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EXCEL - IDEA: XBRL DOCUMENT - CLARCOR INC.Financial_Report.xls
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 26, 2011

OR

 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

 
Commission File Number 1-11024

 
CLARCOR Inc.
(Exact name of registrant as specified in its charter)

DELAWARE
 
36-0922490
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
840 Crescent Centre Drive, Suite 600, Franklin, Tennessee 37067
(Address of principal executive offices)

Registrant’s telephone number, including area code
 
615-771-3100

No Change
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)   Yes ¨  No x

As of February 26, 2011, there were 50,414,409 common shares with a par value of $1 per share were outstanding.
 
 
 

 
 
TABLE OF CONTENTS
 
PAGE
     
Part I. FINANCIAL INFORMATION
   
       
Item 1.
Financial Statements
 
3
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
24
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
35
       
Item 4.
Controls and Procedures
 
35
       
Part II.  OTHER INFORMATION
   
       
Item 1.
Legal Proceedings
 
35
       
Item 1A.
Risk Factors
 
35
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
36
       
Item 3.
Defaults Upon Senior Securities
 
*
       
Item 4.
[Removed and Reserved]
 
*
       
Item 5.
Other Information
 
*
       
Item 6.
Exhibits
 
36

* Item omitted because no answer is called for or item is not applicable
 
Page 2

 

 
Part I. FINANCIAL INFORMATION

 
Item 1. Financial Statements

 
CLARCOR Inc.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share data)
(Unaudited)

   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
             
Net sales
  $ 245,720     $ 215,131  
Cost of sales
    164,767       145,326  
                 
Gross profit
    80,953       69,805  
                 
Selling and administrative expenses
    49,662       46,909  
                 
Operating profit
    31,291       22,896  
                 
Other income (expense):
               
Interest expense
    (44 )     (123 )
Interest income
    37       21  
Other, net
    (200 )     (392 )
                 
      (207 )     (494 )
                 
Earnings before income taxes
    31,084       22,402  
                 
Provision for income taxes
    9,163       7,595  
                 
Net earnings
    21,921       14,807  
                 
Net (earnings) loss attributable to noncontrolling interests
    (40 )     59  
                 
Net earnings attributable to CLARCOR Inc.
  $ 21,881     $ 14,866  
                 
Net earnings per share attributable to CLARCOR Inc.:
               
Basic
  $ 0.43     $ 0.29  
Diluted
  $ 0.43     $ 0.29  
                 
Weighted average number of shares outstanding:
               
Basic
    50,568,499       50,594,234  
Diluted
    51,287,238       50,934,913  
                 
Dividends paid per share
  $ 0.1050     $ 0.0975  
 
See Notes to Consolidated Condensed Financial Statements
 
Page 3

 

 
CLARCOR Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)

 
   
February 26,
   
November 27,
 
   
2011
   
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 107,369     $ 117,022  
Restricted cash
    712       708  
Accounts receivable, less allowance for losses of $11,620 for 2011 and $11,428 for 2010
    185,061       188,186  
Inventories
    196,136       182,384  
Deferred income taxes
    25,086       25,081  
Income taxes receivable
    197       7,324  
Prepaid expenses and other current assets
    6,500       5,568  
Total current assets
    521,061       526,273  
                 
Plant assets, at cost, less accumulated depreciation of $281,907  and $275,372, respectively
    186,659       181,175  
Assets held for sale
    2,000       2,000  
Goodwill
    236,811       228,105  
Acquired intangibles, less accumulated amortization
    102,873       91,174  
Deferred income taxes
    -       1,000  
Other noncurrent assets
    12,857       12,684  
Total assets
  $ 1,062,261     $ 1,042,411  
                 
LIABILITIES
               
Current liabilities:
               
Current portion of long-term debt
  $ 136     $ 146  
Accounts payable and accrued liabilities
    138,545       160,206  
Income taxes
    3,098       3,105  
Total current liabilities
    141,779       163,457  
                 
Long-term debt, less current portion
    17,351       17,331  
Long-term pension and postretirement healthcare benefits liabilities
    66,387       66,124  
Deferred income taxes
    30,763       31,266  
Other long-term liabilities
    20,256       5,138  
Total liabilities
    276,536       283,316  
                 
Contingencies
               
Redeemable noncontrolling interests
    1,556       1,568  
                 
SHAREHOLDERS' EQUITY
               
Capital stock
    50,414       50,335  
Capital in excess of par value
    37,285       33,698  
Accumulated other comprehensive loss
    (28,690 )     (35,041 )
Retained earnings
    724,051       707,478  
Total CLARCOR Inc. equity
    783,060       756,470  
Noncontrolling interests
    1,109       1,057  
Total shareholders' equity
    784,169       757,527  
Total liabilities and shareholders' equity
  $ 1,062,261     $ 1,042,411  
 
See Notes to Consolidated Condensed Financial Statements
 
Page 4

 
 
CLARCOR Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

 
   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net earnings
  $ 21,921     $ 14,807  
Depreciation
    6,998       6,989  
Amortization
    1,331       1,164  
Other noncash items
    (94 )     1  
Net gain on disposition of plant assets
    (3 )     -  
Stock-based compensation expense
    2,605       2,511  
Excess tax benefit from stock-based compensation
    (657 )     (127 )
Change in short-term investments
    -       11,567  
Change in assets and liabilities, excluding short-term investments
    (23,271 )     (1,750 )
Net cash provided by operating activities
    8,830       35,162  
                 
Cash flows from investing activities:
               
Restricted cash
    46       103  
Business acquisitions, net of cash acquired
    (10,455 )     -  
Additions to plant assets
    (3,492 )     (5,996 )
Proceeds from disposition of plant assets
    34       74  
Proceeds from insurance claims
    -       557  
Net cash used in investing activities
    (13,867 )     (5,262 )
                 
Cash flows from financing activities:
               
Net payments under multicurrency revolving credit agreement
    -       (20,000 )
Payments on long-term debt
    (1,574 )     (29 )
Sale of capital stock under stock option and employee purchase plans
    2,508       525  
Purchase of treasury stock
    (1,947 )     -  
Excess tax benefit from stock-based compensation
    657       127  
Cash dividends paid
    (5,308 )     (4,933 )
Net cash used in financing activities
    (5,664 )     (24,310 )
Net effect of exchange rate changes on cash
    1,048       (3,760 )
Net change in cash and cash equivalents
    (9,653 )     1,830  
Cash and cash equivalents, beginning of period
    117,022       59,277  
Cash and cash equivalents, end of period
  $ 107,369     $ 61,107  
                 
Cash paid during the period for:
               
Interest
  $ 36     $ 1,037  
Income taxes, net of refunds
  $ 1,740     $ 6,328  

 
See Notes to Consolidated Condensed Financial Statements
 
Page 5

 
 
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

1.
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
Basis of Presentation

The Consolidated Condensed Statements of Earnings and the Consolidated Condensed Statements of Cash Flows for the periods ended February 26, 2011 and February 27, 2010 and the Consolidated Condensed Balance Sheet as of February 26, 2011 have been prepared by CLARCOR Inc. (“CLARCOR” or “the Company”) without audit.  The Consolidated Condensed Financial Statements have been prepared on the same basis as those in the Company’s Annual Report on Form 10-K for the fiscal year ended November 27, 2010 (“2010 Form 10-K”).  The November 27, 2010 Consolidated Condensed Balance Sheet data was derived from the Company’s year-end audited Consolidated Financial Statements as presented in the 2010 Form 10-K but does not include all disclosures required by accounting principles generally accepted in the United States of America.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows have been made.  The results of operations for the period ended February 26, 2011, are not necessarily indicative of the operating results for the full year.  The information included in this Form 10-Q should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes included in the Company’s 2010 Form 10-K.

Inventories

Inventories are summarized as follows:

   
February 26,
   
November 27,
 
   
2011
   
2010
 
Raw materials
  $ 72,078     $ 67,011  
Work in process
    27,962       26,219  
Finished products
    96,096       89,154  
    $ 196,136     $ 182,384  
 
New Accounting Guidance

 In October 2009, the Financial Accounting Standards Board (“FASB”) issued guidance on revenue arrangements with multiple deliverables effective for the Company’s 2011 fiscal year, although early adoption is permitted.  The guidance revises the criteria for separating, measuring, and allocating arrangement consideration to each deliverable in a multiple element arrangement.  The guidance requires companies to allocate revenue using the relative selling price of each deliverable, which must be estimated if the company does not have a history of selling the deliverable on a stand-alone basis or third-party evidence of selling price.  The impact of adopting this guidance on November 28, 2010 was not material to the Consolidated Condensed Financial Statements.
 
 
Page 6

 
 
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
 
In December 2010, the FASB issued guidance to modify the steps a company performs in preparing its goodwill impairment test.  The guidance deals specifically with reporting units having zero or negative carrying amounts.  For those reporting units, a company is required to perform the second step of the goodwill impairment test if it is more likely than not that a goodwill impairment exists.  In determining whether it is more likely than not that a goodwill impairment exists, a company should consider whether there are any adverse qualitative factors indicating that an impairment may exist.  The Company does not expect the adoption of this guidance on December 4, 2011 to have a material impact on the Consolidated Condensed Financial Statements.

In December 2010, the FASB also issued guidance which amends the pro forma disclosure requirements for business combinations and specifies that if a public company presents comparative financial statements, the company should disclose revenue and earnings of the combined entity as though business combinations occurring during the year had occurred as of the beginning of the comparable prior annual reporting period only.  The guidance also expands the pro forma disclosure requirements to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.  The Company does not expect the adoption of this guidance on December 4, 2011 to have a material impact on the Consolidated Condensed Financial Statements.

2.
BUSINESS ACQUISITIONS, INVESTMENTS AND REDEEMABLE NONCONTROLLING INTERESTS

Business Acquisitions

On December 29, 2010, the Company acquired 100% of the outstanding membership interests in TransWeb LLC (“TransWeb”), a privately-owned manufacturer of media used in a variety of end-use applications, including respirators and HVAC filters.  Founded in 1996 and based in Vineland, New Jersey, TransWeb has supplied media to a subsidiary of the Company for several years.  TransWeb was acquired to expand the Company’s technology capabilities in the area of media development and to enhance the product offerings of our filtration operating companies.  TransWeb’s results are included in the Industrial/Environmental Filtration segment from the date of acquisition.  Net sales and Operating profit attributable to TransWeb for the quarter ended February 26, 2011 were $2,375 and $334, respectively

The base purchase price to acquire TransWeb was $30,017, excluding cash acquired.  Of the base purchase price, the Company withheld payment of $17,000 pending resolution of the 3M litigation, which funds may be used by the Company in connection with the same (see Note 11).  A contingent liability for a potential earn-out payment to one of the former owners of $1,018, recorded at fair value by applying the income approach, was also recognized and is included in Other long-term liabilities in the Consolidated Condensed Balance Sheets.  The Company assumed existing long term debt of $1,544, which was immediately repaid in connection with the closing.  The Company paid the balance of the purchase price with available cash.  The Company is in the process of finalizing the valuation of assets acquired and liabilities assumed; therefore, the fair values set forth below are subject to adjustment once the valuations are completed.
 
 
Page 7

 

 
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
 
The following condensed balance sheet is based on the fair values of the assets acquired and liabilities assumed as of the acquisition date.

Cash
  $ 14  
Accounts receivable, less allowance for losses of $57
    1,153  
Inventory
    1,045  
Other current assets
    93  
Plant assets
    7,291  
Goodwill
    7,976  
Other acquired intangibles
    13,000  
Other assets
    100  
Total assets acquired
    30,672  
Accounts payable and accrued liabilities
    (641 )
Net assets acquired
  $ 30,031  
 
The fair value of the assets acquired includes accounts receivable, which are trade receivables.  The Company does not anticipate any amounts to be uncollectible.  The goodwill of $7,976, which is deductible for income tax purposes, represents the excess of cost over the fair value of the net tangible and intangible assets acquired.  Factors that contributed to a purchase price resulting in the recognition of goodwill included TransWeb’s strategic fit with the Company’s products and services as well as the ability to enhance the Company’s product offerings.

 
The fair value of the identifiable intangible assets and their respective lives are shown in the following table.

Identifiable Intangible Asset
 
Value
 
Estimated
Useful Life
Customer relationships
  $ 8,500  
12 years
Developed technology
    3,500  
12 years
Trade names and trade marks
    900  
Indefinite
Non-compete agreements
    100  
2 years
Total fair value
  $ 13,000    
 
The acquisition-date estimated fair value of the contingent consideration payment of $1,018 was recorded as a component of the consideration transferred in exchange for the equity interests of TransWeb in accordance with accounting guidance.  The contingent liability for the earn-out payment will continue to be accounted for and measured at fair value until the contingency is settled during fiscal year 2016.  The fair value measurement of the contingent liability is based on significant inputs not observed in the market and thus represents a Level 3 measurement as defined by accounting literature (see Note 6).  The fair value of the contingent consideration was estimated using a probability-weighted discounted cash flow model with a discount rate of 11.9%.  The contingent consideration payment is revalued to its current fair value at each reporting date.  Any increase or decrease in the fair value, as a result of changes in significant inputs such as the discount rate, the discount period or other factors used in the calculation, is recognized in Selling and administrative expenses in the Consolidated Condensed Statements of Earnings in the period the estimated fair value changes.

 
 
Page 8

 
 
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

 
Assuming this transaction had been made at the beginning of each of the periods presented, the consolidated pro-forma results would not be materially different from the results as reported. The Company incurred costs of $121 related to the acquisition of TransWeb which are included in Selling and administrative expenses in the Consolidated Condensed Statements of Earnings.

 
Investments

Effective May 1, 2008, the Company acquired a 30% share in BioProcessH2O LLC (“BPH”), a Rhode Island-based manufacturer of industrial waste water and water reuse filtration systems, for $4,000.  Under the terms of the agreement with BPH, the Company has the right, but not the obligation, to acquire additional ownership shares and eventually complete ownership of the company over several years at a price based on, among other factors, BPH’s operating income.  The investment, with a carrying amount of $3,233 and $3,266, at February 26, 2011 and November 27, 2010, respectively, included in Other noncurrent assets in the Consolidated Condensed Balance Sheets, is being accounted for under the equity method of accounting.  The carrying amount is adjusted each period to recognize the Company’s share of the earnings or losses of BPH, included in Other, net in the Consolidated Condensed Statements of Earnings, based on the percentage of ownership, as well as the receipt of any dividends.  During the three months ended February 26, 2011, the Company did not receive any dividends from BPH.  During the three months ended February 27, 2010, the Company received dividends of $382 from BPH.  The equity investment is periodically reviewed for indicators of impairment.

The Company also owns a 15% share in BioProcess Algae LLC (“Algae”), a Delaware-based company developing technology to grow and harvest algae which can be used to consume carbon dioxide and also be used as a renewable energy source.  The investment, with a carrying amount of $398 and $398, at February 26, 2011 and November 27, 2010, respectively, included in Other noncurrent assets, is being accounted for under the cost method of accounting.  Under the cost method, the Company recognizes dividends as income when received and reviews the cost basis of the investment for impairment if factors indicate that a decrease in value of the investment has occurred.  The Company has not received any dividends from Algae.

Redeemable Noncontrolling Interests

In March 2007, the Company acquired an 80% ownership share in Sinfa SA (“SINFA”), a manufacturer of automotive and heavy-duty engine filters based in Casablanca, Morocco.  As part of the purchase agreement, the Company and the noncontrolling owners each have an option to require the purchase of the remaining 20% ownership shares by the Company after December 31, 2012 which would result in SINFA becoming a wholly owned subsidiary.  The remaining 20% of SINFA owned by the noncontrolling owners has been reported as Redeemable noncontrolling interests and classified as mezzanine equity in the Consolidated Condensed Balance Sheets.  The Redeemable noncontrolling interests will be accreted to the redemption price, through equity, at the point at which the redemption becomes probable.  The Company has not recorded any accretion to date.
 
 
Page 9

 

CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

3.
INCENTIVE PLANS AND STOCK-BASED COMPENSATION

On March 23, 2009, the shareholders of CLARCOR approved the 2009 Incentive Plan, which replaced the 2004 Incentive Plan.  The 2009 Incentive Plan allows the Company to grant stock options, restricted stock unit awards, restricted stock, performance awards and other awards to officers, directors and key employees of up to 3,800,000 shares during a ten-year period that ends in December 2019.  Upon share option exercise or restricted stock unit award conversion, the Company issues new shares unless treasury shares are available.  The key provisions of the Company’s stock-based incentive plans are described in Note N of the Company’s Consolidated Financial Statements included in the 2010 Form 10-K.

Stock Options

Nonqualified stock options are granted at exercise prices equal to the market price of CLARCOR common stock at the date of grant, which is the date the Company’s Board of Directors approves the grant and the participants receive it.  The Company’s Board of Directors determines the vesting requirements for stock options at the time of grant and may accelerate vesting.  In general, options granted to key employees vest 25% per year beginning at the end of the first year; therefore, they become fully exercisable at the end of four years.  Vesting may be accelerated in the event of retirement, disability or death of a participant or change in control of the Company.  Options granted to non-employee directors vest immediately.  All options expire ten years from the date of grant unless otherwise terminated.

The following table summarizes compensation expense related to stock options during the quarter ended February 26, 2011 and February 27, 2010.

   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
Pre-tax compensation expense
  $ 1,873     $ 1,778  
Deferred tax benefits
    (688 )     (602 )
Excess tax benefits associated with tax deductions over the amount of compensation expense recognized in the consolidated condensed financial statements
    657       152  

The following table summarizes activity with respect to stock options granted by the Company and includes options granted under the 1994 Incentive Plan, the 2004 Incentive Plan and the 2009 Incentive Plan.

   
Shares Granted
under Incentive
Plans
   
Weighted
Average
Exercise Price
 
Outstanding at beginning of year
    3,229,410     $ 29.07  
Granted
    432,250     $ 42.86  
Exercised
    (98,448 )   $ 23.15  
Surrendered
    (6,863 )   $ 36.74  
Outstanding at February 26, 2011
    3,556,349     $ 30.90  
                 
Options exercisable at February 26, 2011
    2,590,375     $ 28.46  

 
 
Page 10

 

CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

 
At February 26, 2011, there was $5,712 of unrecognized compensation cost related to option awards which the Company expects to recognize over a weighted-average period of 2.9 years.
 
The following table summarizes information about the Company’s outstanding and exercisable options at February 26, 2011.

   
Options Outstanding
   
Options Exercisable
 
Range of Exercise
Prices
 
Number
   
Weighted
Average
Exercise
Price
   
Intrinsic Value
   
Weighted
Average
Remaining Life
in Years
   
Number
   
Weighted
Average
Exercise
Price
   
Intrinsic Value
   
Weighted
Average
Remaining Life
in Years
 
$11.50 - $13.75
    79,711     $ 13.46     $ 2,208       0.76       79,711     $ 13.46     $ 2,208       0.76  
$16.01 - $22.80
    545,198     $ 20.11       11,470       2.22       545,198     $ 20.11       11,470       2.22  
$25.31 - $34.40
    1,996,135     $ 30.62       21,019       6.16       1,536,178     $ 30.06       17,038       5.48  
$35.11 - $42.86
    935,305     $ 39.25       2,508       8.17       429,288     $ 36.14       2,149       6.79  
      3,556,349     $ 30.90     $ 37,205       5.96       2,590,375     $ 28.46     $ 32,865       4.87  

The following table summarizes information about stock option exercises during the quarter ended February 26, 2011 and February 27, 2010.

   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
Fair value at issuance of options exercised
  $ 616     $ 71  
Total intrinsic value of options exercised
    2,048       419  
Cash received upon exercise of options
    2,191       240  
Tax benefit realized from exercise of options, net
    655       152  
Addition to capital in excess of par value due to exercise of stock options
    2,750       372  
 
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions by grant year.

 
   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
Weighted average fair value per option at the date of grant for options granted
  $ 11.39     $ 8.38  
Risk-free interest rate
    2.42 %     2.76 %
Expected dividend yield
    0.98 %     1.25 %
Expected volatility factor
    25.84 %     26.28 %
Expected option term in years
    6.1       5.7  

 
 
Page 11

 

CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

 
The expected life selected for options granted during each year presented represents the period of time that the options are expected to be outstanding based on historical data of option holder exercise and termination behavior.  Expected volatilities are based upon historical volatility of the Company’s monthly stock closing prices over a period equal to the expected life of each option grant.  The risk-free interest rate is selected based on yields from U.S. Treasury zero-coupon issues with a remaining term approximately equal to the expected term of the options being valued.  Expected dividend yield is based on the estimated dividend yield determined on the date of issuance.

Restricted Stock Unit Awards

The Company’s restricted stock unit awards are considered nonvested share awards.  The restricted stock unit awards require no payment from the employee.  Compensation cost is recorded based on the market price of the stock on the grant date and is recorded equally over the vesting period of four years.  During the vesting period, officers and key employees receive compensation equal to the amount of dividends declared on common shares they would have been entitled to receive had the shares been issued.  Upon vesting, employees may elect to defer receipt of their shares.  There were 103,390 and 108,800 vested and deferred shares at February 26, 2011 and November 27, 2010, respectively.

The following table summarizes compensation expense related to restricted stock unit awards during the quarter ended February 26, 2011 and February 27, 2010.

   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
Pre-tax compensation expense
  $ 732     $ 733  
Deferred tax benefits
    (269 )     (248 )
Excess tax expense associated with tax deductions under the amount of compensation expense recognized in the consolidated condensed financial statements
    127       (25 )
Fair value of shares vested
    898       742  
The following table summarizes the restricted stock unit awards.

 
   
Units
   
Weighted
Average
Grant Date
Fair Value
 
Nonvested at beginning of year
    70,894     $ 33.23  
Granted
    29,467     $ 42.86  
Vested
    (26,710 )   $ 33.60  
Nonvested at February 26, 2011
    73,651     $ 36.94  
 
The Company has recognized $1,519 of compensation cost prior to February 26, 2011 related to nonvested restricted stock unit awards.  As of February 26, 2011, there was $1,204 of total unrecognized compensation cost related to nonvested restricted stock unit awards that the Company expects to recognize during fiscal years 2011 through 2014.
 
 
Page 12

 

CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

4.
COMPREHENSIVE EARNINGS

Total comprehensive earnings and its components are as follows:

         
Other Comprehensive Earnings, Net of Tax:
       
   
Net Earnings
(Loss)
   
Foreign Currency and
Other Adjustments
   
Pension Liability
Adjustments
   
Total
Comprehensive
Earnings
 
Three Months Ended
                       
February 26, 2011
                       
CLARCOR Inc.
  $ 21,881     $ 4,823     $ 1,528     $ 28,232  
Non-redeemable noncontrolling interests
    52       -       -       52  
Redeemable noncontrolling interests
    (12 )     -       -       (12 )
    $ 21,921     $ 4,823     $ 1,528     $ 28,272  
                                 
February 27, 2010
                               
CLARCOR Inc.
  $ 14,866     $ (7,369 )   $ 623     $ 8,120  
Non-redeemable noncontrolling interests
    45       (3 )     -       42  
Redeemable noncontrolling interests
    (104 )     53       -       (51 )
    $ 14,807     $ (7,319 )   $ 623     $ 8,111  
 
The components of the ending balances of accumulated other comprehensive loss are as follows:

   
February 26,
   
November 27,
 
   
2011
   
2010
 
Pension liability, gross
  $ (55,734 )   $ (58,191 )
Tax effect of pension liability
    20,220       21,149  
Pension liability, net of tax
    (35,514 )     (37,042 )
                 
Translation adjustments, gross
    6,979       2,156  
Tax effect of translation adjustments
    (155 )     (155 )
Translation adjustments, net of tax
    6,824       2,001  
Accumulated other comprehensive loss
  $ (28,690 )   $ (35,041 )

 
 
Page 13

 
 
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

5.
GOODWILL AND ACQUIRED INTANGIBLES ASSETS

The following table reconciles the activity for goodwill by segment for the three months ended February 26, 2011.  All goodwill is stated on a gross basis, as the Company has not recorded any impairment charges against goodwill.

   
Engine/Mobile
Filtration
   
Industrial/
Environmental
Filtration
   
Packaging
   
Total
 
November 27, 2010
  $ 21,634     $ 206,471     $ -     $ 228,105  
Acquisition
    -       7,976       -       7,976  
Currency translation adjustments
    425       305       -       730  
February 26, 2011
  $ 22,059     $ 214,752     $ -     $ 236,811  

The following table summarizes acquired intangibles by segment. Other acquired intangibles include parts manufacturer regulatory approvals, developed technology, patents and non-compete agreements.

   
Engine/Mobile
Filtration
   
Industrial/
Environmental
Filtration
   
Packaging
   
Total
 
February 26, 2011
                       
Trademarks, gross - indefinite lived
  $ 603     $ 41,919     $ -     $ 42,522  
Trademarks, gross - finite lived
    311       488       -       799  
Accumulated amortization
    (63 )     (289 )     -       (352 )
Trademarks, net
  $ 851     $ 42,118     $ -     $ 42,969  
                                 
Customer relationships, gross
  $ 4,191     $ 42,688     $ -     $ 46,879  
Accumulated amortization
    (1,412 )     (11,262 )     -       (12,674 )
Customer relationships, net
  $ 2,779     $ 31,426     $ -     $ 34,205  
                                 
Other acquired intangibles, gross
  $ 243     $ 39,520     $ -     $ 39,763  
Accumulated amortization
    (243 )     (13,821 )     -       (14,064 )
Other acquired intangibles, net
  $ -     $ 25,699     $ -     $ 25,699  
                                 
Total
  $ 3,630     $ 99,243     $ -     $ 102,873  
 
The following table summarizes estimated amortization expense for the next five fiscal years.

Fiscal year 2011
  $ 5,549  
Fiscal year 2012
    5,474  
Fiscal year 2013
    5,411  
Fiscal year 2014
    5,217  
Fiscal year 2015
    5,204  

 
 
Page 14

 

CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

6.
FAIR VALUE MEASUREMENTS

Fair Value Measurements

The Company measures certain assets and liabilities at fair value as discussed throughout the notes to its quarterly and annual financial statements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  Fair value measurements are categorized in a hierarchy based upon the observability of inputs used in valuation techniques.  Observable inputs are the highest level and reflect market data obtained from independent sources, while unobservable inputs are the lowest level and reflect internally developed market assumptions.  The Company classifies fair value measurements by the following hierarchy:

 
·
Level 1 – Quoted active market prices for identical assets

 
·
Level 2 – Significant other observable inputs, such as quoted prices for similar (but not identical) instruments in active markets, quoted prices for identical or similar instruments in markets which are not active and model determined valuations in which all significant inputs or significant value-drivers are observable in active markets

 
·
Level 3 – Significant unobservable inputs, such as model determined valuations in which one or more significant inputs or significant value-drivers are unobservable

Assets or liabilities that have recurring measurements are shown below:

   
Fair Value Measurements at Reporting Date
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
February 26, 2011
                       
Restricted trust, included in Other noncurrent assets
                       
Mutual fund investments - equities
  $ 893     $ 893     $ -     $ -  
Mutual fund investments - bonds
    353       353       -       -  
Cash and equivalents
    56       56       -       -  
Total restricted trust
  $ 1,302     $ 1,302     $ -     $ -  
                                 
TransWeb contingent earn-out, included in Other long-term liabilities
  $ 1,018     $ -     $ -     $ 1,018  
                                 
November 27, 2010
                               
Restricted trust, included in Other noncurrent assets
                               
Mutual fund investments - equities
  $ 879     $ 879     $ -     $ -  
Mutual fund investments - bonds
    357       357       -       -  
Cash and equivalents
    22       22       -       -  
Total restricted trust
  $ 1,258     $ 1,258     $ -     $ -  

The restricted trust, which is used to fund certain payments for the Company’s U.S. combined nonqualified pension plans, consists of actively traded equity and bond funds.  The TransWeb contingent earn-out payment was established in connection with the acquisition of TransWeb (see Note 2).  There were no changes in the fair value determination methods or significant assumptions used in those methods during the quarter ended February 26, 2011.  There were no transfers between Level 1 and Level 2 during the quarter ended February 26, 2011.

 
 
Page 15

 

CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

Fair Values of Financial Instruments

The fair values of the Company’s financial instruments, which are cash and cash equivalents, restricted cash, accounts receivable and the restricted trust, approximated the carrying values of those financial instruments at both February 26, 2011 and November 27, 2010.  An expected present value technique is used to estimate the fair value of long-term debt.  A fair value estimate of $16,853 and $16,892 for long-term debt at February 26, 2011 and November 27, 2010, respectively, is based on the current interest rates available to the Company for debt with similar remaining maturities.  The carrying value for the long-term debt at February 26, 2011 and November 27, 2010 is $17,487 and $17,477, respectively.
 
7.
ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND GUARANTEES

Accounts payable and accrued liabilities at February 26, 2011 and November 27, 2010 were as follows:

   
February 26,
   
November 27,
 
   
2011
   
2010
 
Accounts payable
  $ 68,798     $ 64,630  
Accrued salaries, wages and commissions
    9,894       31,497  
Compensated absences
    7,789       8,172  
Accrued insurance liabilities
    11,200       11,473  
Customer deposits
    8,315       7,732  
Other accrued liabilities
    32,549       36,702  
    $ 138,545     $ 160,206  
 
Warranties are recorded as a liability on the balance sheet and as charges to current expense for estimated normal warranty costs and, if applicable, for specific performance issues known to exist on products already sold. The expenses estimated to be incurred are provided at the time of sale and adjusted as needed, based primarily upon experience.

 
Changes in the Company’s warranty accrual, which is included in Other accrued liabilities are as follows:

 
   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
Balance at beginning of period
  $ 3,499     $ 3,989  
Accruals for warranties issued during the period
    264       148  
Adjustments related to pre-existing warranties
    (553 )     23  
Settlements made during the period
    (170 )     (178 )
Other adjustments, including currency translation
    39       (131 )
Balance at end of period
  $ 3,079     $ 3,851  
 
The Company has letters of credit totaling $24,610 and $23,189 as of February 26, 2011 and November 27, 2010, respectively, issued to various government agencies, primarily related to industrial revenue bonds, and to insurance companies and other commercial entities in support of its obligations. The Company believes that no payments will be required resulting from these obligations.

 
 
Page 16

 

 
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

 
In the ordinary course of business, the Company also provides routine indemnifications and other guarantees whose terms range in duration and are often not explicitly defined. The Company does not believe these will have a material impact on the results of operations or financial condition of the Company.

8.
LONG-TERM DEBT AND INTEREST RATE AGREEMENT

On December 18, 2007, the Company entered into a five-year multicurrency revolving credit agreement (“Credit Facility”) with a group of financial institutions under which it may borrow up to $250,000 under a selection of currencies and rate formulas.  The Credit Facility interest rate is based upon, at the Company’s election, either a defined Base Rate or the London Interbank Offered Rate (“LIBOR”) plus or minus applicable margins.  Commitment fees, letter of credit fees and other fees are also payable as provided in the credit agreement.  At February 26, 2011, there were no borrowings outstanding on the Credit Facility.  The Credit Facility includes a $75,000 letter of credit subline, against which $16,012 and $16,031 in letters of credit had been issued at February 26, 2011 and November 27, 2010, respectively.

The Company’s significant accounting policies for derivative instruments are described in Note A of the 2010 Form 10-K.  On January 2, 2008, the Company entered into a fixed rate interest swap agreement to manage its interest rate exposure on certain amounts outstanding under the Credit Facility.  The interest rate agreement expired January 1, 2010.  The interest rate agreement provided for the Company to receive interest at floating rates based on LIBOR and pay a 3.93% fixed interest rate plus an applicable margin on a notional amount of $100,000.  Payments pursuant to the interest rate agreement were settled on a net basis quarterly. Hedge accounting was not applied to the fixed rate interest swap agreement and therefore, unrealized gains or losses were recorded in interest expense in the Consolidated Condensed Statements of Earnings.  Periodic settlement payments or receipts were recorded as a component of cash flows from operating activities in the Consolidated Condensed Statements of Cash Flows.

The following table reflects the net settlement payments on the fixed rate interest swap agreement for the quarter ended February 27, 2010.

Derivatives Not Designated
as Hedging Instruments
 
 Location 
 
Three Months
Ended
 
       
February 27,
2010
 
Fixed rate interest swap agreement unrealized losses
 
Interest expense
  $ -  
Fixed rate interest swap agreement net settlement payments
 
Cash flows from operating activities
    961  

 
 
Page 17

 
 
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

9.
PENSION AND OTHER POSTRETIREMENT PLANS

The Company provides various retirement benefits, including defined benefit plans and postretirement healthcare plans covering certain current and retired employees in the U.S. and abroad.  Components of net periodic benefit cost and Company contributions for these plans were as follows:

   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
Pension Benefits:
           
Components of net periodic benefit cost:
           
Service cost
  $ 492     $ 528  
Interest cost
    2,010       2,039  
Expected return on plan assets
    (1,920 )     (1,785 )
Amortization of unrecognized:
               
Prior service cost
    (99 )     (99 )
Net actuarial loss
    1,157       1,201  
Net periodic benefit cost
    1,640       1,884  
Settlement cost
    1,368       -  
Total benefit cost
  $ 3,008     $ 1,884  
                 
Cash contributions
  $ 2,038     $ 93  
 
   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
Postretirement Healthcare Benefits:
           
Components of net periodic benefit income:
           
Interest cost
  $ 6     $ 8  
Amortization of unrecognized:
               
Prior service cost
    (31 )     (31 )
Net actuarial gain
    (32 )     (32 )
Net periodic benefit income
  $ (57 )   $ (55 )
                 
Cash contributions
  $ 30     $ 39  

During the three months ended February 26, 2011, the Company recorded settlement costs in connection with the retirement of one of its former executive officers.

 
The Company’s policy is to contribute to its qualified U.S. and non-U.S. pension plans at least the minimum amount required by applicable laws and regulations, to contribute to the U.S. combined nonqualified plans when required for benefit payments, and to contribute to the postretirement healthcare benefit plan an amount equal to the benefit payments.  The Company, from time to time, makes voluntary contributions in excess of the minimum amount required as economic conditions warrant.  The Company expects to contribute up to $15,400 to its U.S. qualified plans, $2,194 to its U.S. combined nonqualified plans, $403 to its non-U.S. plan and $121 to its postretirement healthcare benefit plan to pay benefits during 2011.
 
 
Page 18

 
 
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

In addition to the plan assets related to its qualified plans, the Company has also funded $1,302 and $1,258 at February 26, 2011 and November 27, 2010, respectively, into a restricted trust for its U.S. combined nonqualified plans, see Note 6.  This trust is included in other noncurrent assets in the Consolidated Condensed Balance Sheets.

10.
INCOME TAXES

The following is a reconciliation of the beginning and ending amount of gross unrecognized tax benefits for uncertain tax positions, including positions which impact only the timing of tax benefits.

   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
             
Balance at beginning of period
  $ 1,806     $ 2,161  
Additions (reductions) for current period tax positions
    96       (146 )
Additions for prior period tax positions
    -       39  
Changes in interest and penalties
    22       (6 )
Balance at end of period
  $ 1,924     $ 2,048  
 
At February 26, 2011, the amount of unrecognized tax benefit, that would impact the effective tax rate if recognized, was $1,787.  The Company recognizes interest and penalties related to unrecognized benefits in income tax expense.  As of February 26, 2011, the Company had $491 accrued for the payment of interest and penalties.

Due to the various jurisdictions in which the Company files tax returns and the uncertainty regarding the timing of settlements it is possible that there could be other significant changes in the amount of unrecognized tax benefits in the next twelve months; however, the amount cannot be estimated.

The Company is regularly audited by federal, state and foreign tax authorities.  The Internal Revenue Service has completed its audits of the Company’s U.S. income tax returns through fiscal year 2009.  With few exceptions, the Company is no longer subject to income tax examinations by state or foreign tax jurisdictions for years prior to 2004.

11.
CONTINGENCIES

Legal Contingencies

From time to time, the Company is subject to lawsuits, investigations and disputes (some of which involve substantial claimed amounts) arising out of the conduct of its business, including matters relating to commercial transactions, product liability, intellectual property and other matters.  Items included in these other matters are discussed below.  The Company believes recorded reserves in its Consolidated Condensed Financial Statements are adequate in light of the probable and estimable outcomes of the items discussed below.  Any recorded liabilities were not material to the Company’s financial position, results of operation or liquidity and the Company does not currently believe that any pending claims or litigation, including those identified below, will materially affect its financial position, results of operation or liquidity.
 
 
Page 19

 

CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

Donaldson

On May 15, 2009, Donaldson Company, Inc. (“Donaldson”) filed a lawsuit in the U.S. Federal District Court for the District of Minnesota, alleging that certain “ChannelFlow®” engine/mobile filters manufactured and sold by a subsidiary of the Company infringe one or more patents held by Donaldson. Through this lawsuit Donaldson seeks various remedies, including injunctive relief and monetary damages of an unspecified amount. Management believes that the products in question do not infringe the asserted patents and that such patents are invalid.  The Company is vigorously defending the action.

Antitrust/Qui Tam

On March 31, 2008, S&E Quick Lube, a filter distributor, filed suit in U.S. District Court for the District of Connecticut alleging that virtually every major North American engine filter manufacturer, including the Company's subsidiary, Baldwin Filters, Inc. (the “Defendant Group”), engaged in a conspiracy to fix prices, rig bids and allocate U.S. customers for aftermarket filters.  This suit is a purported class action on behalf of direct purchasers of filters from the Defendant Group.  Parallel purported class actions, including on behalf of indirect purchasers of filters, have been filed by other plaintiffs against the Defendant Group in a variety of jurisdictions in the United States and Canada.

In addition, the Attorney General of the State of Florida and the County of Suffolk, New York have filed complaints against the Defendant Group based on these same allegations, and the Attorney General of the State of Washington requested various documents, information and cooperation, which the Company has agreed to provide.

In late 2010, William Burch, a former employee of two other defendants in the Defendant Group, brought an action under the United States False Claims Act and similar state statutes on behalf of the governments of the United States and approximately twenty individual states against the Defendant Group, based on these same allegations (the "Qui Tam Action").  On March 1, 2011, Mr. Burch voluntarily dismissed Baldwin Filters, Inc. from this action, without prejudice, based on certain representations by Baldwin.  As such, Baldwin Filters, Inc. is no longer a defendant in the Qui Tam Action.

Finally, the Company understands that the Antitrust Division of the Department of Justice (“DOJ”) was investigating the allegations raised in these suits and issued subpoenas in connection with that investigation.  The Company was not contacted by the DOJ in connection with the DOJ investigation and was not the subject of any subpoena.  Public reports indicate that the DOJ officially closed its investigation in January 2010 and took no action against any filter manufacturer.

All of the U.S cases, including the actions brought by and/or on behalf of governmental entities, have been consolidated into a single multi-district litigation in the Northern District of Illinois.  The Company believes all of these lawsuits and the claims made therein to be without merit and is vigorously defending them.
 
 
Page 20

 
 
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
  
TransWeb/3M

On May 21, 2010, 3M Company and 3M Innovative Properties (“3M”) brought a lawsuit against TransWeb in the United States District Court for the District of Minnesota, alleging that certain TransWeb products infringe certain 3M patents.  Shortly after receiving service of process in this litigation, TransWeb filed its own complaint against 3M in the United States District Court for the District of New Jersey, seeking a declaratory judgment that the asserted patents are invalid and that the products in question do not infringe.  3M withdrew its Minnesota action, and the parties are currently litigating the matter in New Jersey.  The litigation in question was filed and underway before the Company acquired TransWeb in December 2010, but the Company assumed the risk of this litigation as a result of the acquisition.  The Company intends to vigorously defend the action and pursue related claims.  The Company acquired TransWeb in December 2010 (see Note 2).  Of the base purchase price, the Company withheld payment of $17,000 pending resolution of the 3M litigation, which funds may be used by the Company in connection with the same.  During the quarter ended February 26, 2011, the Company applied charges of $759 against the withheld payment, leaving a remaining balance of $16, 241.  At February 26, 2011, $2,500 is included in Other accrued liabilities and $13,741 is included in Other long-term liabilities in the accompanying Consolidated Condensed Balance Sheets.
  
Other

Additionally, the Company is party to various proceedings relating to environmental issues.  The U.S. Environmental Protection Agency and/or other responsible state agencies have designated the Company as a potentially responsible party, along with other companies, in remedial activities for the cleanup of waste sites under the federal Superfund statute.  Although it is not certain what future environmental claims, if any, may be asserted, the Company currently believes that its potential liability for known environmental matters does not exceed its present accrual of $50.  However, environmental and related remediation costs are difficult to quantify for a number of reasons, including the number of parties involved, the difficulty in determining the nature and extent of the contamination at issue, the length of time remediation may require, the complexity of the environmental regulation and the continuing advancement of remediation technology.  Applicable federal law may impose joint and several liability on each potentially responsible party for the cleanup.

In addition to the matters cited above, the Company is involved in legal actions arising in the normal course of business.  The Company records provisions with respect to identified claims or lawsuits when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and lawsuits are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter.  No such provisions have been taken in respect of the Donaldson, antitrust or TransWeb legal proceedings referred to above.

Other Contingencies

In the event of a change in control of the Company, termination benefits are likely to be required for certain executive officers and other employees.
 
 
Page 21

 

CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

12.
EARNINGS PER SHARE AND TREASURY STOCK TRANSACTIONS

Diluted earnings per share reflect the impact of outstanding stock options as if exercised during the periods presented using the treasury stock method.  The following table provides a reconciliation of the numerators and denominators utilized in the calculation of basic and diluted earnings per share.

   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
Weighted average number of shares outstanding
    50,568,499       50,594,234  
                 
Dilutive effect of stock-based arrangements
    718,739       340,679  
                 
Weighted average number of diluted shares outstanding
    51,287,238       50,934,913  
                 
Net earnings attributable to CLARCOR Inc.
  $ 21,881     $ 14,866  
                 
Basic earnings per share
  $ 0.43     $ 0.29  
Diluted earnings per share
  $ 0.43     $ 0.29  
  
The following table provides additional information regarding the calculation of earnings per share and treasury stock transactions.
  
   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
Per share weighted average exercise price of antidilutive options
  $ -     $ 34.38  
Number of antidilutive options with exercises prices greater than the average market price excluded from the computation of dilutive earnings per share
    -       1,241,210  
Common stock repurchased and retired pursuant to the Company's $250,000 stock repurchase program
  $ 1,947     $ -  
Number of shares repurchased and retired pursuant to the Company's $250,000 stock repurchase program
    45,000       -  
 
As of February 26, 2011, there was approximately $231,776 available under the Company’s $250,000 stock repurchase program for future purchases.
 
 
Page 22

 
 
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

13.
SEGMENT INFORMATION

The Company operates in three principal product segments: Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging. Net sales represent sales to unaffiliated customers as reported in the Consolidated Condensed Statements of Earnings.  Intersegment sales were not material.  Unallocated amounts consist of interest expense, interest income and other non-operating income and expense items.  Assets are those assets used in each business segment.  Corporate assets consist of cash, deferred income taxes, corporate facility and equipment and various other assets that are not specific to an operating segment.  The Company operates as a consolidated entity, including cooperation between segments, cost allocating and sharing of certain assets.  As such, the Company makes no representation, that if operated on a standalone basis, these segments would report net sales, operating profit and other financial data reflected below.

   
Three Months Ended
 
   
February 26,
   
February 27,
 
   
2011
   
2010
 
Net sales:
           
Engine/Mobile Filtration
  $ 111,328     $ 96,428  
Industrial/Environmental Filtration
    112,119       102,027  
Packaging
    22,273       16,676  
    $ 245,720     $ 215,131  
                 
Operating profit:
               
Engine/Mobile Filtration
  $ 21,202     $ 17,862  
Industrial/Environmental Filtration
    7,248       4,283  
Packaging
    2,841       751  
      31,291       22,896  
Other expense, net
    (207 )     (494 )
                 
Earnings before income taxes
  $ 31,084     $ 22,402  
 
   
February 26,
   
November 27,
 
   
2011
   
2010
 
Identifiable assets:
           
Engine/Mobile Filtration
  $ 295,028     $ 292,196  
Industrial/Environmental Filtration
    686,740       650,530  
Packaging
    40,746       40,450  
Corporate
    39,747       59,235  
    $ 1,062,261     $ 1,042,411  
  
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information presented in this discussion should be read in conjunction with other financial information provided in the Consolidated Condensed Financial Statements and Notes thereto.  Except as otherwise set forth herein, references to particular years refer to our applicable fiscal year.  The analysis of operating results focuses on our three reportable business segments:  Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging.
 
EXECUTIVE SUMMARY
  
Management Discussion Snapshot
(In millions except per share data)
 
   
First Quarter
 
               
Change
 
   
2011
   
2010
   
 $
   
 %
 
                         
Net sales
  $ 245.7     $ 215.1     $ 30.6       14 %
                                 
Cost of sales
    164.8       145.3       19.5       13 %
                                 
Gross profit
    81.0       69.8       11.2       16 %
                                 
Selling and administrative expenses
    49.7       46.9       2.8       6 %
                                 
Operating profit
    31.3       22.9       8.4       37 %
                                 
Other (expense)
    (0.2 )     (0.5 )     0.3          
                                 
Provision for income taxes
    9.2       7.6       1.6       21 %
                                 
Net earnings attributable to CLARCOR
    21.9       14.9       7.0       47 %
                                 
Weighted average diluted shares
    51.3       50.9       0.4       1 %
                                 
Diluted earnings per share attributable to CLARCOR
  $ 0.43     $ 0.29     $ 0.14       48 %
                                 
Percentages:
                               
                                 
Gross margin
    32.9 %     32.5 %          
0.4 pt
 
                                 
Selling and administrative percentage
    20.2 %     21.8 %          
-1.6 pt
 
                                 
Operating margin
    12.7 %     10.6 %          
2.1 pt
 
                                 
Effective tax rate
    29.5 %     33.9 %          
-4.4 pt
 
                                 
Net earnings margin
    8.9 %     6.9 %          
2.0 pt
 
 
 
Page 24

 
  
First Quarter

Our strong financial performance in the first quarter of 2011 compared with the first quarter of 2010 was primarily the result of the 14% or $30.6 million increase in net sales.  Net sales were higher in each of our operating segments.  The $14.9 million increase in our Engine/Mobile Filtration segment was driven by continued strength in heavy-duty engine filter sales in most of our end-markets both domestically and internationally.  The $10.1 million increase in our Industrial/Environmental Filtration segment was the result of stronger sales domestically in most of our end markets as a result of the improved economy.  The $5.6 million increase in net sales in our Packaging segment was due to continued strength in the smokeless tobacco, confection, spice and decorated flat sheet metal markets.
 
Our 32.9% gross margin percentage in the first quarter of 2011 was 0.4 points higher than the first quarter of 2010 and was our highest first quarter gross margin percentage in almost twenty years.  With our 14% increase in net sales, we were able to leverage our fixed manufacturing costs to generate improved gross margin percentages at all of our operating segments.  Our Packaging segment, where sales increased 34% from last year’s first quarter, showed the most significant improvement of 6.1 points.

Selling and administrative expenses as a percentage of net sales declined 1.6 points as we were able to leverage the 14% increase in net sales while increasing selling and administrative expenses only 6%.  The $2.8 million increase in selling and administrative expenses included a $1.3 million increase in pension costs due to the retirement of one of our former executive officers, a $0.6 million increase related to TransWeb which was not in the prior period and $1.0 million increase in legal costs related to on-going litigation.  On the strength of the improvement in both gross margin and selling and administrative expenses as a percentage of net sales, our operating margin increased 2.1 points from the first quarter of 2010.

Other Items

Other significant items impacting the comparison between the quarters presented are as follows:
  
·
Acquisitions

The acquisition of TransWeb in the first quarter of 2011 positively impacted sales by $2.4 million and operating profit by $0.3 million.  Operating profit at TransWeb was negatively influenced by a $0.2 million write-up of inventory pursuant to purchase accounting.  There were no acquisitions in 2010.

·
Foreign Exchange

The average exchange rate for foreign currencies versus the U.S. dollar positively impacted our translated U.S. dollar value of net sales by $0.3 million and operating profit by $0.2 million in the first quarter of 2011 versus the first quarter of 2010.  The U.S. dollar value of the Euro declined while the U.S. dollar value of certain other currencies increased including the Chinese Yuan Renminbi, the Australian Dollar and the South African Rand.

·
Other income (expense)

Interest expense

Interest expense decreased $0.1 million in the first quarter of 2011 compared with the first quarter of 2010.  This decrease is the result of our repayment of the outstanding balance on our line of credit during fiscal year 2010.  We had an average of $21.7 million outstanding on our line of credit in the first quarter of 2010 while we had no amounts outstanding in the first quarter of 2011.  The interest rate on our line of credit was 0.6% in the first quarter of 2010 which would have been consistent with the interest rate in the first quarter of 2011 if we had amounts outstanding.
  
 
Page 25

 
 
Foreign currency gains and losses

Foreign currency losses included in other income (expense) declined $0.2 million in the first quarter of 2011 versus the first quarter of 2010.  Much of the foreign currency gain or loss was caused by the translation of cash accounts at foreign subsidiaries denominated in a currency other than their functional currency.
 
·
Provisions for income taxes

The 29.5% effective tax rate in the first quarter of 2011 included a $0.7 million benefit related to the extension of the research and experimentation tax credit in December 2010.  Effectively, we recognized a majority of our full year 2010 research and experimentation tax credit in the first quarter of 2011.  Excluding this benefit, our effective tax rate would have been approximately 32.0% in the first quarter of 2011.  The reduction in the effective tax rate from 33.9% in the first quarter of 2010 to the 32.0% adjusted effective tax rate in the first quarter of 2011 was the result of an increase in the domestic production activities deduction (“DPAD”) in the first quarter of 2001 as well as our recognition of the first quarter 2011 research and experimentation tax credit.

·
Shares outstanding

Average diluted shares outstanding increased 0.4 million in the first quarter of 2011 compared with the same period in 2010.  This increase primarily resulted from an increase in the dilutive effects of outstanding stock options due to a higher average stock price.

Commodity Prices
  
Although we have experienced higher material costs—notably in steel and media—these cost increases did not have a significant impact on our margins in the first quarter.  Many of our business units proactively purchased ahead in 2010 thus mitigating the impact of the recent commodity price increases in the first quarter.  In addition, our business units which manufacture filtration vessels or systems are typically able to time customer price quotations with steel purchases and are able to base quotations on actual material costs.

Going forward in 2011, we anticipate that higher commodity prices will increase our material costs.  However, we expect that we will be able to pass most of these higher material costs onto our customers.  Since a large majority of our business is in the after-market where we control our pricing sheets, we believe our ability to pass material cost increases onto our customers is greater than companies which deal primarily with OEMs.  In addition, due to the nature of our after-market filtration products, we believe our customer demand is rather inelastic—meaning reasonable price increases do not significantly impact customer demand.  We enacted a customer price increase at one of our larger business units at the end of the first quarter and anticipate a customer price increase at another larger business unit in the second quarter.  Based upon our anticipated ability to recover material cost through pricing without significantly impacting demand, we do not expect that higher material costs will have a significantly negative impact on our operating margins in 2011.
 
 
Page 26

 
 
SEGMENT ANALYSIS
 
   
First Quarter
 
(Dollars in millions)
 
2011
   
% Total
   
2010
   
% Total
 
                         
Net sales:
                       
Engine/Mobile Filtration
  $ 111.3       45 %   $ 96.4       45 %
Industrial/Environmental Filtration
    112.1       46 %     102.0       47 %
Packaging
    22.3       9 %     16.7       8 %
    $ 245.7       100 %   $ 215.1       100 %
                                 
Operating profit:
                               
Engine/Mobile Filtration
  $ 21.2       68 %   $ 17.9       78 %
Industrial/Environmental Filtration
    7.3       23 %     4.3       19 %
Packaging
    2.8       9 %     0.7       3 %
    $ 31.3       100 %   $ 22.9       100 %
                                 
Operating margin:
                               
Engine/Mobile Filtration
    19.0 %             18.5 %        
Industrial/Environmental Filtration
    6.5 %             4.2 %        
Packaging
    12.8 %             4.5 %        
      12.7 %             10.6 %        

Engine/Mobile Filtration Segment

 
   
First Quarter
 
               
Change
 
(Dollars in millions)
 
2011
   
2010
   
 $
   
 %
 
                         
Net sales
  $ 111.3     $ 96.4     $ 14.9       15 %
                                 
Operating profit
    21.2       17.9       3.3       19 %
                                 
Operating margin
    19.0 %     18.5 %          
0.5 pt
 
 
Our Engine/Mobile Filtration segment primarily sells after-market filters for heavy-duty trucks and off-highway vehicles, locomotives and automobiles.  The largest market included in this segment is Baldwin branded engine filters for heavy-duty trucks.
  
The net sales increase for our Engine/Mobile Filtration segment in the first quarter of 2011 as compared to the same prior year period is detailed in the following table:
 
   
First
 
(Dollars in millions)
 
Quarter
 
       
2010
  $ 96.4  
         
U.S. net sales
    7.6  
Foreign net sales (including export)
    6.5  
Foreign exchange
    0.8  
Net increase
    14.9  
         
2011
  $ 111.3  
  
 
Page 27

 
   
The net increase in U.S. net sales for the Engine/Mobile Filtration segment in the first quarter of 2011 as compared to the same prior year period is detailed as follows:

   
First
 
(Dollars in millions)
 
Quarter
 
       
Heavy-duty engine filters
  $ 6.4  
Locomotive filters
    1.2  
         
Increase in U.S. net sales
  $ 7.6  
  
Our sales of heavy-duty engine filters in the U.S. continue to be positively influenced by continued strength in the U.S. trucking industry.  Heavy-duty truck tonnage in the U.S. was approximately 6% higher in our first two fiscal months of 2011 compared with the same period in 2010 and was at its highest level since February 2008.  Our U.S. sales of locomotive filters increased approximately 14% in the first quarter of 2011 compared to the first quarter of 2010 due to the continuing recovery in U.S. rail activity.  According to the Association of American Railroads, approximately 132,000 freight cars were removed from storage during calendar year 2010.  As of the beginning of February 2011, 20.8% of the U.S. freight car fleet was in storage, down from a peak of 31.9% in July 2009.

The increase in net sales (adjusted for changes in foreign currency) outside the U.S. was primarily due to a $4.5 million, or 69%, increase in net sales in China which was positively impacted by market growth and penetration.  The remainder $2.0 million foreign net sales increase was spread through many end markets.

The increase in operating profit in the Engine/Mobile Filtration segment was driven by the higher heavy-duty engine filter sales.  Our operating margin increased as we were able to leverage our fixed manufacturing and administrative costs.  Our material cost as a percentage of net sales remained relatively flat in the first quarter of 2011 compared with the same period last year.  Although selling and administrative expenses decreased as a percentage of net sales, total selling and administrative expenses increased as we incurred increased legal expenses, as well as various other administrative costs to support our continued growth both domestically and abroad.  We estimate that the change in average foreign exchange rates from the first quarter of 2010 to the first quarter of 2011 positively influenced the translated U.S. dollar value of operating profit by $0.3 million.

Industrial/Environmental Filtration Segment

   
First Quarter
 
               
Change
 
(Dollars in millions)
 
2011
   
2010
   
$
   
%
 
                         
Net sales
  $ 112.1     $ 102.0     $ 10.1       10 %
                                 
Operating profit
    7.3       4.3       3.0       69 %