Operating profit decreased by 51% compared to the same quarter in 2008. Foreign currency fluctuations reduced sales and operating profit by approximately $9 million and $1 million, respectively, for the current quarter.
Norm Johnson, CLARCOR’s chairman and chief executive officer, stated, “The decline in our first quarter sales and operating profit was sudden and deeper than we had expected. Although we knew that this fiscal year’s first quarter would be much more difficult than last year’s first quarter, we did not expect such a large drop in sales. We believe this reflects customer efforts to reduce their inventory levels, as well as a response to the severity of the recession which reduced demand, both in the U.S. and overseas.”
“Before discussing the first quarter in more detail, I want to speak to our expectations for the rest of 2009 and specifically, why we expect the rest of the year will be better than the first quarter. We do expect sales will be down in our filtration businesses in the second quarter compared to last year, though certainly better than the first quarter. We expect sales will significantly improve in the last half of 2009 compared to the first half of the year.”
“We believe that our customers’ inventory reductions during the first quarter will not continue, and that, as we sell primarily aftermarket maintenance filters, base replacement demand will resume, particularly in our independent distribution market channel. We have signed major sales contracts with new customers and shipments will start in the second quarter. Despite a slowdown in Asia during the first quarter, the Chinese market is still growing for our current business there. This will be further enhanced, as well, by recent acquisitions we have made in China. Our sales to other parts of Asia and the Middle East are also expected to grow for the rest of the year based on current orders we have received. It is not unusual for one or two quarters to be down, despite our aftermarket focus, as our customers often react suddenly to unfavorable financial or political news by stopping orders. I know of no major customers we have lost, and I expect that the rest of 2009 will show a resumption in orders and sales.”
“Although we expect that sales will decline for all of 2009 compared to 2008, for the remaining nine months of 2009 we expect the decline in operating profit in percentage terms will be less than the percentage decline in sales. We expect that operating profit in some markets, such as for HVAC air filters, will be significantly improved compared to 2008. In other markets, such as for aviation fuel filtration systems, we expect operating profit to match or be slightly better than last year. Even in the midst of a severe global recession, our product and market diversification and the strength of our balance sheet are great advantages to have.”
“More specifically, we expect our Engine/Mobile Filtration segment sales to decline by approximately 6% to 8% and operating profit to decline by a similar percentage over the next three quarters compared to the last three quarters of 2008. For our Industrial/Environmental Filtration segment over the next three quarters, we expect sales to decline by 2% to 5% and operating profit to decline by 1% to 2% compared to 2008. In our Packaging segment, we expect sales to increase by 5% to 7% and operating profit to grow by 10% to 12% over the next three quarters compared to 2008.”
“We have implemented significant cost reduction programs for 2009, including a salary and headcount freeze for our domestic operating companies and curtailment of discretionary expenses. Unfortunately, some costs are out of our control such as an increase this year in pension expense of nearly $4 million compared to 2008 caused by the decline in asset values in our pension trust. Importantly, we have not cut back on product development, sales and marketing initiatives, plant maintenance and safety programs. If the current recession does not worsen, based on our current forecast, we now expect that 2009 earnings per share will be in the $1.60 to $1.75 range.”
“With respect to our first quarter results, sales declined in all three of our operating segments, though there were still areas of growth in certain markets. Overall, Engine/Mobile Filtration sales dropped 19%, Industrial/Environmental Filtration sales dropped 10% and Packaging sales dropped 20%. Within the U.S. across all three segments, sales declined by 9%, while outside the U.S. sales declined by 26%.”
“In our Engine/Mobile Filtration segment, sales in the U.S. declined by 13%. Heavy-duty engine filter sales grew in Mexico, Australia and South Africa, while filter sales in Asia dropped more than in the rest of the world. By end-market, we saw a drop in filter sales in over-the-road trucking, construction, agriculture, mining and locomotive filtration sales. The decline was seen in sales to both aftermarket and OEM customers.”
“Sales in our Industrial/Environmental Filtration segment were more varied across end-markets and channels. Air filtration systems sales dropped significantly as customers reduced their capital spending plans, both in the U.S. and in Europe. HVAC filter sales also dropped with a significant decline in filters used in automobile plants. Sales to the natural gas industry grew in the first quarter in the U.S., but outside the U.S. dropped from last year’s first quarter. Overall, sales to the natural gas industry declined by about 4%. Filter sales for oil drilling also declined by over 10% as oil drilling throughout the world slowed and drilling projects were delayed. We remain very optimistic, however, in our outlook for medium and long-term growth in filters used in natural resource industries, such as natural gas, oil and water, but it is clear that filter sales to these industries will not grow in 2009. In contrast, aviation fuel filters sales grew in the first quarter, both in the U.S. and in Europe. We expect this trend to continue for the rest of 2009.”
“Our Packaging segment sales dropped by 20% in the first quarter compared to last year, but we are optimistic about the rest of 2009. As we have noted before, sales in this segment in the first quarter are usually not indicative of activity for the entire year. We recently received significant orders that should enable us to record improved results in subsequent quarters this year compared to 2008.”
“Other expense included a charge of approximately $600,000 related to the interest rate swap we have discussed in previous press releases. The current mark-to-market liability for this swap is $2.6 million. The entire $2.6 million liability will be reversed over the next 10 months and reduce interest expense, though the amount recorded in any particular month or quarter will vary and be partly dependent on interest rates.”
“Our balance sheet remains very strong, with outstanding debt, net of cash, of $41 million, and outstanding debt, net of cash, as a percentage of total capital of less than 6%. We have a very attractive credit facility that does not expire until December 2012. This facility enables us to borrow up to $250 million at a variable interest rate that is currently less than 1% per year.”
“Our tax rate in the first quarter at 31.8% was slightly lower than we expect for the rest of 2009. The tax rate for all of 2009 should be approximately 33% to 34%.”
CLARCOR is a US-based provider of filtration products.
