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Article Excerpt
OPERATOR: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the CLARCOR, Inc. third-quarter earnings conference call. Today's conference is being recorded. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (Operator Instructions). It is now my pleasure to turn the conference over to Mr. Tom Lawrence of Dye, Van Mol and Lawrence. Please go ahead, Mr. Lawrence.
TOM LAWRENCE, IR, DYE, VAN MOL & LAWRENCE: Thank you, and good morning. We appreciate your interest in joining us on CLARCOR's conference call to discuss results for the third quarter and first nine months of 2008. By now everyone should have received a copy of the press 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 Bonnie Cash at 615-244-1818, and she will send you a copy immediately.
Before I turn the call over to Norm Johnson, CLARCOR's Chairman and CEO, I remind you that all statements made in the press 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 made as of the date of the call, September 18, 2008. Those listening to any replay should understand that the passage of time by itself will diminish the quality of the statement. Also, the contents of the call are the property of the company, and a replay or transmission of the call may be done only with the consent of CLARCOR. Now it is my pleasure to turn the call over to Norm Johnson for his opening remarks.
NORM JOHNSON, CHAIRMAN, PRESIDENT, CEO, CLARCOR, INC.: Good morning, and thank you for joining us today. With me are Bruce Klein, our Chief Financial Officer and Kim Orr, our corporate controller. From an operating perspective we are very pleased with this quarter's results. Sales are up 16%, operating profit increased 18%, and earnings before taxes, 13%. We expect similar results in the fourth quarter, which Bruce will review in more detail in just a bit.
Operating margin of 14.8% was an all time high for the third quarter and margins for the industrial environmental segment improved to 7.5% compared to 5.8% last year. This was achieved despite CLC Air not yet meeting its profit targets, which we had expected. Unfortunately, the EPS comparison this year was a lot tougher since the 2007, we had a one-time tax credit of $0.08 per share, which makes quarterly comparisons a challenge even with some of the best operating results we achieved in any quarter.
In any event, our business is performing well as evidenced by the numbers I just mentioned, and I believe illustrates our ability to grow in any economic environment. As we've said many times we serve more end-use markets than any other filter company, and 80% of our sales are recurring revenue. In today's economic environment some segments are doing better than others, which is primarily related to the end markets being served. Fortunately not every market or country is in a recession, and some of our businesses are doing very well now and will continue to do so, driving our future increased result. We still have the opportunity to increase our operating margins from the record level we generated this quarter with the improvements which will come from CLC Air or to maintain these margins and invest even more in growth programs which will result in more topline growth.
The bottom line increasing with either alternative. Our recurring revenue business generates consistent earnings growth and cash flow in good and bad economies. We have significant growth opportunities around the world, in fact more than we've ever had as we serve more end-use markets. Probably even more important, we have the ability to fund them and the organization to manage them. We believe CLARCOR is stronger than ever.
Bruce will now review the financials, and then I will discuss these opportunities in our outlook for the future.
BRUCE KLEIN, VP, CFO, CLARCOR, INC.: Thanks, Norm. I'm going to talk about various financial matters this morning, and first address raw material costs. Raw material price increases showing here an impact in our costs this quarter as they have had in the first six months of this year, as well. Even though we have had seen a softening recently in oil and certainly certain commodity prices, this has not affected our material purchasing costs as yet, so we expect this to change if these price decreases hold. For the year to date compared to our costs at the beginning of the year, purchase prices for raw materials have increased by over $10 million.
That is to say our cost of sales would have been more than $10 million less than it was if raw material costs had stayed the same throughout the year. The fact that our gross margins have actually increased from last year is really due to three factors. First, we acquired Peco at the beginning of the fiscal year, and its growth margins were higher than CLARCOR's were last year. Second, we have been very successful at passing through most though not all of our raw material cost increases. Although you ask at each conference call what is the percentage increase you are raising your prices by and when did you do it, the realities are a lot more complicated.
We are a decentralized organization with 10 major domestic operating companies and more outside the US. Each of these companies has a different approach to price increases, and each does so at different times and in different amount. We are fortunate that by selling to the aftermarket we generally sell without restrictive or frozen contracts and therefore we can usually raise prices as necessary without having to negotiate first with customers. But to try to answer this question about half of the sales increase so far this year, excluding Peco, is due to increased prices. The rest is due to increased unit volume growth.
Perhaps most importantly for our margin improvement our operating companies have focused intensely on improving manufacturing efficiencies, which were up in most of our companies and controlling their overall cost structures throughout this year. I noted that Peco historically has had higher gross margins than CLARCOR prior to its acquisition. I think it is also important to note that it had slightly lower operating margins than CLARCOR had. Even so, our consolidated operating margins this quarter and for the year are still better than in 2007 and again this is really a tribute to all of our companies.
For Peco specifically its operating margin this quarter excluding purchase accounting adjustments is actually higher than it was as a privately owned company. We try to point out in the press release the impact of the tax benefit we recorded in the third quarter of 2007 had on last year's earnings per share. The $0.08 per share benefit last year certainly distorts the comparison with this year's results. If you adjust both years to the same effective tax rate our earnings-per-share this quarter increased by over 11% even with an extra 900,000 shares outstanding due to the Peco acquisition.
Year-to-date earnings per share with the same tax adjustment would also be up 11%. As usual, currency fluctuations had only a small impact on sales and operating profit. This has always been something of a disappointment to me as the dollar...
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