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CLC > SEC Filings for CLC > Form 10-K on 24-Jan-2014All Recent SEC Filings

Show all filings for CLARCOR INC.

Form 10-K for CLARCOR INC.


24-Jan-2014

Annual Report


Item 7. 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 Financial Statements and Notes thereto. The analysis of operating results focuses on the Company's three reportable business segments: Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging. Except as otherwise set forth herein, references to particular years refer to the applicable fiscal year of the Company.

The Management's Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report on Form 10-K includes certain net sales and operating profit figures (at the consolidated and segment level) and net earnings and diluted earnings per share figures for the 2011 fiscal year which exclude the impact of having an additional week in our 2011 fiscal year in comparison to our 2013 fiscal year and 2012 fiscal year. These figures are non-GAAP financial measures. For a reconciliation of these non-GAAP financial measures to GAAP financial measures, along with reasons for the inclusion of these non-GAAP financial measures and the limitations of such non-GAAP financial measures, see "Other Matters - Additional Week in 2011" later in this Management's Discussion and Analysis of Financial Condition and Results of Operations section.

EXECUTIVE SUMMARY

                         Management Discussion Snapshot
                      (In thousands except per share data)

                               2013            2012            2011              2013 vs 2012
                            (52 weeks)      (52 weeks)      (53 weeks)       $ Change     % Change
Net sales                  $ 1,130,770     $ 1,121,765     $ 1,126,601     $    9,005        1%
Cost of sales                  760,561         741,433         743,180         19,128        3%
Gross profit                   370,209         380,332         383,421        (10,123 )     (3)%
Selling and administrative
expenses                       195,593         197,618         202,154         (2,025 )     (1)%
Operating profit               174,616         182,714         181,267         (8,098 )     (4)%
Other income (expense)            (316 )           283              41           (599 )
Provision for income taxes      55,950          59,657          56,947         (3,707 )     (6)%
 Net earnings attributable
to CLARCOR                 $   118,076     $   122,986     $   124,003     $   (4,910 )     (4)%
Weighted average diluted
shares                          50,539          50,882          51,191           (343 )     (1)%
Diluted earnings per
common share attributable
to CLARCOR                 $      2.34     $      2.42     $      2.42     $    (0.08 )     (3)%
Percentages:
Gross margin                      32.7 %          33.9 %          34.0 %                    (1.2)   pt
Selling and administrative
percentage                        17.3 %          17.6 %          17.9 %                    (0.3)   pt
Operating margin                  15.4 %          16.3 %          16.1 %                    (0.9)   pt
Effective tax rate                32.1 %          32.6 %          31.4 %                    (0.5)   pt
Net earnings margin               10.4 %          11.0 %          11.0 %                    (0.6)   pt


Table of Contents

2013 versus 2012

Net Sales

Net sales increased $9.0 million, or 1%, in 2013 compared to 2012. The increase in net sales in 2013 primarily reflects increased sales volume at our Industrial/Environmental Filtration and Engine/Mobile Filtration segments, increased selling prices and increased sales from business acquisitions, partly offset by a decline in sales volume at our Packaging segment and unfavorable changes in foreign currency exchange rates. Components of the $9.0 million increase in net sales are as follows:

(Dollars in millions)                Net Sales
Filtration segments combined volume $     9.9
Pricing                                   2.3
Acquisitions                              2.2
Packaging segment volume                 (3.8 )
Foreign exchange                         (1.6 )
Increase in consolidated net sales  $     9.0

Net sales volume in our Industrial/Environmental and Engine/Mobile Filtration segments increased $9.9 million, or 1%, on a combined basis in 2013 compared to 2012, excluding the effects of changes in foreign currency exchange rates, changes in pricing, and acquisitions. This 1% increase was primarily driven by an increase in sales of filter systems, housings and aftermarket elements for oil and natural gas applications, increased sales of aviation vessels and aftermarket filters due to increased commercial aerospace demand, and increased sales of heavy-duty engine filters to the U.S. aftermarket.

Changes in product pricing favorably impacted net sales by approximately $2.3 million, primarily due to selling price increases implemented on certain of our air filtration products and packaging products in 2013.

Net sales increased approximately $2.2 million in 2013 compared to 2012 due to business acquisitions, reflecting our acquisition of Modular Engineering Pty Ltd in the second quarter of 2012.

Net sales volume in our Packaging segment declined approximately $3.8 million, or 4%, in 2013 compared to 2012, excluding the effect of changes in pricing. This 4% decrease was primarily driven by lower sales of metal lithography film cannisters due to lower film industry demand for analog-based products, lower sales of confection packaging products due to the loss of a significant customer, and lower sales of decorated flat sheet metal packaging products.

Changes in the average exchange rates for foreign currencies versus the U.S. dollar unfavorably impacted our translated U.S. dollar value of net sales by $1.6 million in 2013 compared to 2012, primarily due to the strengthening of the U.S. dollar compared to the South African Rand, Brazilian Real, Australian Dollar and Canadian Dollar in 2013, partly offset by the weakening of the U.S. dollar compared to the Euro and Mexican Peso in 2013.

Cost of Sales

Cost of sales increased $19.1 million, or 3%, in 2013 compared to 2012. This 3% increase in cost of sales was greater than the 1% increase in net sales. As a result, our gross margin decreased to 32.7% in 2013 from 33.9% in 2012. This 1.2 percentage point decrease in gross margin percentage was primarily the result of a $4.6 million loss on disposal of equipment at our air filtration operations in 2013 and lower absorption of fixed overhead costs in 2013 compared to 2012. Lower absorption of fixed overhead costs in 2013 was primarily the result of lower volume at certain of our businesses--including our TransWeb filtration media business, our Packaging business and our air filtration business--as well as investments in manufacturing capacity and other infrastructure to support anticipated future growth in our heavy duty engine filter business and our oil and natural gas filtration business. These impacts were partly offset by benefits from our ongoing cost reduction and continuous improvement initiatives across each of our businesses. Raw material costs as a percentage of net sales increased approximately 0.6 percentage points in 2013, as we experienced higher input costs for certain commodities as well as an increase in the mix of our sales towards products with higher material content, including oil and natural gas filtration vessels.


Table of Contents

Selling and Administrative Expenses

Selling and administrative expenses decreased $2.0 million, or 1%, in 2013 compared to 2012. This decrease was primarily driven by a $4.9 million decline in annual expense related to our pension and postretirement benefit plans, a $2.0 million decline in compensation related to our company-wide profit sharing program, a $1.5 million decline in expense related to our stock-based compensation plans and $1.4 million of lower expense related to a change in the estimated contingent liability for a potential earn-out payment to one of the former owners of our TransWeb subsidiary. This was partially offset by a $3.1 million settlement loss recorded in 2013 related to the scheduled payment of pension benefits under our U.S. combined nonqualified pension plan to our former Executive Chairman, who retired from the Company at the end of 2012, approximately $2.7 million of legal, investment advisory and other professional services costs incurred in 2013 related to our acquisitions of CLARCOR Industrial Air and the Bekaert Business, both of which were completed in December 2013, as well as higher legal expenses related to the TransWeb/3M litigation. Since selling and administrative expenses decreased 1% while net sales increased 1%, our selling and administrative expenses as a percentage of net sales decreased to 17.3% in 2013 from 17.6% in 2012.

2012 versus 2011

Net Sales

Net sales decreased $4.8 million, or less than one percent, in 2012 compared to 2011. The decrease in net sales in 2012 primarily reflects the effect of our fiscal year 2012 having one less week than our fiscal year 2011, a decline in sales at our Packaging segment and unfavorable changes in foreign currency exchange rates, partly offset by increased sales volume at our Engine/Mobile Filtration and Industrial/Environmental Filtration segments on a combined basis, increased selling prices and increased sales from business acquisitions. Components of the less than one percent decrease in net sales are as follows:

(Dollars in millions)                Net sales
Additional week in 2011             $    (22.0 )
Packaging segment volume                 (15.7 )
Foreign exchange                         (11.9 )
Filtration segments combined volume       22.7
Pricing                                   12.7
Acquisitions                               9.4
Decrease in consolidated net sales  $     (4.8 )

The effect of our fiscal year 2012 having one less week than our fiscal year 2011 unfavorably impacted net sales by approximately $22.0 million, or 2%.

Excluding the impact of the additional week in 2011 and changes in pricing, net sales at our Packaging segment were approximately $15.7 million, or 17%, lower in 2012 than in 2011, primarily driven by lower sales of smokeless tobacco and confection packaging products and lower sales of decorated flat sheet metal products.

Changes in the average exchange rates for foreign currencies versus the U.S. dollar unfavorably impacted our translated U.S. dollar value of net sales by approximately $11.9 million, or 1%, in 2012 compared to 2011, primarily due to strengthening of the U.S. dollar compared to the Euro during 2012.

Net sales volume in our Engine/Mobile and Industrial/Environmental Filtration segments increased approximately $22.7 million, or 2%, on a combined basis in 2012 compared to 2011, excluding the effects of the additional week in 2011, changes in foreign currency exchange rates, changes in pricing and acquisitions. This 2% increase was primarily driven by an increase in natural gas vessel and aftermarket sales in the U.S. and internationally, increased domestic sales of commercial and industrial filters through our Total Filtration Services distribution business, and increased sales of dust collection cartridges and systems.

Net sales increased approximately $9.4 million, or 1%, in 2012 compared to 2011 due to business acquisitions, reflecting our acquisitions of Modular Engineering Pty Ltd in the second quarter of 2012 and PDDA Filtration, Inc. in the first quarter of 2012.


Table of Contents

Cost of Sales

Cost of sales decreased $2.0 million, or less than one percent, in 2012 compared to 2011. This less than one percent decrease in cost of sales was primarily the result of the less than one percent decrease in net sales. Our 33.9% gross margin percentage in 2012 was 0.1 percentage points lower than 2011. The decrease in gross margin percentage was primarily the result of lower absorption of fixed overhead costs in our Packaging segment due to an 18% decline in net sales in 2012 compared to 2011, partly offset by benefits from our ongoing cost reduction and continuous improvement initiatives across each of our businesses. Raw material costs as a percentage of sales remained relatively stable in 2012, as we were able to increase the selling prices of our products by approximately 1% in 2012 to effectively pass through higher commodity costs to our customers. In 2012, we had the ability to pass the impact of commodity cost increases onto our customers due in part to the fact that a majority of our sales are into the aftermarket where we do not have long-term contracts.

Selling and Administrative Expenses

Selling and administrative expenses decreased $4.5 million, or 2%, in 2012 compared to 2011. This decrease was primarily driven by a $5.9 million decline in compensation related to our company-wide profit sharing program and a $3.2 million decline in legal expenses, partly offset by $3.1 million higher employee costs to support our long-term growth initiatives and $1.5 million higher other selling and administrative expenses to support our domestic and international growth initiatives. Our incentive compensation programs are tied to the achievement of objective annual goals, including the amount by which the Company's after-tax earnings exceeds the Company's cost of capital in relation to the assets under management's control. Although our operating profit increased by 1% in 2012 compared to 2011 and our diluted earnings per share was flat in 2012 compared to 2011, our results were below our internal annual goals, resulting in the decrease in incentive compensation in 2012 compared to 2011. The $3.2 million decline in legal expenses reflects the resolution during 2012 of certain legal matters, including the patent infringement lawsuit filed by Donaldson Company in 2009.

Other Items

Other significant items impacting the comparison between the years presented are as follows:

Additional week in 2011

Fiscal year 2013 and fiscal year 2012 included fifty-two weeks, while fiscal year 2011 included fifty-three weeks. Refer to the "Additional Week in 2011" section within Other Matters for further discussion of the impact of this item on comparisons between the years presented.

Significant acquisitions

On May 9, 2012 we acquired Modular Engineering Company Pty Ltd. This acquisition, which has been integrated into our Industrial/Environmental Filtration segment, impacted our net sales and operating profit in 2013 and 2012 as follows:

(Dollars in thousands)    2013        2012
Net sales               $ 7,035     $ 5,258
Operating (loss) profit  (1,514 )       149

On December 29, 2010 we acquired TransWeb LLC. The impact of including TransWeb's results, which are reported within our Industrial/Environmental Filtration segment, for twelve months in fiscal 2012 compared to eleven months in fiscal 2011 increased our 2012 net sales by $0.7 million (excluding $0.3 million of net sales to other CLARCOR companies) and did not have a material impact on operating profit.


Table of Contents

Foreign exchange

The average exchange rate for foreign currencies versus the U.S. dollar unfavorably impacted our translated U.S. dollar value of net sales and operating profit in 2013 and 2012 as follows:

(Dollars in thousands)    2013         2012
Net sales              $ (1,585 )   $ (11,918 )
Operating profit           (828 )      (2,004 )

Other income (expense)

Interest expense

Interest expense was $0.6 million in 2013 and $0.5 million in each of 2012 and 2011, respectively.

Foreign currency gains and losses

Changes in foreign currency transaction gains and losses favorably impacted other income (expense) by $0.3 million in 2013 versus 2012. We recognized foreign currency losses of $0.5 million in 2013 and $0.8 million in 2012 from the translation of cash accounts at certain foreign subsidiaries denominated in currencies other than their functional currency, primarily driven by foreign holdings of U.S. dollars.

Changes in net foreign currency transaction gains and losses unfavorably impacted other income (expense) by $0.9 million in 2012 versus 2011. We recognized a foreign currency loss of $0.8 million in 2012 from the translation of cash accounts at certain foreign subsidiaries denominated in currencies other than their functional currency, primarily driven by foreign holdings of U.S. dollars. We recognized a foreign currency gain of $0.1 million in 2011.

Provision for income taxes

Our effective tax rate in 2013 was 32.1% compared with 32.6% in 2012. The lower effective tax rate in 2013 was primarily due to a $1.0 million benefit in 2013 related to the extension of the research and development tax credit in December 2012.

Our effective tax rate in 2012 was 32.6% compared with 31.4% in 2011. The higher effective tax rate in 2012 was primarily driven by the research and development tax credit not being renewed for 2012, a $1.0 million tax benefit related to the release of a valuation allowance recorded against net operating loss carryovers at one of our foreign subsidiaries in 2011 that did not recur in 2012, and changes in the effect of foreign tax rate differences.

Shares outstanding

Average diluted shares outstanding decreased by approximately 0.3 million shares in 2013 as compared to 2012, as the number of shares repurchased and retired pursuant to our stock repurchase program exceeded the incremental dilutive shares related to the exercise of stock options and the issuance of restricted shares. Average diluted shares outstanding also decreased by approximately 0.3 million shares in 2012 as compared to 2011, as the number of shares repurchased and retired pursuant to our stock repurchase program exceeded the incremental dilutive shares related to the exercise of stock options and the issuance of restricted shares.


Table of Contents

SEGMENT ANALYSIS

                                     2013                       2012                       2011
(Dollars in thousands)      (52 weeks)     % Total     (52 weeks)     % Total     (53 weeks)     % Total
Net sales:
Engine/Mobile Filtration   $   507,024         45 %   $   503,607         45 %   $   510,012         45 %
Industrial/Environmental
Filtration                     549,746         49 %       541,364         48 %       523,026         46 %
Packaging                       74,000          6 %        76,794          7 %        93,563          9 %
                           $ 1,130,770        100 %   $ 1,121,765        100 %   $ 1,126,601        100 %
Gross profit:
Engine/Mobile Filtration   $   177,815         48 %   $   185,419         49 %   $   189,511         49 %
Industrial/Environmental
Filtration                     178,388         48 %       180,402         47 %       173,731         45 %
Packaging                       14,006          4 %        14,511          4 %        20,179          6 %
                           $   370,209        100 %   $   380,332        100 %   $   383,421        100 %
Operating profit:
Engine/Mobile Filtration   $   106,345         61 %   $   111,653         61 %   $   112,839         62 %
Industrial/Environmental
Filtration                      61,996         36 %        64,766         35 %        58,028         32 %
Packaging                        6,275          3 %         6,295          4 %        10,400          6 %
                           $   174,616        100 %   $   182,714        100 %   $   181,267        100 %
Gross margin:
Engine/Mobile Filtration          35.1 %                     36.8 %                     37.2 %
Industrial/Environmental
Filtration                        32.4 %                     33.3 %                     33.2 %
Packaging                         18.9 %                     18.9 %                     21.6 %
                                  32.7 %                     33.9 %                     34.0 %
Operating margin:
Engine/Mobile Filtration          21.0 %                     22.2 %                     22.1 %
Industrial/Environmental
Filtration                        11.3 %                     12.0 %                     11.1 %
Packaging                          8.5 %                      8.2 %                     11.1 %
                                  15.4 %                     16.3 %                     16.1 %


Table of Contents

Engine/Mobile Filtration Segment

(Dollars in thousands)      2013            2012           2011             2013 v 2012                  2012 v 2011
                                                                          $            %               $            %
                         (52 weeks)      (52 weeks)     (53 weeks)      Change       Change          Change       Change
Net sales              $    507,024     $  503,607     $  510,012     $  3,417           1  %      $ (6,405 )        (1 )%
Cost of sales             329,209          318,188        320,501       11,021           3  %        (2,313 )        (1 )%
Gross profit                177,815        185,419        189,511       (7,604 )        (4 )%        (4,092 )        (2 )%
Selling and
administrative
expenses                   71,470           73,766         76,672       (2,296 )        (3 )%        (2,906 )        (4 )%
Operating profit       $    106,345     $  111,653     $  112,839     $ (5,308 )        (5 )%      $ (1,186 )        (1 )%

Gross margin                   35.1 %         36.8 %         37.2 %                   (1.7 )  pt                   (0.4 )  pt
Selling and
administrative
percentage                     14.1 %         14.6 %         15.0 %                   (0.5 )  pt                   (0.4 )  pt
Operating margin               21.0 %         22.2 %         22.1 %                   (1.2 )  pt                    0.1    pt

Our Engine/Mobile Filtration segment primarily sells aftermarket filters for heavy-duty trucks and off-highway vehicles, locomotives and automobiles. The largest market in this segment includes heavy-duty engine truck filters produced at our Baldwin business unit.

2013 versus 2012

Net Sales

The $3.4 million, or 1%, increase in net sales for our Engine/Mobile Filtration segment in 2013 from 2012 is detailed in the following tables:
Volume 1 %
Pricing - %
Foreign exchange - %
1 %

(Dollars in millions)                 Net Sales
2012                                 $    503.6

U.S. net sales                              7.2
Foreign net sales (including export)       (2.5 )
Foreign exchange                           (1.3 )
Net increase                                3.4

2013                                 $    507.0


Table of Contents

The net increase in U.S. net sales for the Engine/Mobile Filtration segment in 2013 from 2012 is detailed as follows:

(Dollars in millions)       Net Sales
Heavy-duty engine filters  $       4.0
Locomotive filters                 2.1
Other                              1.1
Increase in U.S. net sales $       7.2

Our U.S. net sales increased approximately $7.2 million, or 2%, in 2013 compared with 2012, primarily reflecting a $4.0 million, or 2%, increase in heavy-duty engine filter aftermarket sales, which was driven by growth at certain national accounts and fleet services customers. This growth was largely consistent with the 3% year-over-year increase in heavy-duty truck tonnage for the twelve months ended August 2013 as measured by the American Trucking Associations. We believe that the year-over-year change in heavy-duty truck tonnage, as measured by the American Trucking Associations, is a leading indicator of heavy-duty engine filter aftermarket demand in the U.S., after incorporating a three month time lag (i.e. U.S. truck tonnage activity in a given quarter is generally predictive of U.S. filter aftermarket demand in the following quarter). In addition, U.S. sales of locomotive filters increased approximately $2.1 million, or 9%, in 2013 compared with 2012 as U.S. rail activity expanded.

The net decrease in foreign net sales (including export sales and adjusted for changes in foreign currencies) for our Engine/Mobile Filtration segment in 2013 from 2012 is detailed as follows:

(Dollars in millions)                     Net Sales
Heavy-duty engine filter sales in Europe $    (4.0 )
Heavy-duty engine filter sales in China        3.0
Other                                         (1.5 )
Decrease in foreign net sales            $    (2.5 )

The decrease in net sales outside the U.S. of approximately $2.5 million, or 1%, in 2013 compared to 2012 was primarily the result of decreased sales in Europe, where our sales of heavy-duty engine filters declined 9% in 2013 compared to 2012, which we believe was primarily driven by lingering adverse macroeconomic conditions in Europe and a resultant decline in trucking activity, as well as lower sales in Australia and South Africa. These lower sales in Europe were partially offset by an increase of $3.0 million, or 9%, of sales of heavy-duty engine filters in China in 2013 compared to 2012.

Cost of Sales

Cost of sales increased $11.0 million, or 3%, in 2013 from 2012. This 3% increase in cost of sales was greater than the 1% increase in net sales. As a result, our gross margin decreased to 35.1% in 2013 from 36.8% in 2012. This decrease in gross margin was primarily due to increased manufacturing overhead, reflecting lower absorption of fixed manufacturing costs due to the impact of additional capacity brought into service to support expected future growth as well as a reduction in inventory levels at this segment, in line with our routine production planning practices. This was partially offset by improved material costs in 2013 compared to 2012, as we experienced material cost decreases related to changes in product mix and were able to generate cost savings from our continuous cost reduction activities. Some of these decreased costs were utilized to support price reduction programs to drive sales development in 2013.

Selling and Administrative Expenses

Selling and administrative expenses decreased $2.3 million, or 3%, in 2013 from 2012. This decrease was primarily the result of $1.5 million lower employee costs related to stock-based compensation and pension and postretirement benefits, $1.2 million lower health care and self-insured employee medical costs, $0.7 million lower litigation expenses and a $0.3 million decline in compensation related to our profit sharing program, partially offset by $1.2 million higher legal, investment advisory and other professional services costs . . .

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