CLARCOR Posts Sales Decline In First Quarter 2007 Results
CLARCOR Inc. (NYSE: CLC - News) today reported results for the first quarter ended March 3, 2007. Sales in the first quarter of 2007 declined by $4 million, a 2% decrease compared to the first quarter of 2006. Operating profit decreased by 9% compared to the same quarter in 2006. Net earnings increased by 1% and diluted earnings per share increased by 3%. Foreign currency fluctuations did not materially impact sales or net earnings for the quarter.
Norm Johnson, CLARCOR’s Chairman and Chief Executive Officer, said, "Our first quarter results were below our expectations and were unusual for us. Although not every one of our businesses performs well each quarter, it is not typical for us to have operating results below our forecast in more than a few of our operations. We remain confident, however, that subsequent quarters will be much stronger and believe that we will meet our original earnings per share forecast of $1.67 to $1.77 for fiscal 2007. Our operating results were adversely impacted by manufacturing and shipping delays at several of our HVAC facilities due primarily to our restructuring program, customer requested shipping delays, a slowing in first quarter truck and rail freight traffic in North America partially due to weather and a snowstorm which closed one of our heavy-duty manufacturing plants for several days.
"I think it is important to explain why we believe that subsequent quarters will show an improvement from the first quarter and why we expect increased sales and operating profits in the remaining three quarters of fiscal 2007 compared to the same quarters in 2006. First, our international business is very strong, and we believe this will continue through the rest of 2007. Second, shipment and installation of several of our larger filtration systems were unexpectedly delayed until the second quarter. Third, it is not unusual for certain industries that we serve to have irregular order patterns. This was certainly true during the first quarter with respect to aerospace filter orders, packaging products for confectionary companies, filter sales to the fiber and resin markets and HVAC filter sales to retail and wholesale outlets. Based on current forecasts and order demand, we expect this trend to reverse in the second quarter and for the rest of 2007. Fourth, we expect our customers will need to replenish inventory levels due to the sudden drop in orders at the end of February. Finally, we do not expect the slowdown in rail and truck freight traffic that we experienced in the first quarter will continue.
"Engine/Mobile segment sales increased by 6.2%, with growth across all major market segments, both domestically and internationally. This sales increase was actually less than we expected, and we believe was due, as I noted above, to a slowdown in freight tonnage movements in North America. Market demand for heavy-duty filter products from traditional aftermarket and OEM dealer customers remains solid, as does product demand from railroad filter and dust collector cartridge customers. We expect product demand to increase for the rest of 2007 and that the rate of growth to increase from what we experienced in the first quarter. The segment’s operating margin of 21% was the same as in last year’s first quarter.
"Industrial/Environmental segment sales declined by 6%. Although the decline covered many industrial sectors, there were several which grew strongly during the quarter. Filter sales to the oil and gas industry and sales of process liquid filter systems and filters, primarily for the aviation fuel and defense sectors, both domestically and internationally, had double-digit growth compared to last year. Though sales of filters used by resin and fiber manufacturers declined during the first quarter, order demand and our sales backlog are very strong and we expect significant growth for the rest of the year for this product line.
"Our HVAC restructuring program continues on schedule and is proceeding well and as planned. Though we experienced manufacturing and shipping delays in the first quarter as we reengineered certain of our production facilities, this was not unexpected. Our new facility in Pittston, Pennsylvania is on track to start production during the second quarter. We have not changed our estimate for 2007 of $2.1 million in costs associated with the restructuring program primarily incurred in the second and third quarters of 2007 which are anticipated to be offset by an estimated $3.4 million in cost reductions that we expect to realize in the last half of 2007. The result should be a net operating profit benefit of $1.3 million in 2007. Partly as a result of decline in sales and the restructuring costs incurred in the first quarter, operating margin declined for this segment from 5.3% last year to 3.0% this year. For our Industrial/Environmental segment overall, we expect margins for the remaining three quarters of 2007 will be approximately 8%, compared to 6.3% in the last three quarters of 2006.
"Our Packaging segment had an unexpectedly large decline in first quarter sales of 15%. The first quarter is normally this segment’s slowest. We believe that first quarter sales growth and particularly operating margins will not be indicative of performance during the next three quarters. Several of our larger consumer product customers took fewer products than we had anticipated during the quarter. These customers have confirmed their forecast for the rest of 2007, and therefore, we expect to increase shipments to them as the year progresses.
"Other income this quarter was primarily the result of larger cash balances and short-term investments, driven by our continuing strong cash flow and increased interest rates. During the quarter, we did not repurchase any of our common stock under our current $150 million share repurchase authorization, of which approximately $110 million remains available. Repurchases in future quarters will depend on cash availability, acquisition opportunities and the market price of our common stock.
"Our tax rate in the first quarter at 31.1% was significantly lower than will be the case for the rest of 2007. In the first quarter, we recorded a $500,000 entry related to fiscal 2006 due to the passage by Congress of the Research and Experimentation Tax Credit extension in December 2006. Interest income from increased tax-exempt investments and faster profit growth in international operations with lower tax rates than in the U.S. also contributed to a lower tax rate. For the rest of 2007, we expect our effective tax rate to be approximately 35.0%. Capital expenditures this year are expected to be approximately $40 million to $45 million compared to $18 million in 2006. This increase is largely due to the HVAC restructuring program and new products and production lines, such as our new nanofiber media line which will become operational later this year.
“We still expect that 2007 earnings per share will be in the $1.67 to $1.77 range. This estimate is unchanged from our estimate in January despite our first quarter results. We expect domestic growth to rebound beginning in the second quarter and international sales growth, which was very strong in the first quarter, to continue.”
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