Clarcor's Earnings Up, but Street Gives a Thumbs-Down

Keki Fatakia, The Motley Fool

Clarcor (NYS: CLC) , the maker of industrial filtration and packaging products, reported a 13% rise in third-quarter net income to $32.1 million. Although earnings and revenues rose, they fell short of Street expectations, and the company's shares closed off at a 3.5% loss after recovering from deeper losses. So, what can we learn from the company's third-quarter earnings? Let's take a closer look.

Into the numbers
The Tennessee-based company's net income margins showed a slight improvement -- from 10.8% to 11.3% -- for the third quarter, demonstrating the company's augmented profitability.

I like the fact that despite growing revenues and income, Clarcor was able to keep its selling and administration expenses at $49.4 million, down a little from the previous year's quarter.

How were sales?
Sales of the company's engine/mobile filtration products posted a 9% increase to $129.5 million, primarily due to higher volume and prices in the U.S. Net sales in China fell by 13% due to clients winding down their inventory. However, management claimed that Chinese demand will pick up in the next quarter. Despite this, the segment managed to post an impressive operating profit of $30.2 million, up 16% from the year-ago quarter.

The industrial/environmental filtration segment posted an 11% increase in net sales to $132.4 million. International sales decreased by 2% (11% when factoring in exchange-rate changes) due to negative economic conditions in the eurozone and increased system sales in the German market. While operating profit for this segment increased by 6% to $13.7 million, operating margins fell by 0.5% to 10.3% on account of additional costs incurred for a new product launch.

Third-quarter net sales in the packaging segment fell by 6% to $23 million. The fall isn't very worrisome because the previous year's quarterly sales were higher owing to a product launch by one of the company's clients.

Potential to expand
Clarcor's balance sheet showed a drop in long-term debt, from highs of $127 million back in the first quarter of 2008 to just $16 million in the current quarter. The company's debt as a percentage of equity stands at just 2.1%. Peers Pall Corp (NYS: PLL) and Barnes Group (NYS: B) sport much higher ratios at 48.4% and 40.9%, respectively. Thus, Clarcor can easily assume more debt to finance future expansions. As a matter of fact, the company has already announced in early September that it plans to invest $28 million over the next three years. It would expand its Baldwin manufacturing facility in South Dakota to produce more heavy-duty engine filters. This comes on the back of growing demand in the spare-parts-replacement market from domestic as well as foreign markets, especially Asia.

Additional capacity is expected to be fully available by the end of 2012 to meet the rise in demand. Above and beyond this, the company expects to add further capacity through 2014 along with an additional workforce of 70 people.

The Foolish bottom line
All in all, the company has managed to grow its revenues and net income despite turbulent economic conditions. For the short to medium term, Clarcor will face many challenges. Exchange rate fluctuations have demonstrated how the company's profits can be affected, both positively and negatively. The third quarter saw the company losing $1.1 million solely due to exchange-rate fluctuations. Declining demand from European markets is also expected due to the ongoing eurozone debt crisis. A slowdown in the Chinese economy seems more plausible as the demand to China's "supply side" weakens, again due to weak economic sentiment in Europe and the U.S.

Given the adverse economic conditions, it'll be interesting to see how the company performs in the next few quarters.

At the time thisarticle was published Keki Fatakia does not hold shares in any company mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.