Fourth quarter 2016 consolidated net sales increased US$4 million, or 1%, from last year’s fourth quarter. Higher fourth quarter net sales were primarily driven by the additional fiscal week in 4Q16 compared to 4Q1,5 which contained thirteen weeks. The net sales benefit from this additional fiscal week was partially offset by continued weakness in the natural gas filtration business and lower net sales in several of heavy-duty engine filtration markets when adjusted for the additional fiscal week, as well as changes in average foreign currency exchange rates which negatively impacted consolidated net sales by US$6 million, or 2%. Clarcor also recognised higher incentive compensation expense pursuant to the company-wide annual cash incentive programme in 4Q16, in comparison to 4Q15, as the result of the company achieving a higher payout level under this program in fiscal 2016 than fiscal 2015, which negatively impacted operating profit by US$6.8 million, diluted earnings per share by US$0.09 and operating margin by 1.8 percentage points in 4Q16 compared to 4Q15.
4Q16 net sales in its Engine/Mobile Filtration segment increased US$5 million, or 3%, from 4Q15, including relatively flat domestic sales and a US$4 million, or 9%, increase in international net sales. Changes in average foreign currency exchange rates negatively impacted net sales in this reporting segment by US$2 million, or 1%. In addition to the impact of the extra week in 4Q16, higher international net sales compared to 4Q15 were primarily driven by an increase in heavy-duty engine first-fit filtration sales to our largest customer in China and higher export sales of off-road fuel filtration products to the agricultural and construction equipment markets primarily the result of several new first-fit product introductions. Domestic net sales in this reporting segment were relatively flat compared to 4Q15 – despite the additional fiscal week in 4Q16 – as a 5% increase in heavy-duty engine filtration sales to Clarcor’s US independent aftermarket was offset by a 22% decline in sales to other filtration companies and a 10% reduction in sales to a large retail customer. The company believes lower fourth quarter net sales to this large retail customer continue to be driven by a strategic reorganisation taking place at this customer. 4Q16 net sales in our Industrial/Environmental Filtration segment were relatively flat compared to 4Q15. The net sales benefit of the extra fiscal week was offset by changes in average foreign currency exchange rates, which negatively impacted net sales in this reporting segment by US$4 million, or 2%. Higher year-over-year fourth quarter HVAC filtration product sales and US$3 million additional sales from 1Q16 acquisition of TDC Filter Manufacturing were offset by lower natural gas filtration sales. Sales of HVAC filtration products increased US$6 million, or 21%, from 4Q15 primarily due to continued higher sales into the Middle East. Natural gas filtration sales declined approximately US$9 million, or 12%, from 4Q15, driven by a 30% reduction in capital vessel sales which was partially offset by a 9% increase in aftermarket filtration sales, reflecting continued focus within this business on growing the aftermarket despite continued difficult end-market conditions.
Clarcor’s fourth quarter operating margin of 11.8% declined 1.5 percentage points from 4Q15. This decline was driven by a 1.8 percentage point increase in selling and administrative expenses as a percentage of net sales partially offset by a 0.3 percentage point improvement in gross margin percentage. Selling and administrative expenses increased US$7 million in 4Q16 from 4Q15, primarily driven by expenses pursuant to the pending Parker-Hannifin transaction and higher incentive compensation expense pursuant to a company-wide annual cash incentive programme, partially offset by lower upfront expenses for cost reduction initiatives and a reduction in bad debt expense due to continued improvement in the collection of past due accounts receivable. The higher gross margin percentage compared to 4Q15 was primarily due to improvement in the company’s Engine/Mobile Filtration segment driven by lower material and direct labour costs as a percentage of net sales, partly offset by lower absorption of fixed manufacturing costs. The reduction in material cost as a percentage of net sales was primarily the result of favourable sales mix and a company-wide purchasing cost reduction initiative.
In FY16 Clarcor generated US$285 million of net cash from operating activities, a US$132 million increase from FY15. Approximately US$18 million of this increase resulted from the 3M patent litigation award received during the 2Q16. The remaining improvement in operating cash generation was primarily the result of the ongoing focus on optimising the components of working capital by employing several Lean techniques. For example, Clarcor lowered inventory US$37 million from year-end 2015 while maintaining the same strong delivery and service levels to aftermarket customers, and lowered accounts receivable by US$33 million as it successfully reduced past due customer balances while concurrently benefiting from a US$6 million year-over-year reduction in bad debt expense.
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