MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information presented in this discussion should be read in conjunction with
other financial information provided in the Consolidated Condensed Financial
Statements and Notes thereto. Except as otherwise set forth herein, references
to particular years refer to the applicable fiscal year of the Company. The
analysis of operating results focuses on the Company's three reportable business
segments: Engine/Mobile Filtration, Industrial/Environmental Filtration and
Packaging. The Engine/Mobile Filtration segment sells filtration products used
on engines and in mobile equipment applications, including trucks, automobiles,
buses, locomotives, and marine, construction, industrial, mining and
agricultural equipment. The Company's Industrial/Environmental Filtration
segment centers on the manufacture and marketing of filtration products used in
industrial and commercial processes and in buildings and infrastructures of
various types. The segment's products include liquid process filtration
products, engineered filtration products and technologies and air filtration
products and systems used to maintain high interior air quality and to control
exterior pollution. The Packaging segment manufactures and markets consumer and
industrial packaging products. The Company's products are manufactured and sold
throughout the world.
EXECUTIVE SUMMARY
Management Discussion Snapshot
(Dollars in thousands except per share data)
Quarter to
Quarter
Three Months 2009 2008 Change
Net sales $ 213,690 $ 250,181 -14.6 %
Operating profit 13,687 27,739 -50.7 %
Operating margin 6.4 % 11.1 % -4.7 pts.
Other expense 806 3,509 -77.0 %
Provision for income yaxes 4,096 7,941 -48.4 %
Effective tax rate 28.3 % 25.4 % 2.9 pts.
Net earnings 8,791 16,149 -45.6 %
Net earnings margin 4.1 % 6.5 % -2.4 pts.
Diluted earnings per share $ 0.17 $ 0.32 -46.9 %
Average diluted shares outstanding 51,470,412 51,211,190 0.5 %
|
The global recession impacted the Company significantly in the first quarter of
2009. The Company's reported 2009 first quarter net sales of $213,690,000 and
operating profit of $13,687,000 were 14.6% and 50.7% lower than the first
quarter of 2008, respectively. For the first quarter of 2009, net earnings of
$8,791,000 and diluted earnings per share of $0.17 were lower than the first
quarter of 2008. Within the U.S., sales declined by 9%; outside the U.S., sales
declined by 26%. The drop in sales volume was widespread and affected each of
the Company's reporting segments. Although the Company expected the first
quarter of fiscal 2009 to be lower than the first quarter of 2008, it did not
expect such a large drop in sales. Economic conditions, both domestically and
internationally, contributed to weak demand across most filtration markets
although modest growth in sales of systems and filter cartridges for the
aviation fuel and defense sectors offset some of that weakness. Overall, the
Company believes that customers reduced their inventory levels as a result of
lower demand, both in the U.S. and overseas, due to the severity of the
recession.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The Company believes that its customers' inventory reductions during the first
quarter will not continue, and that, since the Company sells primarily
aftermarket maintenance filters, base replacement demand will resume,
particularly in its independent distribution market channel.
The 2009 first quarter's reduced demand affected production volumes at the
Company's plants causing underabsorption of fixed manufacturing costs and
lowering operating margin. Throughout the first quarter of fiscal 2009, the
Company continued to implement aggressive cost reduction initiatives, including
a salary and headcount freeze for all domestic operating units, and curtailment
of discretionary spending. However, certain costs are not controllable, such as
the $1 million increased pension expense recorded in the first quarter of 2009
due to the decline in the value of the Company's pension plan assets. The
Company expects its cost reduction programs and lower raw material costs to
improve its cost structure during the remainder of fiscal 2009.
Other expense in 2008 included a $2,453,000 charge to interest expense, or $0.03
per diluted share after taxes, to mark to market an interest rate agreement
entered into during the first quarter of 2008. The mark to market charge in
first quarter 2009 was $605,000. In the first quarter of 2009, the strengthening
of the U.S. dollar compared to other currencies reduced net sales and operating
profit by approximately $9 million and $1 million, respectively. Fluctuations in
foreign currencies contributed approximately $6.1 million to net sales and
approximately $1 million to operating profit for the first quarter of 2008.
CLARCOR's financial position remains strong with adequate cash resources and
sufficient borrowing capacity under its current line of credit. As of
February 28, 2009, it had over $56 million of cash and short-term investments
and approximately $166.5 million of availability under its line of credit.
During the first quarter of 2009, the Company acquired several businesses.
Although none of these acquisitions were large, each added to the Company's
product offerings, expanded its reach in certain geographies and markets, and,
for certain acquisitions in China, will allow the Company to lower the cost of
products previously purchased from other third parties. The acquisitions,
individually and in the aggregate, are not expected to be material to the
results of the Company.
On December 29, 2008, the Company purchased the Keddeg Company (Keddeg), a
manufacturer of aerospace filtration products based in Lenexa, Kansas. The
purchase price was $5,497,000, excluding cash acquired and including acquisition
costs. Keddeg's results are included as part of the Company's
Industrial/Environmental Filtration segment from the date of acquisition.
On January 16, 2009, the Company purchased certain assets of Meggitt
(UK) Limited, a manufacturer of aerospace filters based in the United Kingdom
for $578,000. This business was acquired to expand the Company's product range
of aerospace filters sold primarily to European aircraft manufacturers and
aerospace parts distributors. The purchased assets will be combined into an
existing Company subsidiary which is part of the Company's
Industrial/Environmental Filtration segment.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
On February 1, 2009, the Company purchased 85% ownership interests in Pujiang
Novaeastern International Mesh Co., Ltd. (Pujiang) and Quzhou Chinagrace Filter
Co., Ltd. (Quzhou). Both companies are based in China and were under common
ownership. Pujiang and Quzhou are manufacturers of wire mesh filtration products
sold primarily to the fibers, resin and aerospace industries. The companies are
included in the Industrial/Environmental Filtration segment. The combined
purchase price for the ownership interests in both companies was approximately
$4,352,000. The Company has the right, but not the obligation, to purchase the
remaining 15% ownership interest in these companies using a formula based on the
combined companies' future operating results.
During February 2009, the Company entered into an agreement to purchase the
remaining 20% minority interest in its consolidated subsidiary based in Weifang,
China. The acquisition is expected to close during the Company's second fiscal
quarter in 2009. This subsidiary is part of the Company's Engine/Mobile
Filtration segment and manufactures heavy-duty engine filters and certain lines
of environmental filters and filter systems and filters used in off-shore oil
drilling. The purchase price is approximately $4,500,000.
RESULTS OF OPERATIONS: FIRST QUARTER OF 2009 COMPARED WITH FIRST QUARTER OF
2008.
SALES
Net Sales by Segment (Dollars in Thousands)
Quarter to
Quarter
Three Months 2009 2008 Change
Engine/Mobile Filtration $ 85,380 $ 105,109 -18.8 %
Industrial/Environmental Filtration 113,458 126,422 -10.3 %
Packaging 14,852 18,650 -20.4 %
CLARCOR $ 213,690 $ 250,181 -14.6 %
|
The Engine/Mobile Filtration segment's 2009 first quarter sales decreased
$19,729,000 to $85,380,000 from the prior year's first quarter. Sales in the
U.S. declined by 13% and sales outside the U.S. declined by 30% in the first
quarter of 2009 compared to the first quarter of 2008. Heavy-duty engine filter
sales grew in Mexico, Australia and South Africa while filter sales in Asia
dropped more than in the rest of the world. Despite a slowdown in Asia during
the first quarter of 2009, the Chinese market is still growing for the Company's
current business there. The Company believes this will be enhanced by recent
acquisitions it has made in China. Sales to other parts of Asia and the Middle
East are also expected to grow for the rest of the year based on current orders.
Hauled freight tonnage in both over-the-road and railway traffic continued to
decline as the current recession drove down customer demand to transport goods
during the first quarter of 2009. Sales to filter markets for off-road
applications for construction, mining and agricultural equipment were also lower
than in the prior year. Sales to both aftermarket and original equipment
customers declined in the first quarter of 2009. Fluctuations in foreign
currencies reduced sales by approximately $4.7 million, or 4.5% for this segment
in the first quarter of 2009 compared to the first quarter of 2008 as the dollar
strengthened against most currencies. The Company expects the commercial rail
industry and over-the-road truck traffic to remain soft through most of 2009 as
economic pressures continue in the coal, housing, manufacturing and automotive
sectors.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Construction, mining and agricultural activity is also expected to remain slow
throughout the remainder of 2009. Therefore, the Company expects sales to be
lower in fiscal 2009 compared to fiscal 2008 for this segment although it does
expect operating margins to be higher in the remaining quarters of 2009 than
they were in the first quarter of 2009. Specifically, the Company expects the
Engine/Mobile Filtration segment sales to decline by approximately 6% to 8% over
the next three quarters compared to the last three quarters of 2008. The Company
believes that many of its customers will deplete their inventory of filters and
will need to start restocking in the latter half of 2009.
The Company's Industrial/Environmental Filtration segment recorded a
$12,964,000, or 10.3%, decrease in sales to $113,458,000 from $126,422,000 for
the 2009 first quarter. The strengthening of the U.S. dollar during the current
quarter compared to the dollar's value in the 2008 quarter reduced sales by
approximately $4.4 million, or 3.5%. Sales volumes for the first three months of
2009 were varied across end-markets and channels. The 2009 quarter's sales
decline was driven by lower demand for HVAC filters used in industrial,
commercial and residential applications than in the first quarter of 2008
primarily due to the widespread reduction in production at U.S. manufacturing
plants. The Company expects HVAC sales volume to increase over the next several
quarters as the prime cooling season begins although it does not expect sales
levels to be higher in the remaining quarters of 2009 than in the comparable
quarters of 2008. Sales of air filtration systems dropped in the first quarter
of 2009 significantly as customers reduced their capital spending plans, both in
the U.S. and in Europe. Filters and filtration products used in plastic, polymer
and fiber filtration applications and specialty filtration were also weak.
Overall, in the first quarter of 2009, filter sales to the natural gas industry
declined by about 4% from the first quarter of 2008. Filter sales for oil
drilling declined by over 10% for this same period as oil drilling throughout
the world slowed and drilling projects were delayed. The Company expects future
growth, over the medium and long-term, for filters used in natural resource
industries, such as natural gas, oil and water, due to the expectation that
global demand for natural resources will rise in the future, especially as the
economy recovers. However, it appears that filter sales to these industries will
not grow in 2009. In contrast, aviation fuel filters sales grew in the first
quarter of 2009 compared to the first quarter of 2008, both in the U.S. and in
Europe. The Company expects this trend to continue for the rest of 2009 based on
the Company's backlog as of quarter end. Overall, the Company expects sales for
its Industrial/Environmental Filtration segment over the next three quarters to
decline by 2% to 5%.
The Packaging segment's first quarter 2009 sales were $14,852,000 compared to
$18,650,000 in the first quarter of 2008, a $3,798,000 decline. Sales were
impacted in 2009 by lower demand for packaging used in the health and beauty,
confection, tobacco, promotion and film industries. There was modest growth in
flat sheet metal decorating compared to the first quarter of 2008. Continued
slow growth in customers' sales of their products and delayed new product
introductions was due to adverse conditions in the overall economy. Sales in the
first quarter are normally this segment's smallest and are not necessarily
indicative of performance during the next three quarters. The Company expects
that this segment will post overall fiscal 2009 sales at a level consistent with
fiscal 2008 based on significant orders recently received from its customers.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
OPERATING PROFIT
Operating Profit and Margin by Segment (Dollars in Thousands)
Quarter to
Quarter
Three Months 2009 2008 Change
Engine/Mobile Filtration $ 13,301 $ 22,342 -40.5 %
Industrial/Environmental Filtration 663 4,285 -84.5 %
Packaging (277 ) 1,112 -124.9 %
CLARCOR $ 13,687 $ 27,739 -50.7 %
Engine/Mobile Filtration 15.6 % 21.3 % -5.7 pts.
Industrial/Environmental Filtration 0.6 % 3.4 % -2.8 pts.
Packaging -1.9 % 6.0 % -7.9 pts.
CLARCOR 6.4 % 11.1 % -4.7 pts.
|
Operating profit for the first quarter of 2009 was $13,687,000 compared to
$27,739,000 in 2008, a 50.7% decrease. Operating margin was 6.4% for the first
quarter of 2009 compared to 11.1% for the 2008 quarter. In each segment, the
lower operating profit and margin was driven primarily by underabsorption of
fixed manufacturing costs and operating expenses due to reduced sales volume
driven by the downturn in the economy. In addition, the Company recognized
higher workers compensation costs, stock option expense and bad debt expense and
recorded approximately $1 million more in pension expense in the first quarter
of 2009, primarily due to the decline in the value of its pension plan assets.
Discretionary spending, particularly travel, advertising and professional fees,
incentive compensation, salaries and benefits, was lower in the first three
months of fiscal 2009 as the Company continued cost containment actions
throughout its segments, including a salary and headcount freeze at its domestic
locations. During the first quarter of 2009, the Company experienced declines in
material costs, particularly in various types and grades of steel and metals,
oil and natural gas, resins, adhesives, gaskets, packaging material and filter
media prices. The Company expects material costs to continue to decline as
economic pressures keep input costs lower. If this does occur, it should have a
positive impact on the Company's cost structure in the last three quarters of
2009.
The Engine/Mobile Filtration segment recorded an operating profit decrease in
the first quarter of 2009 of 40.5% to $13,301,000 compared to the first quarter
of 2008. This decrease resulted primarily from the sales decline both
domestically and abroad. The segment's operating margin of 15.6% for the first
three months of 2009 was lower than the 21.3% recorded in the first quarter of
2008. Fluctuations in foreign currencies reduced this segment's operating profit
approximately $500,000 during the first quarter of 2009. The Company expects
operating profit for this segment to decline by 6% to 8% over the next three
quarters of fiscal 2009 compared to the last three quarters of 2008.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The Industrial/Environmental Filtration segment reported operating profit of
$663,000 in first quarter 2009 compared to $4,285,000 in the first quarter of
2008. Overall operating profit declined due to excess plant capacity and
utilization, which resulted primarily from lower sales volumes for HVAC filters,
environmental air filtration systems, dust collector cartridges and filters for
polymer, fiber and resin applications. The segment's operating margin was 0.6%
in 2009's first quarter compared to 3.4% in the same 2008 quarter. The Company
expects segment operating profit to decline by 1% to 2% over the next three
quarters compared to the last three quarters of 2008.
The Company is continuing to implement its restructuring program in its HVAC
filter manufacturing operations, which began in 2006, and expects significantly
improved performance, primarily in reduced labor and freight costs, as fiscal
2009 progresses. The Company anticipates improved manufacturing productivity and
a lower product cost structure driven by the new equipment which is being
installed at each of the Company's HVAC filter manufacturing locations. During
the first quarter of 2009, the Company spent $2.6 million for new equipment and
expects to purchase an additional $1.5 million of new equipment over the
remainder of the year. Expenses related to the restructuring plan were
approximately $275,000 during the first quarter of 2009, primarily due to the
consolidation of four Louisville, Kentucky area HVAC related plants into one
location in Jeffersonville, Indiana. The Company expects to complete this
relocation during the second quarter. This is expected to be the last major
plant consolidation effort in the restructuring plan. The Company has not
changed its expectation to improve operating profit at its HVAC filter
manufacturing operations and to achieve an operating margin of 3% to 5% in 2009
and 7% to 9% in 2010 for this business. Further, it still expects to achieve a
$14 million improvement in operating profit by the end of 2010 from the 2006
level and for operating margins to reach an overall 10% for the
Industrial/Environmental Filtration segment, although continuing poor economic
conditions could change these expectations.
The Packaging segment's operating loss in the 2009 quarter was $277,000 compared
to operating profit of $1,112,000 in the first quarter of 2008. The first
quarter of 2009 sales volume was significantly lower than an average first
quarter for this segment and resulted in unused capacity and under absorption
during the 2009 quarter, which led to an operating loss. The Company expects
operating profit to grow by 10% to 12% over the next three quarters compared to
the last three quarters of 2008 based on its sales growth expectations.
OTHER EXPENSE
Net other expense for the 2009 first quarter of $806,000 compared to $3,509,000
for the same quarter of 2008. The most significant change from the 2008 quarter
related to increased interest expense during the first three months of 2008 due
to a $2,453,000 interest charge related to a two-year fixed interest rate swap
agreement that will expire on January 1, 2010. The $2,612,000 current fair value
of the swap agreement will reverse over the next ten months and reduce interest
expense over that period although the amount recorded in any particular month or
quarter will vary and partly depend on interest rates.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
PROVISION FOR INCOME TAXES
The provision for income taxes in the first three months of 2009 was $4,096,000
compared to $7,941,000 in the first three months of 2008, resulting in an
effective tax rate for the first quarter of 2009 of 31.8% compared to 32.8% for
the first quarter of 2008. Lower earnings before income taxes and minority
interests, discrete items and the differing mix of earnings from U.S. and
international operations contributed to a lower rate in 2009. The Company
expects that its overall effective tax rate for fiscal 2009 will be
approximately 33.0% to 34.0%, slightly higher than the effective rate recorded
in the first quarter of 2009, because of increased earnings before income taxes
and minority interests and a differing mix of earnings from international
operations. During the first quarter of 2008, the Company recorded a $440,000
tax benefit related to a refund it received from one of its overseas
subsidiaries arising from changes in certain tax regulations. This lowered the
effective tax rate in first quarter 2008.
NET EARNINGS AND EARNINGS PER SHARE
Net earnings in the first quarter of 2009 were $8,791,000, or $0.17 on a diluted
basis, compared to the 2008 first quarter of $16,149,000, or $0.32 per share on
a diluted basis. Diluted average shares outstanding of 51,470,412 at the end of
the first quarter of 2009 were slightly higher than the average of 51,211,190
for the first quarter of 2008 due to the issuance of shares under stock award
plans.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remains strong with adequate cash resources and
sufficient borrowing capacity under its current line of credit. The global
credit market experienced a significant tightening of credit availability and
interest rate volatility during fiscal 2008 that is continuing into 2009. This
resulted in reduced funding available from commercial banks and for corporate
debt issuers. As a result, capital became more expensive and less available;
however, the Company does not foresee any difficulties meeting its cash
requirements or accessing credit over the next twelve months. On December 18,
2007, the Company entered into a five-year multicurrency revolving credit
agreement with a group of financial institutions under which it may borrow up to
$250 million under a selection of currencies and rate formulas. Management
believes the financial institutions that are party to this arrangement have
adequate capital and resources and will be able to fund future borrowings under
the Company's credit agreement. The interest rate is based upon either, at the
Company's election, a defined Base Rate or the London Interbank Offered Rate
(LIBOR) plus or minus applicable margins. At February 28, 2009, the interest
rate plus margin was 0.80%. Commitment fees, letter of credit fees and other
fees are payable as provided in the credit agreement. As of February 28, 2009,
$75 million was outstanding on the $250 million facility and $8.5 million in
letters of credit had been issued against the credit facility's $75 million
letter of credit subline. The Company had approximately $166.5 million available
for further borrowing at February 28, 2009.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
On January 2, 2008, the Company entered into an interest rate agreement with a
bank to manage its interest rate exposure on certain amounts outstanding under
its $250 million revolving credit agreement. The interest rate agreement
provides for the Company to pay a 3.93% fixed interest rate plus applicable
margins and receive interest based on a three-month LIBOR on a notional amount
of $100 million and expires January 1, 2010. This will mitigate the Company's
economic interest rate risk until January 2010. The swap agreement has not been
designated as a hedge pursuant to SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Unrealized gains and losses and periodic
settlement payments are recorded in interest expense in the statement of
earnings and as a component of cash flows from operations in the statement of
cash flows. The fair value of the interest rate agreement at February 28, 2009
was $2,612,000. This was recorded as part of other current liabilities.
By using derivative instruments, the Company exposes itself, from time to time,
to credit risk and market risk. Credit risk is the failure of the counterparty
to perform under the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty owes the Company, which
creates credit risk for the Company. The Company minimizes this credit risk by
entering into transactions with counterparties which it believes have the
financial resources to meet their obligations. The Company minimizes market risk
by establishing and monitoring parameters that limit the types and degree of
market risk that may be undertaken. The Company's swap agreement incorporates by
reference the non-financial and financial debt covenants included in the
Company's credit facility. The swap agreement also includes other events which
would qualify as a default or termination event, whereby the counterparty could
request payment on the derivative instrument.
Cash and short-term investments at February 28, 2009 of $56,779,000 increased
. . .
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