1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 1, 2001 Commission File Number 1-11024
CLARCOR Inc.
-----------
(Exact name of registrant as specified in its charter)
DELAWARE 36-0922490
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2323 Sixth Street, P.O. Box 7007, Rockford, Illinois 61125
---------------------------------------------------- ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 815-962-8867
-------------
No Change
---------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
24,619,116 common shares outstanding
------------------------------------
Page 1 of 19
2
Part I - Item 1
CLARCOR Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
--------
September 1, November 30,
ASSETS 2001 2000
------------ ------------
(unaudited)
Current assets:
Cash and short-term cash investments $ 10,425 $ 10,864
Accounts receivable, less allowance for losses
of $6,818 for 2001 and $5,027 for 2000 119,877 110,083
Inventories:
Raw materials 38,430 38,277
Work in process 12,113 14,103
Finished products 54,881 48,181
--------- ---------
Total inventories 105,424 100,561
--------- ---------
Prepaid expenses and other current assets 3,863 3,640
Deferred income taxes 10,485 5,331
--------- ---------
Total current assets 250,074 230,479
--------- ---------
Plant assets at cost, 276,657 272,252
less accumulated depreciation (136,664) (132,131)
--------- ---------
139,993 140,121
--------- ---------
Excess of cost over fair value of assets acquired,
less accumulated amortization 77,489 62,333
Other acquired intangibles, less accumulated amortization 38,480 39,544
Pension assets 20,355 19,519
Other noncurrent assets 14,323 9,934
--------- ---------
$ 540,714 $ 501,930
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 5,648 $ 5,482
Accounts payable 45,062 40,826
Income taxes 7,218 8,157
Accrued and other liabilities 36,890 43,361
--------- ---------
Total current liabilities 94,818 97,826
--------- ---------
Long-term debt, less current portion 153,338 141,486
Long-term pension liabilities 5,531 4,374
Other long-term liabilities 21,417 15,756
Minority interests 408 395
Contingencies
SHAREHOLDERS' EQUITY
Capital stock 24,619 24,381
Capital in excess of par value 9,541 5,700
Accumulated other comprehensive earnings (8,275) (6,919)
Retained earnings 239,317 218,931
--------- ---------
265,202 242,093
--------- ---------
$ 540,714 $ 501,930
========= =========
See Notes to Consolidated Condensed Financial Statements
Page 2 of 19
3
CLARCOR Inc.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Dollars in thousands except per share data)
(Unaudited)
---------
Quarter Ended Nine Months Ended
------------ -----------------
September 1, August 26, September 1, August 26,
2001 2000 2001 2000
----------- ----------- ------------ -------
Net sales $ 175,645 $ 160,830 $ 491,347 $ 473,732
Cost of sales 125,339 113,052 349,411 331,686
----------- ----------- ----------- -----------
Gross profit 50,306 47,778 141,936 142,046
Selling and administrative expenses 31,777 28,824 88,668 90,432
----------- ----------- ----------- -----------
Operating profit 18,529 18,954 53,268 51,614
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (2,504) (2,878) (7,965) (8,233)
Interest income 199 89 535 373
Other, net (84) (296) (278) (942)
----------- ----------- ----------- -----------
(2,389) (3,085) (7,708) (8,802)
----------- ----------- ----------- -----------
Earnings before income taxes and
minority interests 16,140 15,869 45,560 42,812
Provision for income taxes 5,868 5,768 16,546 15,542
----------- ----------- ----------- -----------
Earnings before minority interests 10,272 10,101 29,014 27,270
Minority interests in earnings of subsidiaries (15) (23) (17) (39)
----------- ----------- ----------- -----------
Net earnings $ 10,257 $ 10,078 $ 28,997 $ 27,231
=========== =========== ========= ===========
Net earnings per common share:
Basic $ 0.42 $ 0.41 $ 1.18 $ 1.12
=========== =========== ========= ===========
Diluted $ 0.41 $ 0.41 $ 1.17 $ 1.11
=========== =========== ========= ============
Average number of common shares outstanding:
Basic 24,594,053 24,298,993 24,507,888 24,242,592
=========== =========== ========= ============
Diluted 25,118,441 24,617,966 24,843,710 24,477,373
=========== =========== ========= ============
Dividends paid per share $ 0.1175 $ 0.1150 $ 0.3525 $ 0.3450
=========== =========== ========= ============
See Notes to Consolidated Condensed Financial Statements
Page 3 of 19
4
CLARCOR Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
--------
Nine Months Ended
-----------------
September 1, August 26,
2001 2000
----------- -----------
Cash flows from operating activities:
Net earnings $ 28,997 $ 27,231
Depreciation and amortization 16,930 16,895
Impairment of plant assets 2,422 --
Changes in assets and liabilities (6,299) (9,193)
Other, net (261) 139
-------- --------
Net cash provided by operating activities 41,789 35,072
-------- --------
Cash flows from investing activities:
Additions to plant assets (15,240) (18,364)
Business acquisitions, net of cash acquired (33,498) (13,204)
Other, net 706 (207)
-------- --------
Net cash used in investing activities (48,032) (31,775)
-------- --------
Cash flows from financing activities:
Proceeds from line of credit 25,500 35,200
Payments on line of credit (16,500) (30,200)
Proceeds from long term-term debt 8,000 --
Reduction of long-term debt (5,145) (6,756)
Cash dividends paid (8,611) (8,349)
Other, net 2,568 1,156
-------- --------
Net cash provided by financing activities 5,812 (8,949)
-------- --------
Net effect of exchange rate changes on cash (8) (113)
-------- --------
Net change in cash and short-term cash investments (439) (5,765)
Cash and short-term cash investments,
beginning of period 10,864 14,745
-------- --------
Cash and short-term cash investments,
end of period $ 10,425 $ 8,980
======== ========
Cash paid during the period for:
Interest $ 8,803 $ 8,394
======== ========
Income taxes $ 16,517 $ 9,118
======== ========
See Notes to Consolidated Condensed Financial Statements
Page 4 of 19
5
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
--------------------------------------------------------------------------------
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The November 30, 2000 consolidated balance sheet data was derived from
CLARCOR's year-end audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted.
The consolidated condensed balance sheet as of September 1, 2001, the
consolidated condensed statements of earnings and the consolidated
condensed statements of cash flows for the periods ended September 1, 2001,
and August 26, 2000, have been prepared by the Company without audit. The
financial statements have been prepared on the same basis as those in the
Company's November 30, 2000 annual report to shareholders. In the opinion
of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows have been made. The results of operations for
the period ended September 1, 2001 are not necessarily indicative of the
operating results for the full year.
2. RECLASSIFICATIONS
Certain reclassifications have been made to conform prior years' data to
the current presentation. These reclassifications had no effect on
reported earnings.
3. ACCOUNTING CHANGE AND DERIVATIVE INSTRUMENTS
The Company makes limited use of derivative financial instruments and does
not use them for trading or speculative purposes. Derivative financial
instruments are used principally to manage certain interest rate and
foreign currency risks. Interest rate swap agreements are utilized to
convert certain floating rate debt into fixed rate debt. Cash flows related
to interest rate swap agreements are included in interest expense over the
terms of the agreements.
Effective December 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires the recognition of
all derivatives in the balance sheet as either an asset or a liability
measured at fair value. The statement also requires a company to recognize
changes in the derivative's fair value currently in earnings unless it
meets specific hedge accounting criteria. 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 earnings and are
recognized in the income statement when the hedged item affects earnings.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. In addition, the
Company formally assesses (both at the hedge's inception and on an ongoing
basis) whether the derivatives that are used in hedging transactions have
been effective in offsetting changes in the fair value or cash flows of
hedged items and whether
Page 5 of 19
6
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
--------------------------------------------------------------------------------
(Unaudited) Continued
3. ACCOUNTING CHANGE AND DERIVATIVE INSTRUMENTS (Continued)
those derivatives may be expected to remain effective in future periods. If
it is determined that a derivative is not (or has ceased to be) effective
as a hedge, the Company would discontinue hedge accounting prospectively.
Such a determination would be made (1) when the derivative is no longer
effective in offsetting changes in the fair value or cash flows of a hedged
item (including hedged items such as firm commitments or forecasted
transactions); (2) the derivative expires or is sold, terminated, or
exercised; (3) it is no longer probable that the forecasted transaction
will occur; (4) a hedged firm commitment no longer meets the definition of
a firm commitment; or (5) management determines that designating the
derivative as a hedging instrument is no longer appropriate. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings.
During 2000, the Company entered into interest rate agreements to manage
its interest exposure related to the multicurrency credit revolver. The
agreement in place at September 1, 2001 provides for the Company to pay a
7.34% fixed interest rate on a notional amount of $60,000 that is effective
until September 11, 2002. Under the agreement the Company will receive
interest at floating rates based on LIBOR.
The adoption of SFAS 133 resulted in a cumulative effect of an accounting
change to accumulated other comprehensive earnings of a negative $769
($1,183 pretax) and the recognition of a long-term liability. The Company's
derivative instrument is designated as a cashflow hedge and determined to
be effective. Therefore, there was no adjustment to net earnings.
Approximately $707 (or $1,088 pretax) of the net derivative loss included
in other comprehensive earnings as of December 1, 2000, will be
reclassified into earnings during the twelve months ended November 30,
2001. At September 1, 2001, the fair value of the agreement was a negative
$2,791 and is included in other noncurrent liabilities. The net loss
included in other comprehensive earnings for the nine months ended
September 1, 2001 was $1,045 (or $1,608 pretax). Derivative gains and
losses will be reclassified into earnings as payments are made on its
variable rate interest debt. Approximately $367 was reclassified into
earnings during the nine months ended September 1, 2001. The Company
estimates that $1,470 (or $2,261 pretax) of net derivative losses included
in other comprehensive income at September 1, 2001 will be reclassified
into earnings within the next twelve months.
4. BUSINESS COMBINATIONS
On June 4, 2001, the Company acquired several filtration management
companies for approximately $33,368 in cash including acquisition expenses.
The purchase price was paid in cash with available funds and proceeds from
long-term borrowings from a revolving credit facility. As a result of the
acquisition, the companies were combined into one company, Total Filtration
Services, Inc. (TFS) and became a subsidiary of the Company. The
transaction was accounted for under the purchase method of accounting with
the excess of the initial purchase price over the estimated fair value of
the net tangible and identifiable intangible assets acquired recorded as
goodwill and amortized. The initial purchase price was based on the net
assets of the businesses acquired as shown on a June 4, 2001 balance sheet
and is subject to a final adjustment based on the net assets of the
businesses. A preliminary allocation of the initial
Page 6 of 19
7
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
--------------------------------------------------------------------------------
(Unaudited) Continued
4. BUSINESS COMBINATIONS (Continued)
purchase price has been made to major categories of assets and liabilities.
The allocation will be completed when the Company receives a closing
balance sheet in accordance with the purchase agreement from the seller,
obtains a final appraisal of the assets acquired (which includes completing
an assessment of the liabilities assumed), and finalizes the estimates
associated with other costs of the acquisitions. The results are included
in the Company's consolidated results of operations from the date of
acquisition. In the most recent twelve-month period, sales of the acquired
companies totaled approximately $63,000.
In the first and second quarter of 2000, the Company purchased two air
filtration distributors and one liquid process filtration manufacturer
accounted for under the purchase method. Two of the acquisitions were paid
for in cash. The purchase price of the other was paid in cash and stock.
The final allocation of the purchase price to the assets and liabilities
acquired resulted in an increase to goodwill of $615 in the second quarter
of 2001. These acquisitions did not have a significant impact on the
results of the Company.
On September 10, 1999, the Company acquired three industrial filtration
businesses, Purolator Air Filtration, Facet International, and Purolator
Facet, Inc. The transaction was accounted for under the purchase method of
accounting with the excess of the initial purchase price over the estimated
fair value of the net tangible and identifiable intangible assets acquired
recorded as goodwill. During the fourth quarter of fiscal year 2000, the
Company finalized the purchase price according to the terms of the purchase
agreement and completed the estimates of liabilities assumed, including
those associated with exit and other costs of the acquisition. The
finalized allocation to major categories of assets and liabilities resulted
in a reduction to goodwill of $34. As part of the final allocation of
purchase price, the Company accrued an additional $800 for severance and
exit costs during 2000, resulting in a total accrual of $1,085 of which
$1,012 was paid out as of September 1, 2001. The remaining accrual for
severance and exit costs is expected to be settled by the end of 2001. The
operating results are included in the Company's consolidated results of
operations from September 1, 1999, the effective date of the acquisitions.
5. LONG-TERM DEBT
On May 1, 2001, the Company, in cooperation with the Campbellsville-Taylor
County Industrial Development Authority, issued $8,000 of Industrial
Revenue Bonds. The bonds are due May 1, 2031, with a variable rate of
interest that is reset weekly. In conjunction with the issuance of the
Industrial Revenue Bonds, the Company holds in trust certain restricted
investments committed for the acquisition of plant equipment. At September
1, 2001, the restricted asset balance was $2,859 and is included in other
noncurrent assets.
Page 7 of 19
8
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
--------------------------------------------------------------------------------
(Unaudited) Continued
6. IMPAIRMENT LOSS
During the first quarter of 2001, the Company recognized an impairment
loss in its Packaging segment of $2,422 related to certain plant assets
used exclusively in the manufacture of plastic closures for a customer who
terminated a manufacturing contract. The loss is included in the cost of
sales and was calculated under the guidelines of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of."
7. EARNINGS PER SHARE
The Company calculates earnings per share according to Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Diluted
earnings per share reflects the impact of outstanding stock options and
restricted stock as if exercised during the periods presented using the
treasury stock method. The following table provides a reconciliation of the
numerators and denominators utilized in the calculation of basic and
diluted earnings per share.
Quarter Ended Nine Months Ended
-------------------------- ------------------------------
September 1, August 26, September 1, August 26,
2001 2000 2001 2000
------------ ----------- ------------- ---------------
Net Earnings (numerator) $ 10,257 $ 10,078 $ 28,997 $ 27,231
Basic EPS:
Weighted average number of common
shares outstanding (denominator) 24,594,053 24,298,993 24,507,888 24,242,592
Basic per share amount $ .42 $ 0.41 $ 1.18 $ 1.12
=========== =========== =========== ===========
Diluted EPS:
Weighted average number of common
shares outstanding 24,594,053 24,298,993 24,507,888 24,242,592
Dilutive effect of stock options 524,388 318,973 335,822 234,781
----------- ----------- ----------- -----------
Diluted weighted average number of
common shares outstanding
(denominator) 25,118,441 24,617,966 24,843,710 24,477,373
Diluted per share amount $ .41 $ 0.41 $ 1.17 $ 1.11
=========== =========== =========== ===========
The following options were not included in the computation of diluted
earnings per share as the options' exercise prices were greater than the
average market price of the common shares during the respective quarter and
year-to-date periods:
Page 8 of 19
9
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
--------------------------------------------------------------------------------
(Unaudited) Continued
7. EARNINGS PER SHARE (Continued)
Quarter Ended Nine Months Ended
-------------------------------- ---------------------------------
September 1, August 26, September 1, August 26,
2001 2000 2001 2000
--------------- --------------- --------------- ----------------
Options - 477,016 51,751 746,666
Weighted Average Exercise Price - $ 19.79 $ 25.09 $ 19.34
For the nine months ended September 1, 2001, exercises of stock options
added $3,199 to capital in excess of par value.
8. COMPREHENSIVE EARNINGS
The Company's total comprehensive earnings and its components are as
follows:
Quarter Ended Nine Months Ended
------------------------------- -----------------------------
September 1, August 26, September 1, August 26,
2001 2000 2001 2000
--------------- --------------- ------------ --------------
Net earnings $ 10,257 $ 10,078 $ 28,997 $ 27,231
Other comprehensive earnings, net of tax:
Cashflow hedges:
Cumulative effect of accounting change - - (769) -
Net loss on derivative instruments (115) - (1,045) -
Foreign currency translation adjustments 854 (244) 458 (2,053)
--------------- --------------- -------------- ---------------
Total comprehensive earnings $ 10,996 $ 9,834 $ 27,641 $ 25,178
=============== =============== ============== ==============
9. SEGMENT DATA
The Company operates in three reportable segments: Engine/Mobile
Filtration, Industrial/Environmental Filtration, and Packaging. The segment
data for the quarter and nine-month periods ended September 1, 2001 and
August 26, 2000, respectively, are shown below. Net sales represent sales
to unaffiliated customers as reported in the consolidated condensed
statements of earnings. Intersegment sales were not material.
Quarter Ended Nine Months Ended
---------------------------------- -------------------------------
September 1, August 26, September 1, August 26,
2001 2000 2001 2000
--------------- --------------- -------------- --------------
Net sales:
Engine/Mobile Filtration $ 64,421 $ 65,153 $ 187,538 $ 190,366
Industrial/Environmental Filtration 94,214 78,137 252,315 231,952
Packaging 17,010 17,540 51,494 51,414
--------------- --------------- -------------- --------------
$ 175,645 $ 160,830 $ 491,347 $ 473,732
=============== =============== ============== ==============
Page 9 of 19
10
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
--------------------------------------------------------------------------------
(Unaudited) Continued
9. SEGMENT DATA (Continued)
Quarter Ended Nine Months Ended
---------------------------------- -------------------------------
September 1, August 26, September 1, August 26,
2001 2000 2001 2000
--------------- --------------- -------------- --------------
Operating profit:
Engine/Mobile Filtration $ 12,610 $ 12,291 $ 36,440 $ 34,756
Industrial/Environmental Filtration 4,974 4,867 10,802 11,605
Packaging 945 1,796 6,026 5,253
--------------- --------------- -------------- --------------
18,529 18,954 53,268 51,614
Other expense (2,389) (3,085) (7,708) (8,802)
---------------- -------------- --------------- ---------------
Earnings before income taxes and
minority earnings $ 16,140 $ 15,869 $ 45,560 $ 42,812
=============== =============== ============== ==============
Nine Months Ended
---------------------------------
September 1, August 26,
2001 2000
---------------- ---------------
Identifiable assets:
Engine/Mobile Filtration $ 138,352 $ 144,716
Industrial/Environmental Filtration 308,784 259,243
Packaging 43,594 41,094
Corporate 49,984 48,998
---------------- ---------------
$ 540,714 $ 494,051
================ ===============
Page 10 of 19
11
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CLARCOR reported increased sales, operating profit, net earnings and earnings
per share for the first nine months of 2001 compared to the same period in 2000.
Included in the first quarter of 2001 was a contract cancellation payment
received from a customer of the Company's Packaging segment which increased the
2001 nine months operating profit approximately $2,300,000 and diluted earnings
per share by $0.06 compared to last year's nine-month results. At the beginning
of the third quarter of 2001, the Company acquired Total Filtration Services,
Inc. (TFS) for approximately $33,368,000, subject to final adjustments per the
agreement. This acquisition increased sales and operating profit approximately
$15,000,000 and $700,000, respectively, and added $0.01 to diluted earnings per
share for the third quarter and nine months of 2001. Excluding the impact of
these items, sales and operating profit were lower for the nine months primarily
due to reduced customer orders caused by a slowdown in the U.S. economy compared
to fiscal 2000.
RESULTS OF OPERATIONS: THIRD QUARTER OF 2001 COMPARED WITH THIRD QUARTER
OF 2000.
Net sales of $175,645,000 increased 9.2% from $160,830,000 reported for the
third quarter of 2000. The increase over last year's third quarter resulted
primarily from the TFS acquisition at the beginning of the 2001 quarter. The
Engine/Mobile Filtration segment reported reduced sales of 1.1% to $64,421,000
from $65,153,000 in 2000. The decline in sales reflects the overall slowdown in
the U.S. and world economy. The Company's Industrial/Environmental Filtration
segment recorded a 20.6% overall increase in sales to $94,214,000 for the 2001
third quarter. This sales increase resulted primarily from the TFS acquisition
and additional sales from new product introductions and increased distribution
coverage. However, partially offsetting these increases were reduced sales due
to the slowdown in the U.S. economy and in particular, sales of filtration
equipment and systems. The Packaging segment reported a decrease in sales of
3.0% for the 2001 quarter, primarily as a result of the contract cancellation by
a customer in the first quarter of 2001. Excluding the impact of the canceled
contract, sales increased approximately 8% compared to the prior year quarter,
primarily due to additional sales of metal and plastic packaging products.
Operating profit for the third quarter 2001 was $18,529,000 compared to
$18,954,000 in 2000, a decrease of 2.2%. The reduction in operating profit was
principally due to ongoing plant and equipment start-up costs in the
Industrial/Environmental and Packaging segments and the reduced profit resulting
from the Packaging customer contract cancellation. These reductions to operating
profit more than offset the additional profit from TFS for the 2001 quarter.
Gross margin was 28.6% in the 2001 quarter compared to 29.7% in 2000 and
reflected principally the ongoing plant and equipment start-up costs in 2001.
Selling and administrative expenses increased in the 2001 quarter primarily due
to adding TFS. Excluding the impact from the TFS acquisition, discretionary cost
controls and reduced employee-related costs implemented earlier in 2001 resulted
in lower selling and administrative expenses compared to the 2000 quarter.
Although the operating profit margin for TFS is lower than the overall margin
for CLARCOR, beginning in fiscal 2002 it is expected that TFS' margin will
improve as revenues increase and operational changes are made.
The Engine/Mobile Filtration segment recorded operating profit of $12,610,000, a
2.6% increase over the third quarter of 2000. Productivity and cost containment
programs drove the increase in
Page 11 of 19
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
profit and operating margin improved to 19.6% compared to 18.9% in the 2000
quarter. The segment's discretionary cost reductions also offset increases in
energy, material and health care costs. The Industrial/Environmental Filtration
segment reported a $107,000 increase in operating profit in the third quarter of
2001 to $4,974,000 from $4,867,000 recorded in 2000. This increase was primarily
due to the profit from TFS which was acquired at the beginning of the 2001
quarter and offset plant start-up costs. In addition, operating profit was also
affected by reduced sales of filtration equipment and systems and the
corresponding reduction in capacity utilization. The Packaging segment's
decrease in operating profit to $945,000 from $1,796,000 recorded in the 2000
quarter resulted primarily from reduced sales due to the February 2001 customer
contract cancellation, start-up costs related to new lithography equipment, and
higher energy and pension costs. The Packaging segment's operating profit will
also be reduced in fourth quarter of 2001 compared to the same quarter in 2000
as a result of the loss of sales for this customer. If not canceled, the
contract for plastic closures would have continued for two additional years. The
early termination payment that was received in February 2001 was approximately
equal to the operating profit that would have been earned over the remaining
contract period.
Net other expense for the quarter of $2,389,000 was lower than $3,085,000
recorded in the 2000 quarter. During the 2001 quarter, favorable cash flow was
used to reduce borrowings and combined with lower interest rates resulted in
reduced interest expense. Interest income increased due to higher cash balances
during the 2001 quarter.
Earnings before income taxes and minority interests for the third quarter of
2001 were $16,140,000, an increase of 1.7% from $15,869,000 in the comparable
quarter last year. The provision for income taxes in 2001 was $5,868,000, an
effective rate of 36.4% which was the same rate recorded in the 2000 quarter.
Net earnings in the third quarter of the current year were $10,257,000, or $0.41
per share on a diluted basis. The 2000 net earnings for the quarter of
$10,078,000 also resulted in diluted earnings per share of $0.41. Diluted
average shares outstanding were 25,118,441 for the third quarter of 2001, an
increase of 2.0% from the average of 24,617,966 for the 2000 quarter.
NINE MONTHS 2001 COMPARED TO NINE MONTHS OF 2000.
Net sales for the nine-month 2001 period totaled $491,347,000 compared to
$473,732,000 for the prior year period. The Engine/Mobile Filtration segment's
sales decrease of 1.5% to $187,538,000 resulted primarily from reduced
light-duty filtration product sales earlier in fiscal 2001. The segment's sales
were lower than expected for the nine-month 2001 period due to the slowdown in
the U.S. economy and a reduction in inventory levels and product demand by our
customers. The Industrial/Environmental Filtration segment reported an 8.8%
increase in sales, or approximately 2.3% excluding the TFS acquisition, for the
nine-month period. The sales increase resulted primarily from new products
introduced late in fiscal 2000 and increased distribution coverage for
environmental air filters. This increase in sales was partially offset by lower
sales of filtration equipment and systems in the 2001 period. The Packaging
segment's sales of $51,494,000 were approximately even with the prior year. The
2001 sales included the contract cancellation payment received in the first
quarter of 2001 offset by reduced sales of plastic closures and license fees for
that customer.
Page 12 of 19
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Operating profit for the 2001 nine-month period of $53,268,000 exceeded the 2000
period by 3.2%. Included in the nine-month results was a contract cancellation
payment received in the first quarter of 2001. Excluding the operating profit
related to this customer from the 2001 and 2000 nine-month periods and also the
operating profit from TFS, operating profit declined by approximately 3%
compared to the prior year. Reduced discretionary spending and selling and
administrative expenses offset reduced capacity utilization and increased
start-up costs. The operating margin was 10.8% compared to 10.9% in the 2000
nine-month period.
The Engine/Mobile Filtration segment reported an increase in operating profit of
4.8% from the 2001 nine-month period. This increase resulted from reduced
discretionary spending and productivity improvements that offset reduced
capacity utilization and increases in energy, material and health care costs.
The Industrial/Environmental Filtration segment reported reduced operating
profit of 6.9% to $10,802,000. Excluding TFS, operating profit was reduced by
approximately 13% from the prior year. The reduction in operating profit for the
segment resulted primarily from reduced sales of filtration equipment and
systems and start-up costs associated with two new manufacturing facilities. The
start-up costs associated with these new facilities were reduced during the
third quarter of 2001 as production efficiencies improved and capacity
utilization improved. The Packaging segment reported an increase in profit to
$6,026,000 for the nine-month 2001 period from $5,253,000 in 2000. This increase
resulted from the contract cancellation payment received in first quarter 2001
offset by reduced capacity utilization and start-up costs related to the
installation of new lithography equipment. Although increased sales for metal
packaging products occurred in the 2001 third quarter, start-up costs more than
offset the benefit from the additional sales produced on the new automated
equipment.
Net other expense of $7,708,000 in the 2001 nine-month period was lower than the
$8,802,000 recorded in the prior year period. The reduction was principally due
to reduced interest expense, increased interest income and reduced currency
exchange losses resulting from changes in European currency rates.
Earnings before income taxes and minority interests totaled $45,560,000 for the
2001 nine-month period compared to $42,812,000 in 2000, an increase of 6.4%. The
effective tax rate for both of the nine-month periods was 36.3%. The Company
expects the overall effective tax rate for fiscal 2001 will be approximately
36.3%.
Net earnings totaled $28,997,000, or $1.17 diluted earnings per share, for the
nine-month 2001 period. Net earnings totaled $27,231,000, or $1.11 diluted
earnings per share, for the 2000 nine-month period. Nine-month 2001 diluted
earnings per share increased approximately $0.01 from the third quarter 2001 TFS
acquisition and $0.06 per share as a result of the Packaging segment's customer
contract cancellation. Excluding TFS and the impact of the contract cancellation
for both 2001 and 2000, diluted earnings per share were lower in 2001 by
approximately $0.01, primarily as a result of lower sales levels and the new
facility and equipment start-up costs discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $41,789,000 for the 2001
nine-month period, an increase of $6,717,000 from the prior year. Net increases
in assets and liabilities of $6,299,000 for
Page 13 of 19
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
the nine months of 2001 compared to $9,193,000 recorded in 2000. Cash flows used
in investing activities in 2001 of $48,032,000 included $33,498,000 used
principally for the TFS acquisition and $15,240,000 for additions to plant
assets. In the first nine months of 2000, cash flows for investing activities
totaled $31,775,000 and included $13,204,000 used for acquisitions. The Company
also issued 160,704 common shares related to one of the acquisitions. Additions
to plant assets totaled $18,364,000 in the 2000 quarter. Cash flows from
financing activities of $5,812,000 in 2001 included net additional borrowings on
a line of credit of $9,000,000, $8,000,000 received from the issuance of
industrial revenue bonds related to a new facility in Kentucky, $5,145,000 for
payments on long-term debt, and dividend payments of $8,611,000. Cash flows from
financing activities of $8,949,000 in the 2000 nine-month period included net
additional borrowings on a line of credit of $5,000,000 primarily for
acquisitions, repayments on long-term debt of $6,756,000 and dividend payments
of $8,349,000.
CLARCOR's current operations continue to generate cash and sufficient lines of
credit remain available to fund current operating needs, pay dividends, fund
planned capital expenditures, and provide for interest payments and required
principal payments related to the Company's long-term debt. At the beginning of
the 2001 third quarter, the Company completed the acquisition of Total
Filtration Services (TFS) for approximately $33,368,000. Cash balances and
additional borrowing against the Company's outstanding credit line were used to
fund the acquisition. At the end of the 2001 third quarter, the outstanding
balance on the credit facility was $125,000,000. Principal payments on long-term
debt will be approximately $5,500,000 in fiscal 2001; however, no payments are
required in fiscal 2001 on the multicurrency revolving credit facility. The
Company is in compliance with covenants related to the facility. The Company
expects to continue to use free cash flow to further reduce current debt levels.
Operating profit before depreciation, asset impairment and amortization,
increased to $72,620,000 compared to $68,509,000 in 2000. Capital expenditures
in fiscal year 2001 are expected to be approximately $21,000,000 compared to the
total of $29,005,000 in 2000. The 2001 expenditures will be used to increase
production capacity, reduce manufacturing costs, integrate and improve
businesses previously acquired, and develop new products.
The Company's financial position at the end of the third quarter 2001 included
the investment in TFS. Cash and short-term investments totaled $10,425,000 at
the end of the quarter, a slight reduction from $10,864,000 at year-end 2000. At
the end of the 2001 third quarter compared to year-end 2000, accounts receivable
increased by $9,794,000 and inventory increased $4,863,000 due to TFS. Excluding
the acquisition amounts for TFS, accounts receivable and inventory decreased
from the year-end 2000 amounts approximately $940,000 and $4,475,000,
respectively. The current ratio at the end of the 2001 third quarter was 2.6
compared to 2.4 at the end of fiscal 2000. Including the additional borrowings
for the TFS acquisition and industrial revenue bonds issued in the 2001 second
quarter, the ratio of long-term debt to total capitalization at the end of the
third quarter was 36.6% compared to the year-end level of 36.9%. At September 1,
2001, CLARCOR had 24,619,116 shares of common stock outstanding.
Page 14 of 19
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
OTHER MATTERS
Market Risk
The Company's interest expense on long-term debt is sensitive to changes in
interest rates. In addition, changes in foreign currency exchange rates may
affect assets, liabilities and commitments that are to be settled in cash and
are denominated in foreign currencies. During fiscal 2000, the Company entered
into several interest rate swap agreements related to a multicurrency credit
revolver based on LIBOR. The Company's interest rate agreements are discussed in
Note 3 to the consolidated condensed financial statements as the Company adopted
SFAS 133 effective December 1, 2000. Market risks are also discussed in the
Company's Annual Report and Form 10-K for the year ended November 30, 2000 (the
"Annual Report") in the Financial Review on page 10.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements,"
relating to revenue recognition under generally accepted accounting principles
in financial statements. The Company expects to continue to review the guidance
provided in SAB 101 during fiscal 2001 as compliance with SAB 101 is required by
the end of fiscal 2001 for the Company. Based on the assessment to date of
current practices, management does not expect this review to result in any
material effect on the Company's revenue recognition practices.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the
purchase method of accounting be used for business combinations initiated after
June 30, 2001. Under SFAS 142, amortization of goodwill, including goodwill
recorded in past business combinations, will discontinue upon adoption of this
standard. In addition, goodwill and intangible assets will be tested for
impairment in accordance with the provisions of SFAS 142. Although the Company
is not required to adopt the provisions of SFAS 142 until fiscal 2003,
management expects to adopt SFAS 142 in the first quarter of fiscal 2002 ending
March 2, 2002. The Company has not completed an assessment of the impact of
these statements including the impairment test of goodwill; however, adoption of
SFAS 142 will result in a reduction of amortization expense.
Outlook
The Company believes the reduced order rate for filtration products that
occurred in the first nine months of 2001 resulted primarily from customer
concerns related to a downturn in the U.S. economy. This particularly affected
sales of filtration equipment and systems, which are not expected to return to
prior year sales levels before the end of 2001. The order rate from aftermarket
distributors, which is the Company's largest distribution channel for filtration
products, was also reduced during the period. However, the Company anticipates
that although some aftermarket distributors have delayed orders and reduced
their inventory during the first nine months of fiscal 2001, ongoing filter
maintenance and replacement requirements for vehicles, equipment and buildings
will lead to reasonably consistent annual sales of aftermarket filtration
products. Overall demand for engine filters is expected to continue at roughly
the current pace for the remainder of
Page 15 of 19
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
fiscal 2001 and demand for air quality products remains good in each of the
end-use markets serviced: retail, commercial, contractor and industrial.
Continued emphasis on cost reductions within each business unit is expected to
offset cost increases for pensions, health care, energy and for certain raw
materials. Labor availability has improved in several locations that will also
help to reduce costs compared to 2000.
Customer interest in the Company's Total Filtration Program, which was initiated
in fiscal 2000, continues to grow and additional sales are anticipated from new
customers and increased sales to current customers. The Company's third quarter
2001 acquisition of Total Filtration Services (TFS) has already enhanced the
ability of CLARCOR to meet the filtration management requirements of its
customers. Even in the current economic environment, the Total Filtration
Program has continued to grow as customers respond enthusiastically to the
simplification CLARCOR provides to the management of their filtration needs. The
acquisition of TFS and other planned investments, particularly for sales and
sales support, logistics and computer systems, in the Total Filtration Program
are expected to accelerate sales growth in the future. The interaction between
TFS and the other CLARCOR companies is also expected to provide incremental
profits beyond what the companies could achieve on their own.
The Packaging segment will continue with its transition to a business model
focused on growth in its core strength of flat sheet metal lithography. This
repositioning resulted in improved sales beginning in the third quarter of 2001
and is expected to improve operating profit when the start-up of new lithography
equipment is completed. Recently, however, customers have begun to reduce or
delay shipments and sales levels will be lower in the fourth quarter than
previously expected.
If the slowdown in the U.S. economy continues, it will affect the Company's
businesses for the remainder of the fiscal year. In addition, it is impossible
to predict the impact on the Company's sales and operating profit as a result of
the terrorist attacks on the United States on September 11, 2001. Being
primarily a manufacturer of consumable, disposable filters used in aftermarket
applications normally provides stability to sales and profits, but it does not
make the Company immune to fluctuations in the economy overall. The results from
TFS will be included for the third and fourth quarters of the 2001 fiscal year
and this acquisition is expected to be accretive to earnings per share beginning
in fiscal 2001, earlier than expected.
CLARCOR expects to continue to produce a strong, stable cash flow. Capital
expenditures for fiscal 2002 are expected to be approximately $22,000,000 to
$26,000,000. The Company continues to assess acquisition opportunities,
primarily in related filtration businesses. It is expected that these
acquisitions would expand the Company's market base, distribution coverage and
product offerings.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements quoted in the body of this report, and statements in the
"Outlook" section of this report are forward-looking. These statements involve
risk and uncertainty. Actual future results and trends may differ materially
depending on a variety of factors including: the volume and timing of orders
received during the period; the mix of changes in distribution channels through
which the Company's products are sold; the timing and acceptance of new products
and product enhancements by the Company or its competitors; the success of the
Company's Total Filtration Program; changes in pricing, labor availability and
related costs, product life cycles, raw material
Page 16 of 19
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
costs, energy costs, and purchasing patterns of distributors and customers;
competitive conditions in the industry; business cycles affecting the markets in
which the Company's products are sold; the effectiveness of plant conversions,
plant expansions and productivity improvement programs; the management of both
growth and acquisitions; the fluctuation in interest rates, primarily LIBOR,
which affect the cost of borrowing under the revolving credit facility; the
fluctuation in foreign and U.S. currency exchange rates; extraordinary events,
such as litigation, acquisitions or divestitures including related charges; and
economic conditions generally or in various geographic areas. All of the
foregoing matters are difficult to forecast. The future results of the Company
may fluctuate as a result of these and the other risk factors detailed from time
to time in the Company's Securities and Exchange Commission reports.
Due to the foregoing items it is possible that in some future quarters the
Company's operating results will be below the expectation of some stock market
analysts and investors. In such event, the price of CLARCOR common stock could
be materially adversely affected.
Page 17 of 19
18
Part II - Other Information
Item 6b - The Company did not file a Form 8-K during the quarter ended
September 1, 2001.
Page 18 of 19
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLARCOR INC.
(Registrant)
September 20, 2001 By /s/ Bruce A. Klein
---------------------------- ------------------------------------
(Date) Bruce A. Klein, Vice President - Finance
and Chief Financial Officer
Page 19 of 19