in thousands):
Financial information for operations by reportable business segment is included in the following summary:
A reconciliation of assets reported above to total assets as presented on the Company's Consolidated Balance Sheets is as follows:
Note 22 - Quarterly Financial Data
In the fourth quarter of 2004, the Company recorded after-tax, non-cash write-offs of $25.1 million of goodwill and $3.1 million of other assets associated with discontinued operations. See Note 17 for additional detail.
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