SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
QUARTERLY REPORT
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Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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For the quarter ended March 2, 2002
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REGISTRANT: CLARCOR Inc. (Delaware)
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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 March 2, 2002 Commission File Number 1-11024
CLARCOR Inc.
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(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
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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.
24,821,163 common shares outstanding
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Page 1 of 19
Part I - Item 1
CLARCOR Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
--------
March 2, November 30,
ASSETS 2002 2001
----------- ------------
(unaudited)
Current assets:
Cash and short-term cash investments $ 8,884 $ 7,418
Accounts receivable, less allowance for losses
of $7,545 for 2002 and $7,920 for 2001 111,400 115,003
Inventories:
Raw materials 36,633 37,195
Work in process 12,235 12,184
Finished products 57,988 54,913
--------- ---------
Total inventories 106,856 104,291
--------- ---------
Prepaid expenses and other current assets 2,772 4,120
Deferred income taxes 14,866 13,518
--------- ---------
Total current assets 244,778 244,350
--------- ---------
Plant assets at cost, 280,282 277,309
less accumulated depreciation (144,809) (139,993)
--------- ---------
135,473 137,316
--------- ---------
Goodwill 76,010 80,108
Trademarks 29,255 29,255
Other acquired intangibles, less accumulated amortization 9,649 9,831
Pension assets 19,038 18,939
Other noncurrent assets 11,321 10,818
--------- ---------
$ 525,524 $ 530,617
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 5,590 $ 5,579
Accounts payable 43,844 42,656
Income taxes 6,731 4,526
Accrued and other liabilities 36,009 42,170
--------- ---------
Total current liabilities 92,174 94,931
--------- ---------
Long-term debt, less current portion 125,995 135,203
Long-term pension liabilities 5,390 4,955
Other long-term liabilities 20,609 20,833
Minority interests 422 434
Contingencies
SHAREHOLDERS' EQUITY
Capital stock 24,821 24,626
Capital in excess of par value 11,625 9,565
Accumulated other comprehensive earnings (9,805) (9,179)
Retained earnings 254,293 249,249
--------- ---------
280,934 274,261
--------- ---------
$ 525,524 $ 530,617
========= =========
See Notes to Consolidated Condensed Financial Statements
Page 2 of 19
CLARCOR Inc.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Dollars in thousands except per share data)
(Unaudited)
---------
Three Months Ended
------------------------------
March 2, March 3,
2002 2001
------------ ------------
Net sales $ 158,262 $ 156,197
Cost of sales 113,552 109,911
------------ ------------
Gross profit 44,710 46,286
Selling and administrative expenses 30,304 28,602
------------ ------------
Operating profit 14,406 17,684
------------ ------------
Other income (expense):
Interest expense (1,966) (2,734)
Interest income 194 155
Other, net (104) 240
------------ ------------
(1,876) (2,339)
------------ ------------
Earnings before income taxes and minority interests 12,530 15,345
Provision for income taxes 4,518 5,549
------------ ------------
Earnings before minority interests 8,012 9,796
Minority interests in loss of subsidiaries (14) 8
------------ ------------
Net earnings $ 7,998 $ 9,804
============ ============
Net earnings per common share:
Basic $ 0.32 $ 0.40
============ ============
Diluted $ 0.32 $ 0.40
============ ============
Average number of common shares outstanding:
Basic 24,689,170 24,419,466
============ ============
Diluted 25,006,604 24,655,545
============ ============
Dividends paid per share $ 0.1200 $ 0.1175
============ ============
See Notes to Consolidated Condensed Financial Statements
Page 3 of 19
CLARCOR Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
--------
Three Months Ended
----------------------
March 2, March 3,
2002 2001
-------- --------
Cash flows from operating activities:
Net earnings $ 7,998 $ 9,804
Depreciation 5,006 4,823
Amortization 182 814
Impairment of plant assets - 2,422
Changes in assets and liabilities (1,221) (9,091)
Other, net (10) 141
-------- --------
Net cash provided by operating activities 11,955 8,913
-------- --------
Cash flows from investing activities:
Additions to plant assets (3,280) (5,467)
Business acquisitions, net of cash acquired 3,694 (70)
Other, net (48) 8
-------- --------
Net cash provided by (used in) investing activities 366 (5,529)
-------- --------
Cash flows from financing activities:
Proceeds from line of credit 5,500 5,500
Payments on line of credit (14,500) (7,500)
Reduction of long-term debt (197) (8)
Cash dividends paid (2,954) (2,858)
Other, net 1,365 920
-------- --------
Net cash used in financing activities (10,786) (3,946)
-------- --------
Net effect of exchange rate changes on cash (69) 37
-------- --------
Net change in cash and short-term cash investments 1,466 (525)
Cash and short-term cash investments,
beginning of period 7,418 10,864
-------- --------
Cash and short-term cash investments,
end of period $ 8,884 $ 10,339
======== ========
Cash paid during the period for:
Interest $ 2,479 $ 3,139
======== ========
Income taxes $ 1,057 $ 2,872
======== ========
See Notes to Consolidated Condensed Financial Statements
Page 4 of 19
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
1. CONSOLIDATED FINANCIAL STATEMENTS
The November 30, 2001 consolidated balance sheet data was derived from
CLARCOR's year-end audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the
United States of America. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been condensed or omitted.
The consolidated condensed balance sheet as of March 2, 2002, the
consolidated condensed statements of earnings and the consolidated
condensed statements of cash flows for the periods ended March 2, 2002, and
March 3, 2001, 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, 2001 annual report to shareholders except for the
adoption of new accounting pronouncements as discussed in Note 2. 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 March 2, 2002 are not necessarily indicative of the
operating results for the full year.
2. RECENT ACCOUNTING PRONOUNCEMENTS: BUSINESS COMBINATIONS, GOODWILL AND
INTANGIBLES
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill
and Other Intangible Assets," which discontinues amortization of the excess
of cost over fair value of assets acquired and of intangible assets with
indefinite lives. It also requires goodwill and intangible assets with
indefinite lives to be tested for impairment annually or whenever there is
an impairment indicator. The FASB also issued Statement of Financial
Accounting Standards No. 141 (SFAS 141), "Business Combinations," which
requires all business combinations after June 30, 2001 to be accounted for
under the purchase method and contains transition provisions that may
result in the reclassification of carrying values among existing goodwill
and other intangibles. As a result of adopting these standards in the first
quarter of fiscal 2002, the Company no longer amortizes goodwill,
trademarks and trade names. The Company estimates that amortization expense
for goodwill and trademarks would have been $2,908 (or $1,926 net of tax)
for fiscal 2002.
As a result of adopting these new standards, the accounting policies for
goodwill and other intangibles changed on December 1, 2001, as described
below:
Goodwill: The Company recognizes the excess of the cost of an acquired
entity over the net amount assigned to assets acquired and liabilities
assumed as goodwill. Goodwill is tested for impairment on an annual basis
and between annual tests in certain circumstances. Impairment losses would
be recognized whenever the implied fair value of goodwill is less than its
carrying value. Prior to December 1, 2001, goodwill was amortized over a
forty-year period using the straight-line method. Beginning December 1,
2001, goodwill is no longer amortized.
Page 5 of 19
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited) Continued
- --------------------------------------------------------------------------------
2. RECENT ACCOUNTING PRONOUNCEMENTS: BUSINESS COMBINATIONS, GOODWILL
(Continued)
Other Acquired Intangibles: The Company recognizes an acquired intangible
apart from goodwill whenever the asset arises from contractual or other
legal rights, or whenever it is capable of being separated or divided from
the acquired entity and sold, transferred, licensed, rented, or exchanged,
either individually or in combination with a related contract, asset, or
liability. An intangible other than goodwill is amortized over its
estimated useful life unless that life is determined to be indefinite. The
Company's trade names and trademarks have indefinite useful lives and will
be subject to impairment testing under SFAS 142. Prior to December 1, 2001,
the trademarks were amortized over a forty-year life. All other acquired
intangible assets, including patents (average fourteen year life) and other
identifiable intangible assets with lives ranging from one to thirty years,
are being amortized using the straight-line method over the estimated
periods to be benefited. The Company will review the lives of its
intangibles each reporting period and if necessary, impairment losses would
be recognized if the carrying amount of an intangible subject to
amortization is not recoverable from expected future cash flows and its
carrying amount exceeds its fair value.
As a result of adopting SFAS 142, the Company completed the transitional
goodwill impairment reviews required by the new standards during the first
quarter of 2002. In performing the impairment reviews, the Company
estimated the fair values of the reporting units using a present value
method that discounted future cash flows. Such valuations are sensitive to
assumptions associated with cash flow growth, discount rates and terminal
value. The Company further assessed the reasonableness of these estimates
by using valuation methods based on market multiples and recent capital
market transactions. As of December 1, 2001, the transition date, there was
no impairment to goodwill as the fair values exceeded the carrying values
of the reporting units. The carrying amounts of goodwill by reporting unit
as of March 2, 2002 are as follows: $8,466 for Engine/Mobile Filtration,
$67,544 for Industrial/Environmental Filtration and $0 for Packaging.
During the three months ended March 2, 2002, the carrying amount for the
Industrial/ Environmental segment decreased by approximately $4,000 due to
the purchase price adjustments related to an acquisition as discussed in
Note 3. There were also insignificant changes to the carrying values due to
foreign currency translation adjustments.
The Company also performed the impairment tests on its indefinite-lived
intangibles as of December 1, 2001 using the relief-from-royalty method to
determine the fair value of its trademarks and trade names. The fair value
was greater than the carrying value of $29,255 for these indefinite-lived
intangibles.
In connection with adopting SFAS 142, the Company also reassessed the
useful lives and classification of identifiable finite-lived intangible
assets and determined that they continue to be appropriate. The gross
carrying amount of amortized intangible assets was $12,152 and the related
accumulated amortization was $2,503 at March 2, 2002. The amortization
expense during the three months ended March 2, 2002 was $182 and is
estimated to be $726 for fiscal year 2002. The estimated amounts of
amortization expense for the next five years are: $656 in 2003, $501 in
2004, $498 in 2005, $498 in 2006 and $198 in 2007.
Page 6 of 19
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited) Continued
- --------------------------------------------------------------------------------
2. RECENT ACCOUNTING PRONOUNCEMENTS: BUSINESS COMBINATIONS, GOODWILL
(Continued)
The following table presents a reconciliation of net earnings and earnings
per share assuming the nonamortization provisions of SFAS 142 were applied
to fiscal year 2001:
Three Months Ended
------------------------------------------------------- Year Ended
March 3, June 2, September 1, November 30, November 30,
2001 2001 2001 2001 2001
---------------------------------------------------------------------
Reported net earnings $ 9,804 $ 8,936 $ 10,257 $ 12,896 $ 41,893
Goodwill amortization, net of income taxes 302 314 412 347 1,375
Other amortization, net of income taxes 108 127 124 117 475
---------------------------------------------------------------------
Adjusted net earnings $ 10,214 $ 9,377 $ 10,793 $ 13,359 $ 43,743
=====================================================================
Basic EPS:
Basic as reported $ 0.40 $ 0.36 $ 0.42 $ 0.52 $ 1.71
Goodwill amortization, net of income taxes 0.02 0.01 0.02 0.01 0.06
Other amortization, net of income taxes - 0.01 - 0.01 0.02
---------------------------------------------------------------------
Adjusted basic earnings per share $ 0.42 $ 0.38 $ 0.44 $ 0.54 $ 1.79
=====================================================================
Diluted EPS:
Diluted as reported $ 0.40 $ 0.36 $ 0.41 $ 0.51 $ 1.68
Goodwill amortization, net of income taxes 0.02 0.01 0.01 0.01 0.05
Other amortization, net of income taxes - 0.01 - 0.01 0.02
---------------------------------------------------------------------
Adjusted diluted earnings per share $ 0.42 $ 0.38 $ 0.42 $ 0.53 $ 1.75
=====================================================================
3. BUSINESS COMBINATIONS
On June 4, 2001, the Company acquired the stock of several filtration
management companies for approximately $29,258, net of cash received,
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. TFS is included in the
Industrial/Environmental Filtration segment. 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
over forty years by the straight-line method. The initial purchase price
was based on the net assets of the businesses acquired as shown on a June
4, 2001 balance sheet subject to a final adjustment. During first quarter
2002, the purchase price was finalized resulting in a $3,694 payment by the
seller to the Company. A decrease to goodwill of $4,000 was recorded
primarily as a result of the net settlement payment and entries associated
with deferred income taxes and the valuation of inventory acquired.
Purchase accounting
Page 7 of 19
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited) Continued
- --------------------------------------------------------------------------------
3. BUSINESS COMBINATIONS (Continued)
associated with the acquisition is subject to further adjustments to be
finalized in the second quarter of 2002 related to the valuation of certain
inventories outside of the United States, preacquisition contingencies
related to contract matters, and finalization of deferred income taxes. The
results are included in the Company's consolidated results of operations
from the date of acquisition.
The following unaudited pro forma information summarizes the results of
operations for the period indicated as if the acquisition had been
completed as of the beginning of the period presented. The pro forma
information gives effect to the actual operating results prior to the
acquisition, adjusted to include the pro forma effect of interest expense,
depreciation, amortization of intangibles and income taxes. The pro forma
amount does not purport to be indicative of the results that would have
actually been obtained if the acquisition had occurred as of the beginning
of the period presented or that may be obtained in the future. Unaudited
pro forma net sales for the Company would have been $170,600 for the three
months ended March 3, 2001. Net earnings and earnings per share for fiscal
2001 would not have been significantly affected.
4. RECLASSIFICATIONS
Certain reclassifications have been made to conform prior years' data to
the current presentation. These reclassifications had no effect on reported
earnings.
5. DERIVATIVE INSTRUMENTS
Effective December 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." The adoption of SFAS 133 resulted in a
cumulative effect of an accounting change to accumulated other
comprehensive earnings in the first quarter of 2001 of a negative $769
($1,183 pretax) and the recognition of a liability related to an existing
interest rate agreement.
This interest rate agreement provides for the Company to pay a 7.34% fixed
interest rate on a notional amount of $60,000 and expires September 11,
2002. Under the agreement the Company will receive interest at floating
rates based on LIBOR. This derivative instrument is designated as a
cashflow hedge and determined to be effective. Therefore, there was no
adjustment to net earnings during the first quarter of 2002 or 2001. At
March 2, 2002, the fair value of the agreement was a negative $2,397 and is
included in other current liabilities. The net gain included in other
comprehensive earnings for the three months ended March 2, 2002 was $349
(or $535 pretax). Derivative gains and losses will be reclassified into
earnings as payments are made on its variable rate interest debt.
Approximately $380 was reclassified into earnings during the first quarter.
The remaining amount of net derivative losses included in other
comprehensive income at March 2, 2002 will be reclassified into earnings in
fiscal year 2002. At November 30, 2001, the fair value of the agreement was
a negative $2,932 and is included in other current liabilities. The net
loss included in other comprehensive earnings for the three months ended
March 3, 2001 was $696 ($1,071 pretax).
Page 8 of 19
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited) Continued
- --------------------------------------------------------------------------------
6. 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 March 2,
2002, the restricted asset balance was $2,343 and is included in other
noncurrent assets.
7. IMPAIRMENT LOSS
During the three months ended March 3, 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."
8. 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:
Three Months Ended
---------------------------
March 2, March 3,
2002 2001
---------------------------
Net Earnings (numerator) $ 7,998 $ 9,804
Basic EPS:
Weighted average number of common
shares outstanding (denominator) 24,689,170 24,419,466
Basic per share amount $ 0.32 $ 0.40
=========== ===========
Page 9 of 19
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited) Continued
- --------------------------------------------------------------------------------
8. EARNINGS PER SHARE (Continued)
Three Months Ended
-------------------------
March 2, March 3,
2002 2001
-------------------------
Diluted EPS:
Weighted average number of common
shares outstanding 24,689,170 24,419,466
Dilutive effect of stock options and restricted stock 317,434 236,079
---------- ----------
Diluted weighted average number
of common shares outstanding
(denominator) 25,006,604 24,655,545
Diluted per share amount $ 0.32 $ 0.40
========== ==========
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:
Three Months Ended
-----------------------
March 2, March 3,
2002 2001
-----------------------
Options - 25,136
Weighted Average Exercise Price - $ 22.81
For the three months ended March 2, 2002, exercises of stock options added
$1,515 to capital in excess of par value.
9. COMPREHENSIVE EARNINGS
The Company's total comprehensive earnings and its components are as
follows:
Three Months Ended
---------------------
March 2, March 3,
2002 2001
---------------------
Net earnings $ 7,998 $ 9,804
Other comprehensive earnings, net of tax:
Cashflow hedges:
Cumulative effect of accounting change - (769)
Net gain (loss) on derivative instruments 349 (696)
Foreign currency translation adjustments (975) 1,205
---------------------
Total comprehensive earnings $ 7,372 $ 9,544
=====================
Page 10 of 19
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited) Continued
- --------------------------------------------------------------------------------
10. SEGMENT DATA
The Company operates in three principal product segments: Engine/Mobile
Filtration, Industrial/Environmental Filtration, and Packaging. The segment
data for the three-month periods ended March 2, 2002 and March 3, 2001,
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.
Three Months Ended
-------------------------
March 2, March 3,
2002 2001
-------------------------
Net sales:
Engine/Mobile Filtration $ 57,839 $ 58,784
Industrial/Environmental Filtration 85,950 77,548
Packaging 14,473 19,865
-------------------------
$ 158,262 $ 156,197
=========================
Operating profit:
Engine/Mobile Filtration $ 11,258 $ 10,951
Industrial/Environmental Filtration 2,530 2,022
Packaging 618 4,711
-------------------------
14,406 17,684
Other income (expense) (1,876) (2,339)
-------------------------
Earnings before income taxes and
minority interests $ 12,530 $ 15,345
=========================
Identifiable assets:
Engine/Mobile Filtration $ 135,534 $ 145,166
Industrial/Environmental Filtration 301,003 273,916
Packaging 44,293 40,003
Corporate 44,694 47,274
-------------------------
$ 525,524 $ 506,359
=========================
Non-recurring amortization expense recorded in the first quarter 2001
operating profit was $106 in the Engine/Mobile Filtration segment and $534
in the Industrial/Environmental segment. As discussed in Note 2 with the
adoption of SFAS 142, the Company no longer amortizes goodwill or
trademarks.
During the first quarter of 2001, the Company received a settlement payment
of $7,000 for the early termination of a supply and license agreement and
in connection therewith recognized an impairment loss in its Packaging
segment of $2,422 related to certain plant assets as discussed in Note 7.
Page 11 of 19
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: FIRST QUARTER OF 2002 COMPARED WITH FIRST QUARTER OF
2001.
CLARCOR reported slightly increased sales for the quarter and reduced operating
profit, net earnings and earnings per share compared to the same quarter in
2001. Included in the 2002 quarter are the results from Total Filtration
Services (TFS), which the Company acquired at the beginning of the third quarter
2001. TFS added approximately $15,400,000 in sales for the 2002 quarter and
added, after interest expense and income taxes, approximately $0.01 to diluted
earnings per share. The results from TFS are included in the Company's
consolidated results of operations from the date of the acquisition. Purchase
accounting entries, primarily related to a net $3,694,000 payment by the seller
to CLARCOR for finalizing a closing balance sheet in accordance with the
purchase agreement, were recorded in the first quarter of 2002. Goodwill
decreased by $4,000,000 primarily as a result of the settlement payment and
entries associated with deferred income taxes and the valuation of inventories
acquired. Purchase accounting associated with the acquisition is subject to
further adjustments related to the valuation of certain non-U.S. inventories,
preacquisition contingencies related to contract matters and the finalization of
deferred income taxes. These items are expected to be finalized in the second
quarter of 2002.
The most significant change impacting operating profit and net earnings for the
2002 quarter compared to first quarter 2001 was due to a nonrecurring contract
cancellation payment received in the first quarter of 2001 from a customer of
the Company's Packaging segment. This contract cancellation payment increased
sales by $7,000,000, operating profit by $4,489,000 and diluted earnings per
share by $0.12 in the 2001 quarter. The Company also adopted Statement of
Financial Accounting Standards No. 142 (SFAS 142) at the beginning of the first
quarter of 2002, which reduced amortization expense for goodwill and
indefinite-lived intangible assets by approximately $640,000 and would have
increased reported diluted earnings per share by $0.02 in the first quarter of
2001.
Net sales of $158,262,000 increased 1.3% from $156,197,000 reported for the
first quarter of 2001. Compared to last year's first quarter, excluding the
sales from TFS for the 2002 quarter and the contract cancellation payment
received in the 2001 quarter, overall sales were approximately 4% lower than
2001.
The Engine/Mobile Filtration segment reported reduced sales of 1.6% to
$57,839,000 from $58,784,000 in 2001. Sales were slightly lower than the 2001
quarter due to the U.S. economic slowdown and lower freight mileage.
The Company's Industrial/Environmental Filtration segment recorded a 10.8%
overall increase in sales to $85,950,000 for the 2002 first quarter. Excluding
sales from TFS, the segment's sales decreased approximately 9%. The reduced
sales level was primarily due to reduced customer demand, particularly for air
quality equipment and systems. In addition, during the first quarter of 2001
sales were especially strong due to new product introductions for a customer.
Sales of these new products in 2002 are expected to be higher overall for the
year, but at more balanced levels for each of the quarters.
The Packaging segment reported sales of $14,473,000 compared to $19,865,000 in
the 2001 quarter that included the $7,000,000 customer cancellation payment.
Excluding that payment, the
Page 12 of 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
2002 sales increase was approximately 12.5% for the quarter. This increase in
sales relates in part to the segment's focus on recurring metal lithography
business that is supported by new metal lithography equipment installed in early
2001. In addition, sales increased for plastic closures and containers compared
to the 2001 first quarter.
Operating profit for first quarter 2002 was $14,406,000 compared to $17,684,000
in 2001. The 2001 quarter included profit of $4,489,000 resulting from the
$7,000,000 nonrecurring contract cancellation payment less related expenses and
an impairment loss of $2,422,000 for equipment previously used exclusively for
the terminated contract with the Packaging customer. The 2001 quarter also
included approximately $640,000 of amortization expense for goodwill and
intangible assets that was not recorded in 2002 due to the adoption of SFAS 142.
Excluding the impact from the reduced amortization expense and the net operating
profit of $4,489,000 from the cancellation payment, the 2002 operating profit
increased approximately 4% compared to 2001. This increase resulted from profit
related to TFS and productivity improvement programs that offset the impact from
reduced sales levels and significant increases in pension costs and increased
insurance expenses. Selling and administrative expenses increased in 2002
primarily due to TFS and the first quarter 2001 expenses included amortization
expense of $640,000 for goodwill and intangibles that was not recorded in the
2002 quarter. Excluding the impact of these two changes, selling and
administrative expenses in the 2002 quarter were lower than the 2001 quarter by
approximately 4% due to discretionary cost controls.
The Engine/Mobile Filtration segment recorded an operating profit increase in
2002 of 2.8% compared to 2001, or 1.7% excluding the impact of reduced
amortization expenses due to the adoption of SFAS 142. This increase resulted
primarily from discretionary cost reductions and productivity improvements that
offset reduced profit from lower sales levels and higher insurance and pension
costs. As a result, the segment's operating margin of 19.5% increased from 18.6%
recorded in the first quarter of 2001.
The Industrial/Environmental Filtration segment reported operating profit of
$2,530,000 in 2002 compared to $2,022,000 in 2001. This increase includes
approximately $460,000 from TFS and $534,000 from reduced amortization expense
due to the adoption of SFAS 142. These increases offset reduced profit resulting
from a 9% reduction in sales, excluding TFS, for the segment.
The Packaging segment's operating profit in the 2002 quarter was $618,000
compared to $4,711,000 in 2001, or $222,000 in 2001 excluding the profit from
the contract termination payment recorded in 2001. The increase from $222,000 to
$618,000 in 2002 resulted from increased sales of metal and plastic packaging
products in the 2002 quarter.
Net other expense for the quarter of $1,876,000 was lower than $2,339,000 in the
2001 quarter primarily due to reduced interest expense. Interest expense was
lower due to reduced interest rates and lower debt balances during the quarter.
Earnings before income taxes and minority interests for the first quarter of
2002 totaled $12,530,000, compared to $15,345,000 in the comparable quarter last
year. The provision for income taxes in 2002 was $4,518,000 compared to
$5,549,000 in 2001 and the effective rate was 36.1% in both quarters. The
Company expects the overall effective tax rate for fiscal 2002 will be
approximately 36.1%.
Page 13 of 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Net earnings in the first quarter of the current year were $7,998,000, or $0.32
per share on a diluted basis. Net earnings in the first quarter of 2001 were
$9,804,000, or $0.40 per share on a diluted basis. Net earnings and diluted
earnings per share were increased by approximately $2,851,000 or $0.12 per
diluted share in 2001 due to the contract cancellation payment by the Packaging
segment customer. Additionally, net earnings and diluted earnings per share were
decreased by approximately $410,000 or $0.02 per diluted share in 2001 related
to the amortization of goodwill and indefinite-lived intangibles that are no
longer subject to such amortization. Diluted average shares outstanding were
25,006,604 at the end of the first quarter of 2002, an increase of 1.4% from the
average of 24,655,545 for the 2001 quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased to $11,955,000 in first quarter
2002 compared to $8,913,000 in 2001. Cash flows from investing activities in the
2002 quarter included $3,694,000 received from the sellers of TFS in accordance
with terms of the purchase agreement. In the 2002 quarter, $3,280,000 was used
for additions to plant assets. In the first quarter of 2001, cash flows for
investing activities totaled $5,529,000 and included $5,467,000 used for
additions to plant assets. Cash flows used in financing activities of
$10,786,000 in 2002 included net repayments on a line of credit of $9,000,000
and dividend payments of $2,954,000. Cash flows used in financing activities
were $3,946,000 in 2001 and included net repayments on a line of credit of
$2,000,000 and dividend payments of $2,858,000.
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. During the first
quarter of 2002, a net repayment of $9,000,000 was made on the outstanding
balance on a multicurrency revolving credit facility. At the end of the 2002
quarter, the outstanding balance on the credit facility was $98,000,000. Since
the end of the first quarter of 2002, an additional $10,000,000 was paid on the
credit facility and the Company expects to continue to use additional free cash
flow in fiscal 2002 to further reduce outstanding borrowings. Principal payments
on other long-term debt will be approximately $5,600,000 in fiscal 2002. No
payments are required in fiscal 2002 on the multicurrency revolving credit
facility and the Company is in compliance with covenants related to the
facility. At the end of the first quarter of 2002, $75,848,000 remained
available to the Company for future borrowings under the multicurrency
agreement. Capital expenditures in fiscal year 2002 are expected to be
approximately $21,000,000 compared to a total of $18,204,000 in 2001. The 2002
expenditures will be used primarily for normal facility improvements,
productivity improvements and to support new products. Other than operating
leases, the Company has no material off-balance sheet arrangements. Commitments
for noncancelable leases in 2002 total approximately $7,300,000.
While customer demand for the Company's products will affect operating cash
flow, the Company is not aware of any known trends, demands or reasonably likely
events that would materially affect cash flow from operations in the future. It
is possible that business acquisitions or dispositions could be made in the
future that may affect operating cash flows and may require changes in the
Company's debt and capitalization.
The Company's financial position at the end of the first quarter was not
significantly different from fiscal year-end 2001. Cash and short-term
investments totaled $8,884,000 at the end of the
Page 14 of 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
quarter, an increase from $7,418,000 at year-end 2001. At the end of the first
quarter 2002 compared to year-end 2001, accounts receivable were reduced by
$3,603,000 and inventories increased $2,565,000. The current ratio at the end of
the first quarter was 2.7 compared to 2.6 at the end of fiscal 2001. During the
first quarter of 2002, $9,000,000 was repaid on a revolving credit agreement
that reduced long-term debt to $125,995,000 from $135,203,000 at year-end 2001.
The ratio of long-term debt to total capitalization was 31.0% at the end of the
2002 first quarter compared to the year-end 2001 level of 33.0%. At the end of
the first quarter 2002, CLARCOR had 24,821,163 shares of common stock
outstanding.
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. The Company entered into an interest rate
agreement in 2000, which expires in September 2002, that is being accounted for
as a derivative financial instrument under SFAS 133 and is discussed in Note 5
to the consolidated condensed financial statements. Market risks are also
discussed in the Company's Annual Report and Form 10-K for the year ended
November 30, 2001 (the "Annual Report") in the Financial Review on page 10.
Critical Accounting Policies
The Company's critical accounting policies, including the assumptions and
judgments underlying them, are disclosed in the Company's Annual Report in the
Notes to the Consolidated Financial Statements on pages 16-24 and in the Notes
to the consolidated condensed financial statements included herein. These
policies have been consistently applied in all material respects and address
such matters as revenue recognition, depreciation methods, inventory valuation,
asset impairment recognition, business combination accounting and pension and
postretirement benefits. At the beginning of fiscal year 2002 as described in
Note 2 to the consolidated condensed financial statements, the Company adopted
SFAS 142 that changed the Company's accounting policy related to goodwill and
intangible assets. Goodwill and indefinite-lived intangible assets are no longer
amortized but are subject to periodic impairment assessment. The transitional
impairment testing for such assets was completed during the first quarter of
2002 and at December 1, 2001, the transition date, there was no impairment to
such assets. While the estimates and judgments associated with the application
of these policies may be affected by different assumptions or conditions, the
Company believes the estimates and judgments associated with the reported
amounts are appropriate in the circumstances.
Recent Accounting Pronouncements
The Financial Accounting Standards Board recently issued SFAS No. 143,
"Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". These standards will be
effective for the Company beginning in fiscal 2003 and the Company has not yet
evaluated the impact of these standards on its financial statements.
Page 15 of 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Outlook
The Company remains optimistic regarding CLARCOR's future. The impact of the
Total Filtration Program is expected to become more evident as it is introduced
to additional current and new customers. It will ordinarily take two to three
years to fully implement the Program for a customer, particularly when there may
be as many as 200 customer facilities to convert to the Program. As more
customers are added and an increasing number of facilities are converted, the
profit momentum is expected to grow as sales increase. As reported earlier by
the Company, several new Total Filtration contracts were signed with large
manufacturing companies, each of which are expected to add at least $4,000,000
in annual sales when fully implemented over the next few years. The acquisition
of TFS in 2001 was made to facilitate the growth of the Total Filtration Program
by combining TFS' experience in total filtration supply and management for the
automotive industry with CLARCOR's filter manufacturing and financial resources.
The Company plans to expand TFS' capabilities significantly in 2002 with
investments in its distribution and technology infrastructure. This is expected
to accelerate the growth in sales of the Total Filtration Program, though any
improvement to margins is not expected until fiscal 2003.
In addition to participating in the Total Filtration Program, each of the
Company's filtration businesses has its own growth plans. However, a continued
slowdown or an improvement in the U.S. and world economy will impact the
Company's expectations for the remainder of 2002. The Company believes that
sales levels will increase during the remainder of the year for Engine/Mobile
Filtration products as new sales and marketing initiatives begun late in 2001
take hold. Though the Industrial/Environmental Filtration segment has recently
experienced an increase in order inquiries, no material impact on orders has
occurred, and as a result, the Company is less optimistic that an increase in
sales for this segment will occur during this year. The economic slowdown has
particularly affected sales of air quality equipment and systems and sales may
not increase to prior year levels before the end of 2002. However, due to new
productivity improvement programs begun earlier this year and others expected
later this year, and due to significantly improved operations at several newer
facilities, this segment's operating profit and margins are expected to exceed
last year's results. The Packaging segment will continue with its transition to
a business model focused on growth in its core strength of flat sheet metal
lithography and will also continue to develop new plastic closure and container
business. This repositioning is resulting in improved sales and operating profit
which is expected to continue. In addition, the efficiency of new lithography
equipment that was installed in early 2001 continues to increase. Combined with
growing sales to leverage this investment in equipment and further cost
reduction efforts, the Company expects additional margin improvement for the
Packaging segment in 2002.
Continued emphasis on cost reductions within each business unit is expected to
offset cost increases for health care, insurance and pensions. Due to
significantly reduced pension asset valuations and lower discount rates, pension
expense is expected to increase by approximately $3,000,000 in fiscal 2002 from
2001. Costs for property and liability insurance and pensions are particularly
impacted by economic conditions and by decreasing interest rates, lower stock
market valuations and reinsurance availability. These costs for the Company may
change significantly based on future changes in the U.S. and world economies.
Capital investments will continue to be made in each segment's facilities to
improve productivity and to support the Total Filtration Program and new
products. The Company is also planning additional expansion of manufacturing
operations in Asia for the production of Engine/Mobile filters. While the
Company fully anticipates that sales and profits will improve as a result of
sales initiatives and cost reductions, the Company has
Page 16 of 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
developed contingency plans to reduce discretionary spending if recessionary
economic conditions persist. Due to the adoption of SFAS 142, amortization of
goodwill and indefinite-lived intangible assets will be reduced on an annual
basis by approximately $2,900,000, or $0.07 per diluted share.
CLARCOR 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 success of the Company's Total
Filtration Program; the timing and acceptance of new products and product
enhancements by the Company or its competitors; changes in pricing, labor
availability and related costs, product life cycles, raw material costs,
insurance, pension, 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
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders of CLARCOR Inc. held on
March 19, 2002, all of management's nominees for directors, as
listed in the proxy statement dated February 15, 2002, were
elected. The Company had 24,797,015 shares of common stock
outstanding as of the close of business on the February 4, 2002
record date, and the holders of 22,127,881 shares of common stock
were present at the meeting, in person or by proxy.
The three nominees elected received votes as follows:
For Withheld
Robert H. Jenkins 21,979,452 6,292
Philip R. Lochner, Jr. 21,977,933 7,811
Roseann Stevens 21,957,804 27,940
Item 6b - The Company did not file a Form 8-K during the first quarter
2002.
Page 18 of 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)
March 22, 2002 By /s/ Bruce A. Klein
- -------------------------- ----------------------------------------
(Date) Bruce A. Klein, Vice President - Finance
and Chief Financial Officer
Page 19 of 19