10-Q 1 c83914e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED 02/28/04 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ------- FORM 10-Q QUARTERLY REPORT ------- Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ------- For the quarter ended February 28, 2004 ------- REGISTRANT: CLARCOR Inc. (Delaware) ------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission File Number 1-11024 CLARCOR Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 36-0922490 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2323 Sixth Street, P.O. Box 7007, Rockford, Illinois 61125 ---------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 815-962-8867 ------------ No Change -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) 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. 25,372,273 common shares outstanding ------------------------------------ Page 1 CLARCOR Inc. CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands)
February 28, November 30, 2004 2003 -------------------- -------------------- ASSETS (unaudited) Current assets: Cash and short-term cash investments $ 18,150 $ 8,348 Accounts receivable, less allowance for losses of $9,178 for 2004 and $9,106 for 2003 123,152 127,546 Inventories: Raw materials 36,156 34,174 Work in process 12,965 11,866 Finished products 54,510 53,633 -------------- --------------- Total inventories 103,631 99,673 -------------- --------------- Prepaid expenses and other current assets 5,181 5,880 Deferred income taxes 16,370 15,955 -------------- --------------- Total current assets 266,484 257,402 -------------- --------------- Plant assets at cost, 309,299 304,892 less accumulated depreciation (179,639) (175,320) -------------- --------------- 129,660 129,572 -------------- --------------- Goodwill 83,078 82,720 Trademarks 29,476 29,476 Other acquired intangibles, less accumulated amortization 9,965 10,155 Pension assets 20,443 20,153 Other noncurrent assets 9,259 8,759 -------------- --------------- $ 548,365 $ 538,237 ============== =============== LIABILITIES Current liabilities: Current portion of long-term debt $ 639 $ 674 Accounts payable 53,188 49,256 Income taxes 8,067 8,377 Accrued employee compensation 13,264 23,400 Other accrued liabilities 31,820 29,666 -------------- --------------- Total current liabilities 106,978 111,373 -------------- --------------- Long-term debt, less current portion 18,414 16,913 Long-term pension liabilities 8,661 7,813 Deferred income taxes 22,119 21,729 Other long-term liabilities 8,810 8,339 Minority interests 1,524 1,678 Contingencies SHAREHOLDERS' EQUITY Capital stock 25,372 25,309 Capital in excess of par value 20,811 19,998 Accumulated other comprehensive earnings 1,169 (936) Retained earnings 334,507 326,021 -------------- --------------- 381,859 370,392 -------------- --------------- $ 548,365 $ 538,237 ============== ===============
See Notes to Consolidated Condensed Financial Statements Page 2 CLARCOR Inc. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Dollars in thousands except per share data) (Unaudited)
Three Months Ended --------------------------------------- February 28, March 1, 2004 2003 --------------- ----------------- Net sales $ 175,272 $ 171,494 Cost of sales 123,788 123,145 --------------- ----------------- Gross profit 51,484 48,349 Selling and administrative expenses 33,671 32,862 --------------- ----------------- Operating profit 17,813 15,487 --------------- ----------------- Other income (expense): Interest expense (118) (524) Interest income 51 110 Other, net 652 46 --------------- ----------------- 585 (368) --------------- ----------------- Earnings before income taxes and minority interests 18,398 15,119 Provision for income taxes 6,703 5,516 --------------- ----------------- Earnings before minority interests 11,695 9,603 Minority interests in earnings of subsidiaries (34) (7) --------------- ----------------- Net earnings $ 11,661 $ 9,596 =============== ================= Net earnings per common share: Basic $ 0.46 $ 0.39 =============== ================= Diluted $ 0.45 $ 0.38 =============== ================= Average number of common shares outstanding: Basic 25,368,917 24,920,638 =============== ================= Diluted 25,813,606 25,348,353 =============== ================= Dividends paid per share $ 0.1250 $ 0.1225 =============== =================
See Notes to Consolidated Condensed Financial Statements Page 3 CLARCOR Inc. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Three Months Ended -------------------------------------- February 28, March 1, 2004 2003 ------------ ------------- Cash flows from operating activities: Net earnings $ 11,661 $ 9,596 Depreciation 4,602 4,967 Amortization 190 225 Changes in assets and liabilities (993) (1,570) Other, net (653) - ------------ ------------- Net cash provided by operating activities 14,807 13,218 ------------ ------------- Cash flows from investing activities: Additions to plant assets (5,242) (3,017) Other, net 1,407 7 ------------ ------------- Net cash used in investing activities (3,835) (3,010) ------------ ------------- Cash flows from financing activities: Proceeds from line of credit 1,500 6,250 Payments on line of credit - (18,333) Payments on long-term debt (34) (181) Cash dividends paid (3,175) (3,052) Other, net 297 162 ------------ ------------- Net cash used in financing activities (1,412) (15,154) ------------ ------------- Net effect of exchange rate changes on cash 242 23 ------------ ------------- Net change in cash and short-term cash investments 9,802 (4,923) Cash and short-term cash investments, beginning of period 8,348 13,747 ------------ ------------- Cash and short-term cash investments, end of period $ 18,150 $ 8,824 ============ ============= Cash paid during the period for: Interest $ 117 $ 704 ============ ============= Income taxes $ 5,962 $ 1,639 ============ =============
See Notes to Consolidated Condensed Financial Statements Page 4 CLARCOR Inc. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) 1. CONSOLIDATED FINANCIAL STATEMENTS The November 30, 2003 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 February 28, 2004, the consolidated condensed statements of earnings and the consolidated condensed statements of cash flows for the periods ended February 28, 2004, and March 1, 2003, 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, 2003 annual report on Form 10-K. 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 February 28, 2004 are not necessarily indicative of the operating results for the full year. Certain reclassifications have been made to conform prior years' data to the current presentation. These reclassifications had no effect on reported earnings. 2. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method. If the Company had determined compensation expense for its stock-based compensation plans based on the fair value at the grant dates, the Company's pro forma net earnings and basic and diluted earnings per share (EPS) would have been as follows:
Three Months Ended --------------------------------- February 28, March 1, 2004 2003 ------------- ------------ Net earnings, as reported $ 11,661 $ 9,596 Less total stock-based compensation expense under the fair value-based method, net of tax (591) (401) ------------- ------------ Pro forma net earnings $ 11,070 $ 9,195 ============= ============ Basic EPS, as reported $ 0.46 $ 0.39 Pro forma basic EPS $ 0.44 $ 0.37 Diluted EPS, as reported $ 0.45 $ 0.38 Pro forma diluted EPS $ 0.43 $ 0.36
Page 5 CLARCOR Inc. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) Continued 2. STOCK-BASED COMPENSATION (Continued) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the three months ended February 28, 2004 and March 1, 2003, respectively. Adjustments for forfeitures are made as they occur.
Three Months Ended -------------------------- February 28, March 1, 2004 2003 ------------ -------- Risk-free interest rate 4.50% 3.87% Expected dividend yield 1.29% 1.58% Expected volatility factor 27.20% 23.00% Expected option term (in years) 7.0 7.0
3. EARNINGS PER SHARE Diluted earnings per share reflects the impact of outstanding stock options and restricted stock as if exercised during the periods presented using the treasury stock method. The following table provides a reconciliation of the numerators and denominators utilized in the calculation of basic and diluted earnings per share:
Three Months Ended -------------------------------- February 28, March 1, 2004 2003 ------------ ----------- Net Earnings $ 11,661 $ 9,596 Basic EPS: Weighted average number of common shares outstanding 25,368,917 24,920,638 Basic per share amount $ 0.46 $ 0.39 =========== =========== Diluted EPS: Weighted average number of common shares outstanding 25,368,917 24,920,638 Dilutive effect of stock options and restricted stock 444,689 427,715 ----------- ----------- Diluted weighted average number of common shares outstanding 25,813,606 25,348,353 Diluted per share amount $ 0.45 $ 0.38 =========== ===========
Page 6 CLARCOR Inc. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) Continued 3. 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:
Three Months Ended ----------------------------- February 28, March 1, 2004 2003 ------------ -------- Options 293,400 - Weighted Average Exercise Price $ 45.59 -
For the three months ended February 28, 2004, exercises of stock options added $761 to capital in excess of par value. 4. COMPREHENSIVE EARNINGS The Company's total comprehensive earnings and its components are as follows:
Three Months Ended --------------------------- February 28, March 1, 2004 2003 ------------ -------- Net earnings $ 11,661 $ 9,596 Other comprehensive earnings, net of tax: Foreign currency translation adjustments 2,105 1,455 --------- -------- Total comprehensive earnings $ 13,766 $ 11,051 ========= ========
5. RELOCATION COSTS On January 8, 2004, the Company announced that the corporate headquarters will move to Nashville, TN in 2004. Costs for this move, which will largely be a one-time expense incurred primarily during the third quarter of fiscal 2004, are still being finalized. Approximately $8 was accrued during the first quarter ended February 28, 2004 for employee termination benefits. These termination benefits, currently estimated at $100, are dependent upon the employees rendering service through the retention period and will be recognized ratably over the required service period. Relocation costs in total are not expected to exceed $0.07 per share. The Company expects to pay all significant relocation costs during fiscal year 2004. 6. GUARANTEES AND WARRANTIES The Company has provided letters of credit totaling approximately $23,513 to various government agencies, primarily related to industrial revenue bonds and to insurance companies Page 7 CLARCOR Inc. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) Continued 6. GUARANTEES AND WARRANTIES (Continued) and other entities in support of its obligations. The Company believes that no payments will be required resulting from these accommodation obligations. In the ordinary course of business, the Company also provides routine indemnifications and other guarantees whose terms range in duration and often are not explicitly defined. The Company does not believe these will have a material impact on the results of operations or financial condition of the Company. The Company has a majority ownership interest in a consolidated affiliate in which the Company has agreed, under certain conditions, to buy out the minority owners' interest for an amount estimated not to exceed $850. Warranties are recorded as a liability on the balance sheet and as charges to current expense for estimated normal warranty costs and, if applicable, for specific performance issues known to exist on products already sold. The expenses estimated to be incurred are provided at the time of sale and adjusted as needed, based primarily upon experience. Changes in the Company's warranty accrual during the quarter ended February 28, 2004 are as follows: Balance at November 30, 2003 $ 1,789 Accruals for warranties issued during the period 170 Accruals related to pre-existing warranties (10) Settlements made during the period (99) Other adjustments, including currency translation 2 -------- Balance at February 28, 2004, included in other current liabilities $ 1,852 ========
7. GOODWILL AND INTANGIBLES The following table summarizes the activity for acquired intangibles by reporting unit for the quarter ended February 28, 2004.
2004 ---------------------------------------------------------------------------- Currency Beginning Translation End of of Year Acquisitions Adjustments Amortization Quarter --------- ------------ ----------- ------------ ------- Goodwill: Engine/Mobile Filtration $12,170 $ - $ 350 $ - $12,520 Industrial/Environmental Filtration 70,550 - 8 - 70,558 Packaging - - - - - ------- ---- ------- ----- ------- $82,720 $ - $ 358 $ - $83,078 ======= ==== ======= ===== =======
Page 8 CLARCOR Inc. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) Continued 7. GOODWILL AND INTANGIBLES (Continued)
2004 ------------------------------------------------------------------------- Currency Beginning Translation End of of Year Acquisitions Adjustments Amortization Quarter --------- ------------ ----------- ------------ ------- Trademarks: Engine/Mobile Filtration $ 603 $ - $ - $ - $ 603 Industrial/Environmental Filtration 28,873 - - - 28,873 Packaging - - - - - ------- ----- ------ ------- ------- $29,476 $ - $ - $ - $29,476 ======= ===== ====== ======= ======= Other acquired intangibles, gross: Engine/Mobile Filtration $ 1,040 $ - $ - $ - $ 1,040 Industrial/Environmental Filtration 13,104 - - - 13,104 Packaging - - - - - ------- ----- ------ ------- ------- 14,144 - - - 14,144 Less accumulated amortization 3,989 - - 190 4,179 ------- ----- ------ ------- ------- Other acquired intangibles, net $10,155 $ - $ - $ 190 $ 9,965 ======= ===== ====== ======= =======
Amortization expense is estimated to be $759 in 2004, $755 in 2005, $721 in 2006, $708 in 2007, and $653 in 2008. 8. 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. Although it is not certain what future environmental claims, if any, may be asserted, the Company currently believes that its potential liability for known environmental matters does not exceed its present accrual of $50. 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. In the event of a change in control of the Company, termination benefits may be required for certain executive officers and other key employees. Page 9 CLARCOR Inc. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) Continued 9. SEGMENT DATA The Company operates in three principal product segments: Engine/Mobile Filtration, Industrial/Environmental Filtration, and Packaging. The segment data for the three months ended February 28, 2004 and March 1, 2003, respectively, are shown below. Net sales represent sales to unaffiliated customers as reported in the consolidated condensed statements of earnings. Intersegment sales were not material.
Three Months Ended ------------------------------ February 28, March 1, 2004 2003 ------------ --------- Net sales: Engine/Mobile Filtration $ 70,800 $ 66,776 Industrial/Environmental Filtration 88,962 90,369 Packaging 15,510 14,349 --------- --------- $ 175,272 $ 171,494 ========= ========= Operating profit: Engine/Mobile Filtration $ 14,425 $ 12,686 Industrial/Environmental Filtration 3,252 2,373 Packaging 136 428 --------- --------- 17,813 15,487 Other income (expense) 585 (368) --------- --------- Earnings before income taxes and minority earnings $ 18,398 $ 15,119 ========= ========= Identifiable assets: Engine/Mobile Filtration $ 161,777 $ 147,528 Industrial/Environmental Filtration 300,449 292,779 Packaging 41,140 41,366 Corporate 44,999 55,858 --------- --------- $ 548,365 $ 537,531 ========= =========
Page 10 CLARCOR Inc. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) Continued 10. NEW ACCOUNTING STANDARDS Effective January 12, 2004, the FASB issued FASB Staff Position No. 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," (the Act). This Staff Position permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act until authoritative guidance on accounting for subsidies provided by the Act is issued. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans. The Company does not anticipate that the Act will have a material effect on the measurement of the Company's postretirement obligations. On December 23, 2003, the FASB issued SFAS No. 132R, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement requires additional disclosures to be made by employers regarding pensions and other postretirement benefit plans, but does not change the measurement or recognition of those plans. The interim period disclosure requirements of the Statement are effective for interim periods beginning after December 15, 2003. The Company will adopt the interim provisions of this Statement beginning in the second quarter of 2004. All other provisions of this Statement will be adopted in the fourth quarter of 2004. Page 11 Part I - Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: FIRST QUARTER OF 2004 COMPARED WITH FIRST QUARTER OF 2003. CLARCOR reported record sales, operating profit and net earnings for the first quarter of 2004. Sales increased 2.2%, operating profit increased 15.0% and net earnings increased 21.5% over the same quarter in 2003. Net sales of $175,272,000 increased from $171,494,000 reported for the first quarter of 2003. Favorable currency translation, due to the weaker U.S. dollar, improved sales by approximately $900,000. The Engine/Mobile Filtration segment reported increased sales of 6.0% to $70,800,000 from $66,776,000 in 2003. This increase was primarily due to additional sales of heavy-duty filters through domestic aftermarket and national account distribution and sales to railroads and railroad equipment maintenance companies. International sales also increased, both in local currencies and U.S. dollars. The favorable currency translation due to the weaker U.S. dollar resulted in additional sales of approximately $400,000 for the quarter. The Company's Industrial/Environmental Filtration segment recorded a 1.6% overall decrease in sales to $88,962,000 for the 2004 quarter from $90,369,000 for the 2003 first quarter. The decreased sales level was primarily due to reduced customer demand for HVAC filters used in building maintenance and for air quality equipment. Sales increases were recorded for specialty process liquid filters, both domestically and internationally. Approximately $500,000 of sales for the quarter was related to favorable currency translation during the 2004 quarter. The Packaging segment reported sales of $15,510,000 compared to $14,349,000 in 2003. Sales increases for the quarter were related to flat sheet metal decorating and tooling charges billed to customers; however, these increases were partially offset by reduced sales of plastic packaging and metal container sales that were particularly strong in the first quarter of 2003. Operating profit for the first quarter of 2004 was $17,813,000 compared to $15,487,000 in 2003, a 15.0% increase. The operating profit increase resulted primarily from the Engine/Mobile segment's sales growth, from continued cost reduction programs throughout each of the business segments, and from restructuring and integration programs in the Industrial/Environmental segment. The Engine/Mobile Filtration segment recorded an operating profit increase of 13.7% to $14,425,000 from $12,686,000 in 2003. This increase resulted primarily from sales growth, cost reduction programs and favorable capacity utilization. The segment's operating margin was 20.4% compared to 19.0% recorded in the first quarter of 2003. The Industrial/Environmental Filtration segment reported operating profit of $3,252,000 in 2004 compared to $2,373,000 in 2003. Although sales were lower overall for the quarter, cost reduction initiatives and restructuring and integration programs benefited the segment's 2004 quarter. In addition, increased sales of specialty process liquid filters, used primarily in aerospace and aviation fuel systems, also improved operating profit. The segment's operating margin improved to 3.7% compared to 2.6% in the 2003 quarter. Page 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued The Packaging segment's operating profit in the 2004 quarter was $136,000 compared to $428,000 in 2003. The decrease resulted from reduced utilization of facilities and unfavorable absorption related primarily to reduced plastic product sales and metal container sales. Net other income for the quarter of $585,000 included a gain of $720,000 related to the sale of a building, interest expense of $118,000 and interest income of $51,000. Net other expense in 2003 of $368,000 included interest expense of $524,000 and interest income of $110,000. Interest expense was lower in 2004 due to significantly lower debt balances during the 2004 quarter. Earnings before income taxes and minority interests for the first quarter of 2004 totaled $18,398,000, compared to $15,119,000 in the comparable quarter last year. The provision for income taxes in 2004 was $6,703,000 compared to $5,516,000 in 2003. The effective rate was 36.4% in 2004 and 36.5% in 2003. The Company expects that the overall effective tax rate for fiscal 2004 will be approximately 36.5%. Net earnings in the first quarter of the current year were $11,661,000, or $0.45 per share on a diluted basis. Net earnings in the first quarter of 2003 were $9,596,000, or $0.38 per share on a diluted basis. Diluted average shares outstanding were 25,813,606 at the end of the first quarter of 2004, an increase of 1.8% from the average of 25,348,353 for the 2003 quarter. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities increased to $14,807,000 in first quarter 2004 compared to $13,218,000 in 2003, primarily due to increased net earnings. In the first quarter of 2004, cash flows for investing activities totaled $3,835,000 and included $5,242,000 used for plant asset additions offset by $1,407,000 received from the sale of plant assets. In the 2003 quarter, $3,017,000 was used for additions to plant assets. Cash flows used in financing activities totaled $1,412,000 in 2004 and included $3,175,000 used for dividend payments offset by $1,500,000 that was drawn on a line of credit. Cash flows used in financing activities of $15,154,000 in 2003 included net repayments on debt agreements of $12,264,000 and dividend payments of $3,052,000. 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 debt agreements. At the end of the first quarter of 2004, $1,500,000 was the outstanding balance on a $165 million multicurrency revolving credit facility. The credit facility also includes a $40 million letter of credit line subline, against which $14,132,000 had been issued at the end of the first quarter of 2004. Other long-term debt totaled $17,553,000 at the end of the 2004 quarter and related principal payments in 2004 will be approximately $674,000. The Company is in compliance with all covenants related to debt agreements. The Company expects to continue to use future additional cash flow for dividends, capital expenditures and acquisitions. Capital expenditures in fiscal year 2004 are expected to be approximately $25 million to $30 million and will be used primarily for normal facility improvements, productivity improvements, improvements to technical centers, and to support new products. Early in the second quarter of 2004, the Company acquired the operating assets of a small engine filter company in England for approximately $5 million, subject to finalization of assets acquired. Page 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued Off-Balance Sheet Arrangements - The Company's off-balance sheet arrangements relate to various operating leases. Commitments for noncancelable leases in 2004 total approximately $8,229,000. The Company had no derivative, swap, hedge, variable interest entity or special purpose entity agreements during 2004 or in fiscal 2003. The following table summarizes the Company's fixed cash obligations for the various future years ending November 30: (Dollars in thousands)
2004 2005 & 2006 2007 & 2008 Thereafter ---- ----------- ----------- ---------- Long-Term Debt $ 674 $ 503 $ - $ 16,410 Credit Facility $ - $ - $ 1,500 $ - Operating Leases $ 8,229 $ 10,705 $ 6,834 $ 9,933
While changes in 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 cash flow from operations for fiscal 2004 will be lower than the prior fiscal year due to additional investments in working capital that may be required to support increased operations in fiscal 2004. In addition, a higher level of capital expenditures is expected in fiscal 2004 than in the prior year. It is possible that business acquisitions or dispositions could be made in the future that may affect operating cash flows and may require changes in the Company's debt and capitalization. The Company's financial position at the end of the first quarter reflected cash and short-term investments of $18,150,000, an increase from $8,348,000 at year-end 2003. As mentioned previously, subsequent to the end of the first quarter, approximately $5 million of cash was used for a small asset acquisition. At the end of the first quarter 2004 compared to year-end 2003, accounts receivable were reduced by $4,394,000 primarily due to lower sales in the first quarter of 2004 compared to the fourth quarter of 2003. Inventories increased $3,958,000 from the year-end level due to inventory requirements for increased shipments expected for the remainder of 2004. The changes in accounts receivable and inventories at the end of the first quarter were consistent with the normal seasonality changes between fiscal quarters. The current ratio at the end of the first quarter was 2.5 compared to 2.3 at the end of fiscal 2003. The ratio of total debt to total capitalization was 4.8% at the end of the 2004 first quarter compared to the year-end 2003 level of 4.5%. At the end of the first quarter 2004, CLARCOR had 25,372,273 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. Market risks are also discussed in the Company's Annual Report and Form 10-K for the year ended November 30, 2003 (the "Annual Report") in the Financial Review on page 10. Page 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued Critical Accounting Policies The Company's critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the Company's Annual Report in the Financial Review on page 10 and 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. While the estimates and judgments associated with the application of these policies may be affected by different assumptions or conditions, the Company believes the estimates and judgments associated with the reported amounts are appropriate in the circumstances. Recent Accounting Pronouncements Effective January 12, 2004, the FASB issued FASB Staff Position No. 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," (the Act). This Staff Position permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act until authoritative guidance on accounting for subsidies provided by the Act is issued. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans. The Company does not anticipate that the Act will have a material effect on the measurement of the Company's postretirement obligations. On December 23, 2003, the FASB issued SFAS No. 132R, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement requires additional disclosures to be made by employers regarding pensions and other postretirement benefit plans, but does not change the measurement or recognition of those plans. The interim period disclosure requirements of the Statement are effective for interim periods beginning after December 15, 2003. The Company will adopt the interim provisions of this Statement beginning in the second quarter of 2004. All other provisions of this Statement will be adopted in the fourth quarter of 2004. Outlook Stronger sales growth for the Company overall is expected for the remainder of 2004. Continued sales growth is expected for the Engine/Mobile segment as a result of continued improvement in aftermarket distribution, increased sales to OEM dealers and sales of new products. Sales are expected to increase for the Industrial/Environmental segment as the economy improves and additional facility maintenance occurs. The Total Filtration Program is also expected to benefit from the completion of the conversion of a group of 20 company-owned branches from selling primarily HVAC filtration products to selling the Company's entire range of liquid and air filter products. Sales and operating profit growth are expected for the Packaging segment for 2004. As a result of the anticipated overall sales growth for the Company combined with continued cost control efforts for the remainder of the year, it is expected that diluted earnings per share for 2004 will be in the $2.25 to $2.40 range. This range does not include estimated costs of approximately Page 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued $0.07 per share related to moving the Company's headquarters to Nashville, TN. The majority of these costs are expected to be incurred and paid during the third quarter of fiscal 2004. Continued emphasis on cost reductions and price changes within each business unit are expected to offset costs that have recently been increasing for energy and for purchased materials, primarily metal products. 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 new products. 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 unfavorable economic conditions persist. 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. The assets of a small engine filter company were acquired early in the second quarter of 2004. This acquisition will not materially affect operating results for 2004. 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 cost of the relocation of the Company's corporate offices; the cost of compliance with recently enacted regulatory requirements such as Sarbanes-Oxley Rule Section 404; the fluctuation in interest rates, primarily LIBOR, which affect the cost of borrowing under its revolving credit facility; the fluctuation in foreign and U.S. currency exchange rates; extraordinary events such as litigation, acquisitions or divestitures including related charges; market disruptions caused by domestic or international conflicts; 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 16 Part I - Item 3. Quantitative and Qualitative Disclosure About Market Risk. The information required hereunder is set forth on Page 14 of the Quarterly Report under the captions "Management's Discussion and Analysis - Other Matters - Market Risk." Part I - Item 4. Controls and Procedures. The Company has established disclosure controls and procedures which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 are recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Norman E. Johnson, Chairman of the Board, President, and Chief Executive Officer and Bruce A. Klein, Vice President - Finance and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of February 28, 2004. Based on their evaluation, they concluded that the Company's disclosure controls and procedures were effective in achieving the objectives for which they were designed. No change in the Company's internal control over financial reporting occurred during the Company's most recent fiscal quarter ended February 28, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Page 17 Part II - Other Information Item 6 Exhibits and Reports on Form 8K a. Exhibits: 31(i) Certification of Norman E. Johnson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31(ii) Certification of Bruce A. Klein pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32(i) Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 c. Report Filed on Form 8-K During the First Quarter Ended February 28, 2004. Form 8-K dated January 15, 2004 reporting Item 7--Financial Statements and Exhibits and Item 5--Other Events. Item 7 (c) included an exhibit 99.1, "CLARCOR Press Release dated January 15, 2004". Page 18 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CLARCOR INC. (Registrant) March 19, 2004 By /s/ Norman E. Johnson -------------------------- (Date) Norman E. Johnson Chairman of the Board, President and Chief Executive Officer March 19, 2004 By /s/ Bruce A. Klein --------------------------- (Date) Bruce A. Klein Vice President - Finance and Chief Financial Officer Page 19