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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 August 31, 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 August 31, 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
----------------
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.
24,901,154 common shares outstanding
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Page 1 of 31
Part I - Item 1
CLARCOR Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
--------
August 31, November 30,
ASSETS 2002 2001
---------- ------------
(unaudited)
Current assets:
Cash and short-term cash investments $ 7,704 $ 7,418
Accounts receivable, less allowance for losses
of $8,065 for 2002 and $7,920 for 2001 122,854 115,003
Inventories:
Raw materials 35,110 37,195
Work in process 11,492 12,183
Finished products 55,405 54,913
--------- ---------
Total inventories 102,007 104,291
--------- ---------
Prepaid expenses and other current assets 4,518 4,120
Deferred income taxes 15,886 13,518
--------- ---------
Total current assets 252,969 244,350
--------- ---------
Plant assets at cost, 288,642 277,309
less accumulated depreciation (154,338) (139,993)
--------- ---------
134,304 137,316
--------- ---------
Goodwill 83,020 80,108
Trademarks 29,255 29,255
Other acquired intangibles, less accumulated amortization 9,286 9,831
Pension assets 19,482 18,939
Other noncurrent assets 9,505 10,818
--------- ---------
$ 537,821 $ 530,617
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 5,644 $ 5,579
Accounts payable 48,604 42,657
Income taxes 9,765 4,526
Accrued employee compensation 16,522 15,099
Other accrued liabilities 28,313 27,070
--------- ---------
Total current liabilities 108,848 94,931
--------- ---------
Long-term debt, less current portion 94,846 135,203
Long-term pension liabilities 6,530 4,955
Other long-term liabilities 23,742 20,833
Minority interests 463 434
Contingencies
SHAREHOLDERS' EQUITY
Capital stock 24,901 24,626
Capital in excess of par value 12,657 9,565
Accumulated other comprehensive earnings (5,283) (9,179)
Retained earnings 271,117 249,249
--------- ---------
303,392 274,261
--------- ---------
$ 537,821 $ 530,617
========= =========
See Notes to Consolidated Condensed Financial Statements
Page 2 of 31
CLARCOR Inc.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share data)
(Unaudited)
---------
Quarter Ended Nine Months Ended
------------------------------- -------------------------------
August 31, September 1, August 31, September 1,
2002 2001 2002 2001
------------ -------------- ------------- -------------
Net sales $ 189,368 $ 175,645 $ 524,140 $ 491,347
Cost of sales 135,810 125,339 374,572 349,411
------------ ------------ ------------- ------------
Gross profit 53,558 50,306 149,568 141,936
Selling and administrative expenses 33,041 31,777 95,849 88,668
------------ ------------ ------------- ------------
Operating profit 20,517 18,529 53,719 53,268
------------ ------------ ------------- ------------
Other income (expense):
Interest expense (1,526) (2,504) (5,320) (7,965)
Interest income 88 199 373 535
Other, net (2) (84) (538) (278)
------------ ------------ ------------- ------------
(1,440) (2,389) (5,485) (7,708)
------------ ------------ ------------- ------------
Earnings before income taxes and
minority interests 19,077 16,140 48,234 45,560
Provision for income taxes 6,884 5,868 17,419 16,546
------------ ------------ ------------- ------------
Earnings before minority interests 12,193 10,272 30,815 29,014
Minority interests in earnings of subsidiaries (8) (15) (25) (17)
------------ ------------ ------------- ------------
Net earnings $ 12,185 $ 10,257 $ 30,790 $ 28,997
============ ============ ============= ============
Net earnings per common share:
Basic $ 0.49 $ 0.42 $ 1.24 $ 1.18
============ ============ ============= ============
Diluted $ 0.48 $ 0.41 $ 1.22 $ 1.17
============ ============ ============= ============
Average number of common shares outstanding:
Basic 24,896,048 24,594,053 24,817,964 24,507,888
============ ============ ============= ============
Diluted 25,300,904 25,118,441 25,187,422 24,843,710
============ ============ ============= ============
Dividends paid per share $ 0.1200 $ 0.1175 $ 0.3600 $ 0.3525
============ ============ ============= ============
See Notes to Consolidated Condensed Financial Statements
Page 3 of 31
CLARCOR Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
--------
Nine Months Ended
-------------------------
August 31, September 1,
2002 2001
--------- --------------
Cash flows from operating activities:
Net earnings $ 30,790 $ 28,997
Depreciation 14,781 14,251
Amortization 545 2,679
Impairment of plant assets - 2,422
Changes in assets and liabilities 17,348 (6,299)
Other, net (63) (261)
-------- --------
Net cash provided by operating activities 63,401 41,789
-------- --------
Cash flows from investing activities:
Additions to plant assets (9,612) (15,240)
Business acquisitions, net of cash acquired (6,559) (33,498)
Other, net 259 706
-------- --------
Net cash used in investing activities (15,912) (48,032)
-------- --------
Cash flows from financing activities:
Proceeds from line of credit 10,000 25,500
Payments on line of credit (45,000) (16,500)
Proceeds from long-term debt - 8,000
Reduction of long-term debt (5,295) (5,145)
Cash dividends paid (8,922) (8,611)
Other, net 1,850 2,568
-------- --------
Net cash provided by (used in) financing activities (47,367) 5,812
-------- --------
Net effect of exchange rate changes on cash 164 (8)
-------- --------
Net change in cash and short-term cash investments 286 (439)
Cash and short-term cash investments,
beginning of period 7,418 10,864
-------- --------
Cash and short-term cash investments,
end of period $ 7,704 $ 10,425
======== ========
Cash paid during the period for:
Interest $ 6,021 $ 8,803
======== ========
Income taxes $ 8,486 $ 16,517
======== ========
See Notes to Consolidated Condensed Financial Statements
Page 4 of 31
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 August 31, 2002, the
consolidated condensed statements of earnings and the consolidated
condensed statements of cash flows for the periods ended August 31, 2002,
and September 1, 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 August 31, 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.
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.
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,
Page 5 of 31
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)
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 definite-lived intangibles annually
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 August 31, 2002 are as follows: $12,495 for Engine/Mobile Filtration,
$70,525 for Industrial/Environmental Filtration and $0 for Packaging.
During the nine months ended August 31, 2002, the carrying amount for the
Industrial/Environmental segment increased by approximately $2,918 related
to a third quarter acquisition offset by $3,954 due to purchase price
adjustments related to a 2001 acquisition. The carrying amount of goodwill
for the Engine/Mobile segment increased during the nine months ended August
31, 2002 by $3,880 related to an acquisition. These acquisitions are
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. As of December
1, 2001, there was no impairment as 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 $2,866 at August 31, 2002. The amortization
expense during the quarter and nine months ended August 31, 2002 was $180
and $545, respectively, 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 31
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 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
During the third quarter ended August 31, 2002, the Company acquired Locker
Filtration Limited (Locker), a Warrington, England manufacturer of
heavy-duty air filters, diesel and gas turbine air intake system filters
and specialty filters, and Total Filter Technology (TFT), a process liquid
filtration manufacturer based in North Chelmsford, Massachusetts, for
approximately $10,253 in cash. As a result of the acquisitions, Locker and
TFT became subsidiaries of the Company and their results will be included
in the Company's consolidated results of operations from the dates of
acquisition. The combined sales for both Locker and TFT in the most recent
twelve-month period were approximately $15,000. Locker is included in the
Engine/Mobile Filtration segment. TFT is included in the
Industrial/Environmental Filtration segment.
A preliminary allocation of the initial purchase prices has been made to
major categories of assets and liabilities for each acquisition. The
preliminary allocation of the purchase price over the preliminary estimated
fair value of the net tangible and identifiable intangible assets acquired
for Locker and for TFT resulted in $3,880 and $2,918 recorded as goodwill
for each acquisition,
Page 7 of 31
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited) Continued
- --------------------------------------------------------------------------------
3. BUSINESS COMBINATIONS (Continued)
respectively. The Locker and TFT acquisitions are not material to the
results of the Company. The Company expects to make additional adjustments
during the fourth quarter of 2002 to reflect purchase agreement
adjustments, appraisal values of assets acquired and adjustments for assets
and liabilities assumed.
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 the first
quarter of 2002, the purchase price was finalized resulting in a $3,694
payment by the seller to the Company. A decrease to goodwill of $3,954 was
recorded primarily as a result of the net settlement payment and entries
associated with deferred income taxes, the valuation of inventory acquired,
and preacquisition contingencies related to contract matters. No additional
purchase accounting entries associated with the TFS acquisition are
expected other than entries to finalize deferred income taxes. The results
are included in the Company's consolidated results of operations from the
date of acquisition. Unaudited pro forma net sales for the Company would
have been $517,345 for the nine months ended September 1, 2001. Net
earnings and earnings per share for fiscal 2001 would not have been
significantly affected.
4. 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 expired September 11,
2002. Under the agreement the Company will receive interest at floating
rates based on LIBOR. This derivative instrument is designated as a cash
flow hedge and determined to be effective. Therefore, there was no
adjustment to net earnings during the nine month period of 2002 or 2001 for
hedge effectiveness. At August 31, 2002, the fair value of the agreement
was a negative $835 and is included in other current liabilities. The
reversal of previously recorded net derivative losses included in other
comprehensive earnings for the nine months ended August 31, 2002 was $2,097
(or $1,363 pretax). Such derivative gains and losses will be reclassified
into earnings as payments are made on its variable rate interest debt and
totaled approximately $1,440 during the nine months ended August 31, 2002.
The remaining amount of net derivative losses
Page 8 of 31
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited) Continued
- --------------------------------------------------------------------------------
4. DERIVATIVE INSTRUMENTS (Continued)
included in accumulated other comprehensive income at August 31, 2002 will
be reclassified into earnings in the fourth quarter of 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 nine months ended August 31, 2001 was
$1,045 ($1,608 pretax).
5. LONG-TERM DEBT
On May 1, 2001, the Company, in cooperation with the Campbellsville-Taylor
County Industrial Development Authority, issued $8,000 of Industrial
Revenue Bonds. The bonds are due May 1, 2031, with a variable rate of
interest that is reset weekly. In conjunction with the issuance of the
Industrial Revenue Bonds, the Company holds in trust certain restricted
investments committed for the acquisition of plant equipment. At August 31,
2002, the restricted asset balance was $1,245 and is included in other
noncurrent assets.
6. CONTINGENCIES
The Company is involved in legal actions arising in the normal course of
business. Additionally, the Company is party to various proceedings
relating to environmental issues. The U.S. Environmental Protection Agency
(EPA) and/or other responsible state agencies have designated the Company
as a potentially responsible party (PRP), along with other companies, in
remedial activities for the cleanup of waste sites under the federal
Superfund statute.
At August 31, 2002, the Company was addressing two claims for environmental
remediation costs at two sites where it has been named a potentially
responsible party. A negotiated settlement has been reached on a "buyout"
basis concerning waste disposal by the Company and other companies at a
site in Maryland. Based upon past participation, the Company expects to
qualify for a buyout settlement at a site in Illinois as well. Estimated
costs to settle outstanding liabilities associated with these two matters
is less than $50 and has been accrued for by the Company. This estimate is
based upon information provided by the relevant environmental agencies,
legal counsel and independent environmental consultants.
Although it is not certain what future claims, if any, may be asserted
against the Company in these matters, the Company currently believes that
its potential liability for future remediation costs does not exceed its
present accrual. However, environmental and related remediation costs are
difficult to quantify for a number of reasons, including the number of
parties involved, the difficulty in determining the extent of the
contamination, the length of time remediation may require, the complexity
of the environmental regulation and the continuing advancement of
remediation technology. Applicable federal law may impose joint and several
liability on each PRP for the cleanup.
It is the opinion of management, after consultation with legal counsel that
additional liabilities, if any, resulting from these legal or environmental
issues, are not expected to have a material adverse effect on the Company's
financial condition or consolidated results of operations.
Page 9 of 31
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited) Continued
- --------------------------------------------------------------------------------
7. IMPAIRMENT LOSS
During the first quarter 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. RESEARCH & DEVELOPMENT
The Company charges research and development costs relating to the
development of new products or the improvement or redesign of its existing
products to expense when incurred. Research and development costs were
approximately $4,809 and $4,591 for the nine months ended August 31, 2002
and September 1, 2001, respectively.
9. EARNINGS PER SHARE
The Company calculates earnings per share according to Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Diluted
earnings per share reflects the impact of outstanding stock options and
restricted stock as if exercised during the periods presented using the
treasury stock method.
The following table provides a reconciliation of the numerators and
denominators utilized in the calculation of basic and diluted earnings per
share:
Quarter Ended Nine Months Ended
---------------------------- ----------------------------
August 31, September 1, August 31, September 1,
2002 2001 2002 2001
------------ ------------ ------------ -------------
Net Earnings (numerator) $ 12,185 $ 10,257 $ 30,790 $ 28,997
Basic EPS:
Weighted average number of common
shares outstanding (denominator) 24,896,048 24,594,053 24,817,964 24,507,888
Basic per share amount $ 0.49 $ 0.42 $ 1.24 $ 1.18
=========== =========== =========== ============
Diluted EPS:
Weighted average number of common
shares outstanding 24,896,048 24,594,053 24,817,964 24,507,888
Dilutive effect of stock options 404,856 524,388 369,458 335,822
----------- ----------- ----------- ------------
Diluted weighted average number of
common shares outstanding
(denominator) 25,300,904 25,118,441 25,187,422 24,843,710
Diluted per share amount $ 0.48 $ 0.41 $ 1.22 $ 1.17
=========== =========== =========== ============
Page 10 of 31
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited) Continued
- --------------------------------------------------------------------------------
9. EARNINGS PER SHARE (Continued)
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:
Quarter Ended Nine Months Ended
--------------------------------- ---------------------------------
August 31, September 1, August 31, September 1,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Options 60,187 - 60,187 51,751
Weighted Average Exercise Price $ 31.66 - $ 31.66 $ 25.09
For the nine months ended August 31, 2002, exercises of stock options added
$2,224 to capital in excess of par value.
10. COMPREHENSIVE EARNINGS
The Company's total comprehensive earnings and its components are as
follows:
Quarter Ended Nine Months Ended
-------------------------------- --------------------------------
August 31, September 1, August 31, September 1,
2002 2001 2002 2001
--------------- --------------- --------------- ----------------
Net earnings $ 12,185 $ 10,257 $ 30,790 $ 28,997
Other comprehensive earnings, net of tax:
Cash flow hedges:
Cumulative effect of accounting change - - - (769)
Net gain (loss) on derivative instruments 535 (115) 1,363 (1,045)
Foreign currency translation adjustments 1,987 854 2,533 458
--------------- --------------- --------------- ----------------
Total comprehensive earnings $ 14,707 $ 10,996 $ 34,686 $ 27,641
=============== =============== =============== ================
11. RECLASSIFICATIONS
Certain reclassifications have been made to conform prior years' data to
the current presentation. These reclassifications had no effect on reported
earnings.
Page 11 of 31
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited) Continued
- --------------------------------------------------------------------------------
12. SEGMENT DATA
The Company operates in three principal product segments: Engine/Mobile
Filtration, Industrial/Environmental Filtration, and Packaging. The segment
data for the third quarter and nine-month periods ended August 31, 2002 and
September 1, 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.
Quarter Ended Nine Months Ended
------------------------------------ ---------------------------------
August 31, September 1, August 31, September 1,
2002 2001 2002 2001
--------------- ----------------- -------------- ----------------
Net sales:
Engine/Mobile Filtration $ 70,385 $ 64,421 $ 192,984 $ 187,538
Industrial/Environmental Filtration 101,174 94,214 281,501 252,315
Packaging 17,809 17,010 49,655 51,494
--------------- ----------------- -------------- ----------------
$ 189,368 $ 175,645 $ 524,140 $ 491,347
=============== ================= ============== ================
Operating profit:
Engine/Mobile Filtration $ 13,358 $ 12,610 $ 37,785 $ 36,440
Industrial/Environmental Filtration 5,994 4,974 13,196 10,802
Packaging 1,165 945 2,738 6,026
--------------- ----------------- -------------- ----------------
20,517 18,529 53,719 53,268
Other expense (1,440) (2,389) (5,485) (7,708)
---------------- ---------------- -------------- -----------------
Earnings before income taxes and
minority earnings $ 19,077 $ 16,140 $ 48,234 $ 45,560
=============== ================= ============== ================
Identifiable assets:
Engine/Mobile Filtration $ 145,198 $ 138,352
Industrial/Environmental Filtration 300,723 308,784
Packaging 45,384 43,594
Corporate 46,516 49,984
-------------- -----------------
$ 537,821 $ 540,714
============== =================
Nonrecurring amortization expense recorded in operating profit in the third
quarter and nine months ended September 1, 2001 was $111 and $334 in the
Engine/Mobile Filtration segment and $727 and $1,828 in the
Industrial/Environmental segment, respectively. The Packaging segment
operating profit did not include any nonrecurring amortization in 2001. 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 12 of 31
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CLARCOR's results of operations and financial position for the 2002 third
quarter and nine months include several acquisitions made by the Company during
2002 and 2001. At the beginning of third quarter 2002, the Company acquired
Locker Filtration (Locker) which added sales of approximately $3,300,000 for the
quarter. At the end of the 2002 third quarter the Company acquired Total
Filtration Technology (TFT) which will be included in the results of operations
beginning with the fourth quarter of 2002. The Company's operating profit and
net earnings were not materially impacted by these businesses in 2002.
Additional purchase accounting entries related to the combined purchase price of
approximately $10,253,000 for Locker and TFT will be made during the fourth
quarter of 2002 to reflect purchase agreement adjustments, appraisal values of
assets acquired and adjustments for assets and liabilities assumed. No debt was
assumed with either of these transactions.
The Company acquired Total Filtration Services (TFS) at the beginning of the
third quarter 2001. Sales and operating profit for the 2002 and 2001 third
quarter include the results of operations from TFS and for the first six-month
period of 2002, TFS added approximately $32,000,000 in sales and $0.02 to
diluted earnings per share, after interest expense and income taxes. Purchase
accounting entries for TFS, primarily related to a $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 in the first quarter of 2002 primarily as a result of
the settlement payment and entries associated with deferred income taxes and the
valuation of acquired inventories. A final adjustment related to a
preacquisition contingency was recorded in the 2002 second quarter for
approximately $46,000. No additional purchase accounting entries associated with
the TFS acquisition are expected other than entries to finalize deferred income
taxes.
The most significant change impacting operating profit and net earnings for the
2002 nine-month period compared to the first nine months of 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 first quarter of 2001.
The Company also adopted Statement of Financial Accounting Standards No. 142
(SFAS 142) at the beginning of the first quarter of 2002 as described in Note 2
to the consolidated condensed financial statements. No impairment charges were
recorded as a result of adopting SFAS 142; however, amortization expense for
goodwill and indefinite-lived intangible assets was reduced by approximately
$2,162,000 for the nine-month period of 2002 compared to 2001. Alternatively,
this amortization expense decreased diluted earnings per share by $0.05 in the
first nine months of 2001.
RESULTS OF OPERATIONS: THIRD QUARTER OF 2002 COMPARED WITH THIRD QUARTER
OF 2001.
CLARCOR reported record sales, operating profit, net earnings and earnings per
share for the third quarter 2002. Net sales of $189,368,000 increased 7.8% from
$175,645,000 reported for the third quarter of 2001. Compared to last year's
third quarter, excluding the sales from Locker for the 2002 quarter, overall
sales increased approximately 6% from 2001.
Page 13 of 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
The Engine/Mobile Filtration segment reported increased sales of 9.3% in the
third quarter to $70,385,000 from $64,421,000 in 2001, or an increase of
approximately 4% excluding Locker. Sales of heavy-duty filters, both in domestic
and international markets, were particularly strong in the 2002 quarter and
sales of light-duty filtration products were slightly lower than the 2001
quarter. Sales of railroad locomotive filters were lower in 2002 compared to
2001 as major railroads and locomotive manufacturers continue to experience
decreased rail traffic and lower demand for new locomotives.
The Industrial/Environmental Filtration segment recorded a 7.4% overall increase
in sales to $101,174,000 for the 2002 third quarter compared to $94,214,000 in
2001. Particularly strong were increased sales of 10% for environmental air
filters used in commercial, industrial and residential HVAC systems and sales
for Total Filtration Services. Sales of industrial filtration products sold for
oil and gas drilling, pharmaceutical, beverage, defense and fluid power
applications also increased compared to the prior year quarter. These increases
offset continued lower sales resulting from reduced customer demand for air
quality equipment and filters and systems sold primarily into the capital goods
markets.
The Packaging segment reported third quarter sales of $17,809,000 compared to
$17,010,000 in 2001, an increase of 4.7%. 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 the segment installed in early 2001.
Partially offsetting the increase in metal sales was a reduction in sales of
plastic packaging products for the quarter.
The Company's operating profit for third quarter 2002 was $20,517,000 compared
to $18,529,000 in 2001. The 2001 quarter included approximately $838,000 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 reduced
amortization expense, 2002 operating profit increased approximately 6% compared
to 2001. This increase resulted primarily from increased sales levels and
productivity improvement programs that offset the impact from cost increases for
employee benefit programs, pensions and insurance. Foreign currency fluctuations
also slightly increased sales and operating profit for the quarter. Selling and
administrative expenses for third quarter 2001 included amortization expense of
$838,000 for goodwill and intangibles that was not recorded in the 2002 quarter.
Excluding the impact of this change, selling and administrative expenses in the
2002 quarter increased approximately 7% from the 2001 quarter due primarily due
to increased business activity related to the increased sales levels and for
expenses related to employee benefit programs.
The Engine/Mobile Filtration segment recorded an operating profit increase in
2002 of 5.9% compared to 2001, or 5% excluding the impact of reduced
amortization expenses due to the adoption of SFAS 142. This increase resulted
primarily from higher heavy-duty sales levels, discretionary cost reductions and
productivity improvements. These increases to operating profit offset reduced
profit from lower railroad filtration sales levels, a small operating loss at
Locker, and higher raw material, insurance, pension and employee benefit costs.
The segment's operating margin declined from 19.6% in 2001 to 19.0% in 2002, but
excluding Locker, operating margins increased to 20.0% in the third quarter of
2002.
The Industrial/Environmental Filtration segment reported operating profit of
$5,994,000 in 2002 compared to $4,974,000 in 2001. Strong sales and improved
productivity from the segment's air filtration businesses offset increased
benefit plan and insurance costs. The quarter was also
Page 14 of 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
impacted by continued reduced sales of filtration equipment. The 2001 quarter
included approximately $727,000 for amortization expense that did not recur in
2002 due to the adoption of SFAS 142. The segment's operating margin of 5.9% for
the quarter reflects improved productivity, particularly at several newer
facilities, and compares to 5.0% recorded for second quarter 2002.
The Packaging segment's operating profit in the 2002 quarter was $1,165,000
compared to $945,000 in 2001, an increase of $220,000. The increase resulted
from increased sales of lithographed metal and packaging products in the 2002
quarter and better capacity utilization.
Net other expense for the third quarter was $1,440,000 compared to $2,389,000 in
the 2001 quarter and the reduction was due primarily to lower 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 third quarter of
2002 totaled $19,077,000, compared to $16,140,000 in the comparable quarter last
year. The provision for income taxes in 2002 was $6,884,000 compared to
$5,868,000 in 2001. The effective rate was 36.1% in the 2002 quarter and 36.4%
in 2001. The Company expects the overall effective tax rate for fiscal 2002 will
be approximately 36.1%; however, certain tax reviews and audits may be concluded
in the fourth quarter of 2002 that may favorably impact the rate recorded in the
fourth quarter of 2002.
Net earnings in the third quarter of the current year were $12,185,000, or $0.48
per share on a diluted basis. Net earnings in the third quarter of 2001 were
$10,257,000, or $0.41 per share on a diluted basis. Net earnings and diluted
earnings per share were decreased by approximately $536,000 or $0.01 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 25,300,904 at the end of the third quarter of 2002, an
increase of 0.7% from the average of 25,118,441 for the 2001 quarter.
NINE MONTHS OF 2002 COMPARED TO NINE MONTHS OF 2001.
Net sales increased to $524,140,000 in 2002 from $491,347,000 in the 2001
nine-month period. Sales for 2002 include approximately $32,000,000 from TFS for
the first six-months and $3,300,000 from Locker for third quarter 2002. The 2001
period included a nonrecurring $7,000,000 contract cancellation payment received
in the 2001 first quarter. Excluding the sales added from TFS and Locker in 2002
compared to 2001 and the contract cancellation payment received in the 2001
period, sales in the 2002 nine-month period were approximately 1% higher than
the prior year.
The Engine/Mobile Filtration segment reported a 2.9% increase in sales, or
approximately 1% excluding Locker, for the 2002 nine-month period compared to
2001. This sales increase resulted primarily from stronger second and third
quarter 2002 heavy-duty filtration sales which offset reduced sales of railroad
filtration products due primarily to reduced rail traffic.
Sales increased 11.6% for the Industrial/Environmental Filtration segment to
$281,501,000 in 2002 from $252,315,000 in the 2001 nine-month period. This sales
increase was primarily due to $32,000,000 added from TFS for the first six-month
period of 2002 that offset an overall 1% reduction in sales for the segment.
This reduction was primarily due to reduced customer demand,
Page 15 of 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
particularly for air quality equipment and filtration systems that was partially
offset by increased sales of environmental air quality filters and specialty
industrial filters.
The Packaging segment reported sales of $49,655,000 compared to $51,494,000 in
2001. The 2001 period included a nonrecurring $7,000,000 customer contract
cancellation payment. Excluding this payment, the segment's sales increased 12%
primarily due to new metal lithography business related to new equipment the
segment installed in early 2001 and additional sales of plastic closures and
containers.
The Company's operating profit for the nine-month period totaled $53,719,000
compared to $53,268,000 in 2001. The 2001 period 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 period also included approximately $2,162,000 of amortization expense for
goodwill and intangibles that was not recorded in 2002 due to the adoption of
SFAS 142. Excluding the impact from the reduced amortization expense and the
operating profit from the cancellation payment, 2002 operating profit increased
approximately 5% compared to 2001. This increase resulted primarily from profit
related to TFS and productivity improvement programs that offset the impact from
increased costs for employee benefit programs, pensions and insurance. Selling
and administrative expenses increased in 2002 primarily due to TFS, and the 2001
period included amortization expense of $2,162,000 for goodwill and intangibles
that was not recorded in the 2002 period. Excluding the impact of these two
changes, selling and administrative expenses in the 2002 period increased
approximately 3% from the 2001 period.
The Engine/Mobile Filtration segment recorded an operating profit increase of
3.7% for the nine-month period. This increase reflects the impact of reduced
amortization expense of $334,000 due to the adoption of SFAS 142 and ongoing
discretionary cost reductions and productivity improvements in 2002 that offset
increased costs for employee benefit programs, insurance and pensions. The
segment's operating margin increased to 19.6% from 19.4% in 2001. Excluding the
impact of Locker in 2002 and the amortization expense recorded in 2001,
operating margin improved to 20.0% from 19.6% for the nine-month period.
The Industrial/Environmental Filtration segment recorded operating profit of
$13,196,000 for the nine-month period of 2002, an increase of 22.2% from 2001.
This increase of $2,394,000 includes approximately $1,300,000 from TFS for the
first six months of 2002 and $1,828,000 from reduced amortization expense due to
the adoption of SFAS 142. These increases offset reduced profit resulting from a
1% reduction in sales for the segment, excluding TFS, and increased costs for
employee benefit plans, pensions and insurance.
The Packaging segment's operating profit decreased to $2,738,000 for the
nine-month 2002 period from $6,026,000 recorded in 2001. This decrease was
primarily due to the profit resulting from the first quarter 2001 contract
termination payment. Excluding the operating profit of $4,489,000 related to
that payment, the segment's profit increased $1,201,000, or 78%. This increase
was due primarily to higher sales levels and better capacity utilization as a
result of higher customer demand for metal and plastic packaging products in the
2002 nine-month period.
Net other expense for the nine-month 2002 period of $5,485,000 was lower than
the 2001 amount of $7,708,000 due primarily to lower interest expense as a
result of lower debt balances and reduced interest rates during the 2002 period.
Page 16 of 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Earnings before income taxes and minority interests for the 2002 nine-month
period totaled $48,234,000, compared to $45,560,000 in the comparable period
last year. The provision for income taxes was 36.1% in the 2002 period and 36.3%
in 2001.
Net earnings in the 2002 nine-month period were $30,790,000, or $1.22 per share
on a diluted basis. Net earnings in the comparable 2001 period were $28,997,000,
or $1.17 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 $1,387,000 or $0.05 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 25,187,422
at the end of the nine-month 2002 period, an increase of 1.4% from the average
of 24,843,710 for the 2001 period.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased to $63,401,000 in the 2002
nine-month period compared to $41,789,000 in 2001. This increase is primarily
related to increased earnings and improved working capital management in the
2002 nine-month period compared to 2001. Cash flows from investing activities in
the 2002 nine-month period included $3,694,000 received from the sellers of TFS
in accordance with terms of the purchase agreement. During the third quarter of
2002, the Company acquired Locker and TFT and made payments totaling
approximately $10,253,000 for these acquisitions. In the 2002 period, $9,612,000
was used for additions to plant assets. In the 2001 nine-month period, cash
flows for investing activities totaled $48,032,000 and included $33,498,000 used
primarily for the acquisition of TFS and $15,240,000 used for additions to plant
assets. Cash flows used in financing activities of $47,367,000 in 2002 included
net repayments on a line of credit of $35,000,000, $5,295,000 for payments on
other long-term debt and dividend payments of $8,922,000. Cash flows provided by
financing activities were $5,812,000 in 2001 and included net additional
borrowings on a line of credit of $9,000,000, $8,000,000 received from the
issuance of industrial revenue bonds, $5,145,000 for payments on long-term debt
and dividend payments of $8,611,000.
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
nine-month period of 2002, $5,295,000 was repaid on long-term notes and a net
repayment of $35,000,000 was made on the outstanding balance on a multicurrency
revolving credit facility. At the end of the third quarter of 2002, the
outstanding balance on the credit facility was $72,000,000. The Company expects
to continue to use future additional free cash flow to further reduce
outstanding borrowings; however, during the remainder of fiscal 2002 free cash
flow is expected to be used primarily for additional investments in working
capital and capital expenditures. A contribution to the pension plan of
approximately $5,000,000 may be made in the fourth quarter based on the value of
pension plan assets during the fourth quarter. No payments are required in
fiscal 2002 on the multicurrency revolving credit facility and the Company is in
compliance with covenants related to all of its borrowings. At the end of the
third quarter of 2002, $101,767,000 remained available to the Company for future
borrowings under the multicurrency agreement. This $185,000,000 revolving credit
agreement expires in September 2003 and the Company is in the early stages of
negotiations on a replacement agreement. The Company fully anticipates that a
Page 17 of 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
new agreement will be in place prior to the expiration of the current agreement.
If a new agreement is not in place at the time the Company files its 2002 Annual
Report and Form 10-K with the Securities and Exchange Commission, the
outstanding balance on this facility will be reported as a current liability in
the fiscal 2002 year-end balance sheet. Capital expenditures in fiscal year 2002
are expected to be approximately $18,000,000 to $20,000,000 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 tooling for new
products. The Company's off-balance sheet arrangements relate to various
operating leases as discussed in Note I in the Notes to the Consolidated
Financial Statements included in the Company's Annual Report and Form 10-K for
the year ended November 30, 2001 (the "Annual Report"). Commitments as of the
beginning of fiscal 2002 for noncancelable leases totaled approximately
$7,300,000 for 2002. Except for an interest rate agreement that is described
below under Market Risk, the Company has no derivative, swap, hedge or special
purpose entity agreements.
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 likely 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 third quarter reflects
increased cash flow from operations and significant reductions in long-term debt
since the beginning of the 2002 fiscal year. Cash and short-term investments
totaled $7,704,000 at the end of the quarter, an increase from $7,418,000 at
year-end 2001. From year-end 2001 to the end of the third quarter 2002, accounts
receivable increased by $7,851,000 primarily due to increased sales activities
during the period. The current ratio at the end of the third quarter was 2.3
compared to 2.6 at the end of fiscal 2001. During the first nine months of 2002,
$40,295,000 was repaid on a revolving credit agreement and on other long-term
debt that reduced long-term debt to $94,846,000 from $135,203,000 at year-end
2001. The ratio of long-term debt to total capitalization was 23.8% at the end
of the 2002 third quarter compared to the year-end 2001 level of 33.0%. At the
end of the third quarter 2002, CLARCOR had 24,901,154 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 expired in September 2002, that is being accounted for
as a derivative financial instrument under SFAS 133 and is discussed in Note 4
to the consolidated condensed financial statements. As a result of the
expiration of this interest rate agreement, the Company estimates that annual
interest expense on the notional amount of $60,000,000 will be reduced by
approximately $3,300,000 based on interest rates currently payable under the
revolving credit agreement. The Company has no other interest rate or foreign
currency derivative agreements. Market risks are also discussed in the Annual
Report in the Financial Review on page 10.
Page 18 of 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Critical Accounting Policies
The Company's 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
the December 1, 2001 transition date there was no impairment to such assets.
While the estimates and judgments associated with the application of accounting
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. Since the Company's financial reporting
results rely on estimation about the effect of matters that are inherently
uncertain, actual results may differ from those estimates. The following briefly
explains several of the Company's critical accounting policies that are used in
preparing its consolidated financial statements which require the Company's
management to use significant judgment and estimates:
Allowance for losses on accounts receivable - Allowances for losses on
customer accounts receivable balances are estimated based on historical losses,
by evaluating specific customer accounts for risk of loss and current payment
trends, and economic conditions in the industries to which the Company sells.
The allowances provided are estimates that may be impacted by economic and
market conditions which could have an effect on future allowances required and
results of operations.
Pensions - The Company's pension obligations are determined using
estimates including those related to discount rates, asset values and changes in
compensation. Actual results and future obligations will vary based on changes
in interest rates, stock and bond market valuations and employee compensation.
Interest rates and pension plan valuations may vary significantly based on
worldwide economic conditions and asset investment decisions.
Income Taxes - The Company is required to estimate and record income
taxes payable for each of the U.S. and international jurisdictions in which the
Company operates. This process involves estimating actual current tax expense
and assessing temporary differences resulting from differing accounting
treatment between tax and book which result in deferred tax assets and
liabilities. In addition, reserves are also estimated for federal, state and
international tax issues that are unresolved. Taxes payable and the related
deferred tax differences may be impacted by changes to tax codes, changes in tax
rates and changes in taxable profits and losses.
Goodwill and Indefinite-lived Intangible Assets - As described earlier,
the Company has adopted SFAS 142 and goodwill and indefinite-lived intangible
assets are now reviewed periodically for impairment. These reviews of fair value
of the Company's reporting units involve judgment and estimates of future cash
flows, discount rates and transaction multiples that may be impacted by market
conditions and worldwide economic conditions.
Page 19 of 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Recent Relevant Accounting Pronouncements
The Financial Accounting Standards Board recently issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" and SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." These standards will be
effective for the Company beginning in fiscal 2003 and the Company has not yet
fully evaluated the impact of these standards on its financial statements.
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 may take two to three years to fully
implement the Program for a very large 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. 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 and 2003 with
investments in its distribution and technology infrastructure. In addition,
through TFS the Company's air filter branch operations are beginning to be
remade into total filter stores. These investments and changes are 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. The Company believes
that sales levels overall will remain good during the remainder of 2002 for
Engine/Mobile Filtration products as new sales and marketing initiatives begun
late in 2001 continue to develop; however, sales of filters used for railroad
locomotives are expected to be lower as a result of continued reduced railcar
mileage. Though the Industrial/Environmental Filtration segment experienced good
demand for air filters especially late in the second quarter of 2002 and
continuing in the third quarter, the economic slowdown has particularly affected
sales of filters and equipment, such as dust collectors and electrostatic
filtration equipment, sold primarily into the capital goods markets. The Company
anticipates that customer demand will be reasonably good for filters for
industrial manufacturing processes for the remainder of 2002 and sales are
expected to remain slow and below last year for equipment sold into the capital
goods markets. 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 sales
and operating profit improvements that are expected to continue. The efficiency
of new lithography equipment that was installed in early 2001 continues to
increase. Combined with growing sales to leverage the investment in this
equipment and further cost reduction efforts, the Company expects additional
margin improvement for the Packaging segment in 2002.
Continued emphasis on cost reductions and improved pricing programs within each
business unit are expected to offset cost increases for material costs, health
care, insurance and pensions. Due
Page 20 of 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
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 and pension expense is expected to increase further in 2003.
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 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 21 of 31
Part I - Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The information required hereunder is set forth on Page 18 of the
Quarterly Report under the captions "Management's Discussion and
Analysis - Other Matters - Market Risk".
Part I - Item 4. Controls and Procedures.
a. The Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in this
report is accumulated and communicated to the Company's management,
including its principal executive officers as appropriate, to allow
timely decisions regarding required disclosure.
b. There were no significant changes in the Company's internal controls or
other factors that could significantly affect such controls subsequent
to the date of their evaluation and there were no corrective actions
with regard to significant deficiencies and material weaknesses.
Page 22 of 31
Part II - Other Information
Item 6 Exhibits and Reports on Form 8K
a. Exhibit 99
Certifications Pursuant to Section 1350 of Chapter 63 of Title 18
of the United States Code
b. The Company did not file a Form 8-K during the third quarter ended
August 31, 2002.
Page 23 of 31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLARCOR INC.
(Registrant)
September 20, 2002 By /s/ Bruce A. Klein
- ------------------------------ -----------------------------------
(Date) Bruce A. Klein, Vice President -
Finance and Chief Financial Officer
Page 24 of 31
CERTIFICATIONS
I, Norman E. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CLARCOR Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: September 20, 2002
/s/ Norman E. Johnson
------------------------------------
Norman E. Johnson
Chairman of the Board, President and
Chief Executive Officer
Page 25 of 31
CERTIFICATIONS
I, Bruce A. Klein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CLARCOR Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: September 20, 2002
/s/ Bruce A. Klein
-------------------------------------
Bruce A. Klein
Vice President - Finance and
Chief Financial Officer
Page 26 of 31
CERTIFICATIONS
I, Marcia S. Blaylock, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CLARCOR Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: September 20, 2002
/s/ Marcia S. Blaylock
------------------------------------
Marcia S. Blaylock
Vice President, Controller and
Chief Accounting Officer
Page 27 of 31
EXHIBIT INDEX
Page No.
Exhibit 99
Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code of:
99.1 Norman E. Johnson ........................................... 29
99.2 Bruce A. Klein .............................................. 30
99.3 Marcia S. Blaylock........................................... 31
Page 28 of 31