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Executives

Tom Lawrence

Christopher L. Conway - Chairman, Chief Executive Officer and President

David J. Fallon - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Analysts

Kevin R. Maczka - BB&T Capital Markets, Research Division

Tim Mulrooney

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Gary Farber - CL King & Associates, Inc., Research Division

Adam Brooks - Sidoti & Company, LLC

CLARCOR (CLC) Q2 2013 Earnings Call June 20, 2013 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the CLARCOR Inc. Second Quarter 2013 Earnings Conference Call. Today's conference call is being recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Tom Lawrence of Dye, Van Mol & Lawrence. Please go ahead, sir.

Tom Lawrence

Thank you. We appreciate your interest in joining us on CLARCOR's conference call to discuss results for the second quarter of 2013. By now, everyone should have received a copy of the news release that was distributed yesterday. If anyone does need a copy, it is available on CLARCOR's website at www.clarcor.com, or you can call Charnell Thomas at (615) 244-1818 and she will send you a copy immediately.

Before I turn the call over to Chris Conway, CLARCOR's Chairman, President and CEO, I'll remind you that all statements made in the news release and during this conference call, other than statements of historical fact, are forward-looking statements. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

The company believes that its expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the company's actual results, performance or achievements, or industry results, to differ materially from the company's expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, the company's past results of operations do not necessarily indicate its future results.

Finally, we wanted to let people know that the information statements made during the call are as of the date of the call, June 30, 2013. Those listening to any replay should understand that the passage of time by itself will diminish the quality of the statements. Also, the contents of the call are the property of the company, and the replay or transmission of the call may be done only with the consent of CLARCOR.

It's now my pleasure to turn the call over to Chris Conway for his opening remarks.

Christopher L. Conway

Thank you, Tom. Good morning, and thank you for joining us today. With me are David Fallon, our Chief Financial Officer; and David Janicek, our Corporate Controller. After a few opening remarks, I'll turn it over to David Fallon to review our financial results in more detail. After David's remarks, I'll discuss the quarter from an operational perspective and discuss our outlook and our guidance before we open it up to questions.

We reported a record diluted earnings per share of $0.66 for the quarter after the close of trading yesterday. Net sales and operating profit grew 1% for the quarter compared to last year's first quarter with operating margin of 17.2%, equal to last year's record second quarter margin.

Higher sales in our Engine/Mobile and Industrial Filtration segments were partially offset by lower sales in our Packaging segment. I'm especially pleased by the continued sales growth in our global Oil and Gas business where we saw an 8% growth over last year's second quarter despite a 30% decline in our European oil and gas sales. And while global Engine/Mobile growth was modest at 1.3%, I'm pleased to report a continuing steady increase in growth in our domestic aftermarket and good growth in the quarter in our China business.

I'll talk more about some operational highlights from the quarter after David reviews our financial results in more detail. David?

David J. Fallon

Thanks, Chris. As Chris alluded to, in light of the uncertainty inherent in the current macroeconomic backdrop, I would characterize our second quarter financial performance as steady. Like all companies, even in uncertain economic times, we target growth on the top and bottom lines from the prior year quarter. Although we certainly are not satisfied from a long-term perspective with our second quarter growth metrics, we are pleased that net sales and diluted earnings per share each expanded from the second quarter of 2012. We did experience some mixed top line results in the second quarter among our diverse filtration markets, but consistent with recent prior quarters, our Oil and Gas Filtration business led the way, growing 8% on a global basis. This business expanded in every primary geographic region, with the exception of Europe, where sales declined approximately 30% from the second quarter of 2012. These lower European sales were in part due to lower military aviation and marine filtration sales as Eurozone budgets continued to tighten. When adjusted for Europe, our global Oil and Gas Filtration sales increased over 20% from last year's second quarter.

While our U.S. Oil and Gas Filtration sales continued to be driven by activity surrounding shale, we also benefited in the second quarter from a nice rebound in our domestic aviation and Marine Fuel Filtration business, which increased approximately 26% from last year's second quarter.

Most of our nondomestic Oil and Gas Filtration markets also produced solid top line growth but of special note, our filtration sales in Latin and South America have doubled on a year-to-date basis and we expect the sales growth to continue for the full year. This sales performance, primarily in Brazil, demonstrates our commitment and ability to grow in key international markets. After entering South America with a small sales office in Brazil only a few years ago, we have been able to build that business into a $15 million to $20 million operation with legitimate expectations going forward for continued growth at a double-digit rate.

While our global Oil and Gas market was the highlight of our second quarter growth in Industrial/Environmental, lower sales in our domestic HVAC business negatively impacted our overall growth in this reporting segment.

Our domestic HVAC filtration sales declined approximately 7% from last year's second quarter as we transitioned away from several larger low-margin customer accounts. As a result, although sales declined in the second quarter and the first 6 months of 2012, our gross margin in this market actually improved in excess of 1.5 percentage points from the same periods last year. A key factor contributing to this operational improvement has been the introduction of a Lean continuous improvement culture. As we mentioned in our press release, we believe there are further opportunities to enhance the cost structure of our HVAC markets, and we fully intend to transfer our Lean knowledge from this business unit to other CLARCOR businesses going forward.

Moving from Industrial/Environmental to Engine/Mobile, second quarter growth in this reporting segment was also mixed. We were certainly encouraged by the 4% growth in our domestic heavy-duty engine filtration aftermarket, which was within our 3% to 5% expectation heading into the quarter and a nice recovery from the 4% decline in the first quarter.

It seems our costumers returned to a more stable order pattern compared to recent prior quarters. And although visibility in this market does not extend beyond a few weeks, we are cautiously optimistic that we can maintain growth in the 3% to 5% range over the remainder of the year. Giving us some confidence that this growth will continue is recent strength in U.S. truck tonnage, which increased approximately 5% in our second quarter compared with the same period in 2012.

Moving to Engine/Mobile sales outside the U.S., our 2 largest geographic markets moved in opposite directions in the second quarter. China heavy-duty engine filtration sales recovered from a 7% reduction in the first quarter to grow approximately 19% in the second quarter. This growth was primarily driven by higher order volume from our first fit customers, but we also benefit from higher aftermarket sales, including seals through our -- through OE dealers.

Heading into 2013, we projected flat full year sales in China. But based upon recent market dynamics and building off the momentum from our second quarter, we now believe our China heavy-duty engine filtration sales will grow 10% plus for the full year. Of course, this expectation presses against the backdrop of continued macroeconomic uncertainty. And while we will be ready for this higher order volume, we have also continuously planned for lower sales scenarios.

While our recent performance in China is encouraging, our European sales of heavy-duty engine filters have been consistent with the lackluster economic activity across the Eurozone, where GDP has declined for a record 6 consecutive quarters.

Our second quarter Engine/Mobile sales in Europe declined 13% from last year's second quarter and are 10% lower for the first 6 months. It would be a significant stretch to anticipate material improvement in the European economy over the remainder of the year. Accordingly, we are expecting flat to lower sales in this region in our last 6 months.

Moving from the top line to the bottom line, our consolidated operating margin remained consistent from the second quarter of 2012 at 17.2%. Both our Industrial/Environmental and Packaging segments improved operating margins from last year's second quarter, while our Engine/Mobile operating margin declined 0.7 percentage points to 22%, partly driven by additional costs associated with the expansion of our Yankton, South Dakota manufacturing facility.

However, on a year-to-date basis, our 21% operating margin in Engine/Mobile is in line with the 21.1% operating margin in the first 6 months of 2012, and for the full year, we have guided that we anticipate operating margin in this reporting segment to be between 21.5% and 22%, just slightly lower than the 22.2% operating margin in 2012.

As described in our press release, we are lowering the top end of our 2013 diluted earnings per share guidance from $2.60 to $2.55. Our revised full year EPS guidance is $2.45 to $2.55, down $0.025 at the midpoint from our prior guidance. Looking at the components of our EPS expectations, we still anticipate consolidated net sales to grow between 2.5% and 4%, but we have increased our sales expectations for Engine/Mobile by approximately 1% due to more confidence in both the domestic aftermarket and China. We have reduced our sales expectations for Industrial/Environmental by a comparable 1% due to the timing of some larger oil and gas vessel orders, lower expected sales in our domestic HVAC market and continued volume challenges at TransWeb.

In addition, we have lowered the midpoint of our expected consolidated operating margin by 25 basis points from 16.5% to 16.25%, roughly in line with our full year 2012 consolidated operating margin.

This 25 basis point reduction at the midpoint was impacted by both our Engine/Mobile and Industrial/Environmental segment, Engine/Mobile due to additional costs in China to support future growth and lower absorption at several of our heavy-duty manufacturing facilities, primarily from a reduction in inventory levels. The 25 basis point reduction in Industrial/Environmental was driven by higher launch and integration costs related to our 2012 acquisition of Modular Engineering, continued challenges with TransWeb and slightly lower margin expectations with several larger natural gas vessel orders.

Finally, as it relates to guidance, and we do not regularly provide specific perspective quarterly direction, but as you are developing your expectations for the remainder of the year, please consider that we will recognize a $3 million expense in our third quarter related to pension accounting and the final cert payment to our former Chairman, Norm Johnson. This expense was budgeted and forecasted heading into the year but will negatively impact third quarter EPS by approximately $0.04.

With that said, I turn it back over to Chris for operational comments. Chris?

Christopher L. Conway

Thank you, David. As we've indicated, Engine/Mobile sales benefited this quarter from an improvement in the domestic aftermarket. This is the result of continued product line growth and work in support of our distributor customers. We continue to add locations and new points of distribution, solidifying our market share.

In China, our Engine/Mobile business growth is partly due to improved business conditions but more so due to the introduction of new products with existing and new customers, as well as the continued development of our aftermarket sales through both OE dealer networks and our own independent distributor relationships. We continue to see great opportunities in our Industrial/Environmental business, which includes our Oil and Gas business, aviation and aerospace as well. Our natural gas business was especially strong in the U.S. this past quarter as we continue to benefit from the development of liquids-rich shale plays. Sales of our sand control filtration for offshore drilling were strong this quarter driven by Gulf of Mexico activity, as well as drilling activity in Southeast Asia.

These products protect and preserve the well and the pumping areas of the well from collapse and from the incursion of abrasive sand, withstanding extreme pressures and tough conditions. Domestic bulk jet fuel filtration sales were up this quarter. Our continued high level of customer service, availability of inventory and experienced team in that business is recognized in the industry and has led to new customer additions and the sales growth that we are experiencing.

Our initiatives to grow sales in aerospace filtration continue to bear fruit. These are the results of close work in cooperation with customer design and purchasing teams over many months to secure a position on a new aircraft. Gains this past quarter included award of new programs on key commercial and military aircraft, some of which we'll see sales this year and others which start next year and carry into many future years of sales.

We also see PMA growth. That is sales of FAA-certified aftermarket parts for commercial airline use, and military aviation sales remain strong, driven by replenishments of inventory ahead of anticipated sequestered controls.

Finally, our Packaging business continues to rebound as evidenced by the improvement in operating profit despite the sales shortfall from last year's second quarter. This is the result of a lot of hard work and a shift of the business lost from 2 large accounts to a healthier mix of diverse but smaller commercial programs across a more diverse set of markets. The team in Packaging has added new technologies and improvements in manufacturing, as well as continued to provide their customers with innovative designs and high levels of service.

Now I'd like to address our forward outlook. We remain cautiously optimistic about the rest of the year. While we see some uncertainties, we also see exciting opportunities in many of our businesses. The pace has picked up in some of our key markets while other markets or geographies are struggling to reach last year's levels. Accordingly, as David mentioned, we are narrowing our guidance to between $2.45 to $2.55 diluted earnings per share.

We will now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Kevin Maczka from BB&T Capital Markets.

Kevin R. Maczka - BB&T Capital Markets, Research Division

First question on the big capacity expansion projects. Which ones of those are finished? And can you quantify how much margin pressure you saw in the Engine/Mobile segment this quarter from having that excess capacity or that new capacity?

Christopher L. Conway

Yes. I'll let David answer some of the detail there, but the largest expansion is the Yankton expansion. That is essentially done, and what we're in the midst of is transitioning product from one location to the other as we ramp up the production there. And David, you can answer the rest of it.

David J. Fallon

Yes. Kevin, for the full year, we anticipate close to $2 million of additional fixed costs related to that expansion. That includes depreciation and added headcount and some ancillary expenses. So for the second quarter, there's probably a $0.5 million headwind. I think that translates into probably 20 or 30 basis points of margin.

Kevin R. Maczka - BB&T Capital Markets, Research Division

Okay. And then when you get to the point where these 3 are all complete, where -- can you just update us on your view of capacity in general? Do you have it in the right places where you need it? Are there further big projects we ought to maybe be looking for as we go out into next year? Or should we see CapEx kind of come back into a more normal level for you?

Christopher L. Conway

Kevin, I think you'll see CapEx come back to a more normal level. If there's further work, it'll probably happen on international locations, and those will be smaller in scale and nature compared to what we made domestically here.

Kevin R. Maczka - BB&T Capital Markets, Research Division

Okay. And then, David, it was an interesting wording you used. I think you used the word introducing a Lean culture in some of the HVAC and other environmental areas. I'm just wondering if you can expand on that a little bit more. Is there still a good portion of the business here that needs to be introduced to Lean? I know this is an ongoing journey, that's the way it's always described, it's never ending. But are there some units that are really in the very, very early innings of Lean, if you will?

Christopher L. Conway

I'll take that, Kevin. Each of our businesses have continuous improvement, Lean initiatives going on, some to varying degrees than others and some are fairly new into the effort. As you know, we run very decentralized, and at this point, each of the businesses have engaged local experts in Lean and some of them are further down the path than others. The one we mentioned, the HVAC, started out 1.5 years ago and they've probably touched 75% of their business activity with Lean initiatives. Others are further back, just really in the initial stages of development of some of that. And our philosophy has always been, we don't want to get caught in a program of the month-type effort. We want to make sure that these efforts get embedded into the day-to-day activity at each location. So that's what we're really working on at this point and I would say some -- for example, our Baldwin organization has been long ago working on a lot of Lean activity and fairly, fairly well refined on it, and others, as I mentioned, are just starting.

Kevin R. Maczka - BB&T Capital Markets, Research Division

Yes, that's why I asked because I know you've had Baldwin involved in that for a long time and I know I've heard you say that before about not wanting to just get roped into the program of the month, but when you -- you don't often hear industrial companies about using the word introducing anymore when talking about Lean activity, so that's why I asked. And I'm just wondering, as a follow-up, if you can quantify anything there in terms of when companies talk about Lean and that's always ongoing. I know you have some targets longer term over the next few years for industrial operating margins, but how much of that comes from these new initiatives and some of these decentralized units that aren't as advanced with Lean yet?

Christopher L. Conway

I would think as we've characterized it more appropriately, we've said our target for the Industrial/Environmental segment is driven to that 15% level over the next 3 years and there's a part of that, that comes from these initiatives. On the Engine/Mobile side, we've said we're going to maintain our operating margins within the high range of the -- within the range of the 22% operating margin range and that really is sustained by some of these activities. So I wouldn't -- I think our way of monitoring this is really to say how are we improving operating margin at the bottom line overall and seeing this contribute part of that effort.

Operator

[Operator Instructions] We'll move next to Tim Mulrooney from William Blair.

Tim Mulrooney

A couple of questions. The first one, just to hit the midpoint of your revenue guidance for the full year of 2013, I think you need about 6% top line growth in the second half of the year, and this compares to less than 1% in the first half of the year. Can you just walk us through or talk about what the main drivers are behind this improvement in year-over-year growth rate for the back half of the year?

David J. Fallon

Yes, Tim, I'll tackle that. If you look at it by segment, I think the growth implied in the Engine/Mobile segment is probably between 7% and 8%. And so that translates somewhere between $15 million and $20 million of additional sales in the second half of this year versus the second half of last year. We talked about a couple of those drivers on the call, the first is the aftermarket, which we anticipate -- the aftermarket in the U.S., which we anticipate to grow between 3% and 5%. The other one is China, which we expect to grow 10% plus. If you combine those 2 markets, you probably get half of that $15 million to $20 million growth. The remainder comes from a combination of on the heavy-duty side, higher export sales, and we expect higher sales from the South America and also the Middle East in the second half, higher growth in Mexico, North Africa. And also contributing to that growth is higher sales in the locomotive market. So that's Engine/Mobile. Industrial/Environmental, there's probably a lot of levers that are going a lot of different ways, but the primary thing that drives growth there in the second half is a pretty decent backlog of some large natural gas vessel orders that we should see here in the third and fourth quarters.

Tim Mulrooney

Okay, great. That's very helpful. Just one more. You guys mentioned in your press release transitioning some resources and capacity to develop opportunities in other higher-margin air filtration markets. Can you give some color on what those markets might be?

Christopher L. Conway

Well, that refers to the work that we've done on ag, as we've mentioned before, developing filters for consignment buildings. The other is electronic cabinetry that requires heating, ventilation and filtration. And also, we're involved in HEPA filters, which is a higher end, more technical product that we sell.

Operator

Richard Eastman from Robert W. Baird has your next question.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Chris or Dave, could you just maybe comment about EMEA in total? When you look at CLARCOR, both E&M and I&E sides of the business, it feels like EMEA has taken a step down. Trying to roll up your commentary, maybe in total, maybe it was down 15% to 20%. And should we be concerned that, that market in general is stepping down further maybe over the next 6 months?

Christopher L. Conway

Well, I think part of the EMEA business, as you know, is the capital side of PECOFacet Oil and Gas business and some of that is lumpiness that we see coming and going and comparisons to last year as well. We had a couple of big projects last year in the second quarter that made the comp look difficult from that aspect. The Engine/Mobile side, I'll turn it back to David to answer on that but we see, I think, more macroeconomic pressure there than anything else. So...

David J. Fallon

Yes. Engine/Mobile year-to-date is down about 10% in the first 6 months. Industrial/Environmental is down 13% year-to-date. So they're both trending, I would say, around the same rate of decline. The Industrial/Environmental, as you know, is a lot more lumpy. Some of that reduction year-to-date is the timing of vessel orders. We had some large vessel orders into the Mid-East last year. So we anticipate Industrial/Environmental growth in the second half of the year. Engine/Mobile, I think, is going to correlate more with the economic activity over there. We did have some one-offs, I would say, in the first 6 months and I think the comps get a little bit easier as we go through the year, and that's why we mentioned that in the second half of the year, we anticipate flat to maybe slightly lower growth, but we wouldn't anticipate continued 10% reductions as we get -- go through 2013.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then also, just the -- one of the numbers that I think there was a general reference to, was within the Engine/Mobile business rest of world, that U.S. exports were down year-over-year in the quarter. I think you just suggested that they would snap back in the second half. But what markets in the second quarter were soft from an export standpoint?

David J. Fallon

It -- we have a global customer, which we won't mention the name, but we have a global customer that orders product over various markets. And it's really hard to pinpoint a specific geography that was impacted. However, it was very clear that sales to this individual customer was impacted in several geographic regions. For the remainder of the year, based on communication with that customer, we are fairly confident that those sales will rebound, and that should be South America, the Middle East and Russia.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then, can I just -- just one thought, Chris, on the -- jumping around here, but the Industrial/Environmental side of the business, I'm a little bit curious. I mean, we kind of know the challenges there, TransWeb, HVAC. We've been doing some culling of business and it seems you're getting better margin there. But do you feel like we're on track with the margin improvement that we're targeting, kind of this 15%? I'm actually thinking 15% for '15, but it looks like maybe some of the margin improvement is stalled this year just given the mix of business in I&E and also this TransWeb issue. But do you think we can kind of get back on track for '15? Or is this our 15% up margin for I&E slip out to maybe '16?

Christopher L. Conway

I think we're on track. At this point, our improvements in the HVAC side continue to show progress. Probably the thing that, as David mentioned, I think we've also mentioned, the mix in the vessel business on natural gas can influence that quarterly fairly easily. So the other thing to think about with that mix is that the vessel business we're taking is with specific intent to make sure that we've got vessel designs that we're going out securing aftermarket business for in the future. So as that aftermarket business comes in a year or 2 from now, that will help to bolster that target number as well. And then as far as TransWeb, again, I think we're on track at this point. We feel better this quarter about where things are headed. We've made some progress in both internal and external customer development. And so I think, to answer your question, quick answer is, no, we don't feel we're in any need to back away from that number at this point.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Okay, okay. And just one more question, just to double back for a second. The total revenue, David, the total revenue in the quarter, what was the -- how did the U.S. business do versus rest of world? Is it -- was U.S. kind of plus 1 or...

David J. Fallon

Yes. For -- if you look at it company-wide, our U.S. business was up about 1% and outside of the U.S. was up about 2%.

Operator

We'll move next to Gary Farber from CL King.

Gary Farber - CL King & Associates, Inc., Research Division

Can you talk a little bit more about your China business, how big your distribution base or customer base is there and how much more potential do you see to it?

Christopher L. Conway

The base of business, as we've talked before, the total business there is about $40 million in sales and aftermarket is a smaller portion of that business compared to our first fit business at this stage. We think that it's 10% to 15% at this point and that's a combination of aftermarket sold through our customers' descript dealer networks, as well as our own independent aftermarket. So I'd still characterize it as a developing opportunity with huge potential. And to put a number on the size of it, I think, at this point, it's still too early to guess but we all see what's happening with the market overall in terms of it becoming the second-largest economy in the world. So we're convinced that, that's a long-term opportunity that makes sense to continue investing. And our way of investing in it is really to build on the model of success that we've had with Baldwin, which is make sure that we have a broad product offering, so we continue to develop products to fit the market there and that we have high availability and good customer service. We believe those factors are going to be successful in the long run there as they are in any of our markets around the world.

Gary Farber - CL King & Associates, Inc., Research Division

Right. But even just the distributor base itself, the number of distributors, is it possible to quantify how big the market is and how penetrated it is?

Christopher L. Conway

I think those numbers are hard to get at this point. We have a track of how many distributors we keep adding and we keep continuing to add distributors and locations there, but at this point I'm not going to answer too much detail on that question.

Operator

Adam Brooks from Sidoti & Company.

Adam Brooks - Sidoti & Company, LLC

A few quick questions here. One, is it possible to maybe quantify the drag on the I/E margin from TransWeb?

David J. Fallon

The specific margin impact is primarily driven by absorption in lower sales. So I won't rehash the story there, but we probably would estimate that at maybe 10 to 20 basis points.

Gary Farber - CL King & Associates, Inc., Research Division

Okay. And then if we look at Oil and Gas in Europe as we kind of move away from anniversary-ing some of those big orders, can you give us a sense of maybe what you think for the back half of this year maybe into next year then even maybe a long-term view?

David J. Fallon

As you know, that part of our business, the Oil and Gas business, is probably the most lumpy. We have a pretty solid backlog heading into second half of this year. We do have several larger projects that are straddling, I would say, our year end, and it could just be a matter of days on whether that will hit 2013 or 2014. But as we've been pretty consistent in the past, overall, we anticipate our Oil and Gas business to grow 10% plus as we move forward. We will take a few steps back, I think with Europe in the short run, but we historically have supplied the Middle East through our European operations. That will continue until we get a physical presence in the Middle East. And -- but overall, I would say all of our markets, we would anticipate 10% plus growth, including Europe and the Middle East.

Operator

[Operator Instructions] We'll go back to a follow-up from Kevin Maczka from BB&T capital.

Kevin R. Maczka - BB&T Capital Markets, Research Division

One quick follow-up on the cash balance, which continues to build on the balance sheet. I'm just wondering, in terms of uses of cash, we ask this question quite a bit. But can you just update us there as that continues to build? And it looks like buybacks and M&A have still been pretty minimal.

David J. Fallon

Yes, of the $190 million that we had at the end of the second quarter, $90 million of it was in the U.S., $100 million of it was at our foreign locations. Our priorities for cash remain consistent with what we've talked about the last several years. We'll use that to continue to fund internal growth and a testament of that is committing to the $40 million expansion of the D.C. here in the U.S., the expansion of Yankton and also the construction of the R&D center down in Mineral Wells. So organic growth and investing in internal resources will continue to be the priority. Beyond that, we certainly would like to do a synergistic, accretive acquisition, and then probably third priority would be the repurchase of stock while all along continue to fund our annual dividend.

Kevin R. Maczka - BB&T Capital Markets, Research Division

Any update on, David, on the pipeline in terms of what you're pursuing, what you're seeing, what multiples are doing? And then any other roadblocks that may be out there? I know timing is hard to ever pin down, but what are you seeing in your M&A activity generally?

David J. Fallon

I would say, it definitely ebbs and flows. If you look at the first 6 months last year and compare it to what we saw last year, I think the activity has been rather consistent. We do have time periods wherein a couple of weeks, we'll get 5 or 6 different opportunities that we see and then in the next week, we won't see -- or next couple of weeks, we won't see any. I would say, overall, the activity is rather consistent with the last 1.5 years or so. Multiples, once again, liquid filtration, we're seeing those being higher than air filtration, and I guess, we would anticipate that going into any deal.

Christopher L. Conway

And I'd add emphasis that our focus will be to continue to look for opportunities where we can invest and expand our global footprint, where we can add strength or heft to an existing business that we have, to add technology offerings that can be spread across the business much like the TransWeb opportunity is and look for potential new market opportunities as well. So we're on the hunt for any that fit those kind of criteria.

Kevin R. Maczka - BB&T Capital Markets, Research Division

And I'm just wondering, I mean, TransWeb was all the way back at the end of 2010. Do you just not see things that meet all your criteria? Or have you been outbid more often than not or -- I'm just wondering.

Christopher L. Conway

I think we're going to maintain a discipline, as we've said in the past. We will see many opportunities that come across the trends some, but we've got a commitment to stay disciplined about the factors that -- the financial payback and the kind of investments that we're going to make and we're not going to get too far out of those parameters.

Operator

And Mr. Conway, at this time, there are no further questions in the queue. I'd like to turn the conference back over to you for any closing remarks.

Christopher L. Conway

Thank you. Given the challenging environment, through the support of all our employees, our business continues to perform well. Long term, we continue to expect growth between 6% and 10% on the top line and bottom line growth north of 10%. Whether it's working to gain new sales accounts, developing new products or improving our day-to-day operations, CLARCOR is working harder and smarter every day for our customers, our shareholders and our employees. Thank you for your interest and your questions.

Operator

And that does conclude today's teleconference. We thank you all for your participation.

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