CLC 2015 Q2 May 30 10Q


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 May 30, 2015

OR
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to ________

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

Delaware
 1-11024
36-0922490
(State or other jurisdiction of
incorporation or organization)
 (Commission File Number)
(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 __
 
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 __

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 June 15, 2015, 50,096,733 common shares with a par value of $1 per share were outstanding.




TABLE OF CONTENTS
 
 
 
 
 
PAGE
 
 
Financial Statements
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Quantitative and Qualitative Disclosures About Market Risk
 
Controls and Procedures
 
 
 
 
 
 
 
Legal Proceedings
 
Risk Factors
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
*
Item 4.
Mine Safety Disclosures
 
*
Item 5.
Other Information
 
*
Exhibits
 
 

* Item omitted because the 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 share data)
(Unaudited)
 
 
Quarter Ended
 
Six Months Ended
 
 
May 30,
2015
 
May 31,
2014
 
May 30,
2015
 
May 31,
2014
Net sales
 
$
399,799

 
$
386,642

 
$
750,922

 
$
699,327

Cost of sales
 
266,189

 
261,272

 
504,337

 
477,370

 
 
 
 
 
 
 
 
 
Gross profit
 
133,610

 
125,370

 
246,585

 
221,957

 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
74,667

 
74,223

 
148,449

 
139,544

 
 
 
 
 
 
 
 
 
Operating profit
 
58,943

 
51,147

 
98,136

 
82,413

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(1,556
)
 
(670
)
 
(2,627
)
 
(1,070
)
Interest income
 
90

 
96

 
231

 
203

Other, net
 
(422
)
 
174

 
(538
)
 
4,145

 
 
(1,888
)
 
(400
)
 
(2,934
)
 
3,278

 
 
 
 
 
 
 
 
 
Earnings before income taxes
 
57,055

 
50,747

 
95,202

 
85,691

 
 
 
 
 
 
 
 
 
Provision for income taxes
 
18,482

 
16,201

 
29,892

 
26,804

 
 
 
 
 
 
 
 
 
Net earnings
 
38,573

 
34,546

 
65,310

 
58,887

 
 
 
 
 
 
 
 
 
Net (earnings) loss attributable to noncontrolling interests
 
(76
)
 
6

 
(104
)
 
(14
)
 
 
 
 
 
 
 
 
 
Net earnings attributable to CLARCOR Inc.
 
$
38,497

 
$
34,552

 
$
65,206

 
$
58,873

 
 
 
 
 
 
 
 
 
Net earnings per share attributable to CLARCOR Inc. - Basic
 
$
0.77

 
$
0.68

 
$
1.30

 
$
1.17

Net earnings per share attributable to CLARCOR Inc. - Diluted
 
$
0.76

 
$
0.68

 
$
1.28

 
$
1.16

 
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding - Basic
 
50,209,215

 
50,513,588

 
50,232,565

 
50,488,651

Weighted average number of shares outstanding - Diluted
 
50,791,198

 
50,945,090

 
50,791,840

 
50,934,768

 
 
 
 
 
 
 
 
 
Dividends paid per share
 
$
0.2000

 
$
0.1700

 
$
0.4000

 
$
0.3400




See Notes to Consolidated Condensed Financial Statements
Page 3


CLARCOR Inc.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE EARNINGS
(Dollars in thousands)
(Unaudited)
 
 
Quarter Ended
 
Six Months Ended
 
 
May 30,
2015
 
May 31,
2014
 
May 30,
2015
 
May 31,
2014
Net earnings
 
$
38,573

 
$
34,546

 
$
65,310

 
$
58,887

 
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
 
Pension and other postretirement benefits —
 
 
 
 
 
 
 
 
Pension and other postretirement benefits liability adjustments
 
860

 
619

 
1,721

 
1,283

Pension and other postretirement benefits liability adjustments tax amounts
 
(335
)
 
(240
)
 
(597
)
 
(507
)
Pension and other postretirement benefits liability adjustments, net of tax
 
525

 
379

 
1,124

 
776

 
 
 
 
 
 
 
 
 
Foreign currency translation —
 
 
 
 
 
 
 
 
Translation adjustments
 
(5,720
)
 
(1,764
)
 
(22,334
)
 
2,561

Translation adjustments tax amounts
 
—

 
—

 
—

 
—

Translation adjustments, net of tax
 
(5,720
)
 
(1,764
)
 
(22,334
)
 
2,561

 
 
 
 
 
 
 
 
 
Comprehensive earnings
 
33,378

 
33,161

 
44,100

 
62,224

 
 
 
 
 
 
 
 
 
Comprehensive earnings attributable to non-redeemable noncontrolling interests
 
(50
)
 
(82
)
 
(18
)
 
(133
)
Comprehensive loss attributable to redeemable noncontrolling interests
 
12

 
83

 
155

 
106

 
 
 
 
 
 
 
 
 
Comprehensive earnings attributable to CLARCOR Inc.
 
$
33,340

 
$
33,162

 
$
44,237

 
$
62,197

 
 
 
 
 
 
 
 
 



See Notes to Consolidated Condensed Financial Statements
Page 4


CLARCOR Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
 
May 30,
2015
 
November 29,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
81,837

 
$
94,064

Accounts receivable, less allowance for losses of $11,132 and $10,811, respectively
280,563

 
305,580

Inventories
300,885

 
274,718

Deferred income taxes
38,209

 
37,749

Prepaid expenses and other current assets
21,952

 
16,796

Total current assets
723,446

 
728,907

 
 
 
 
Property, plant and equipment, at cost, less accumulated depreciation of $363,694
  and $357,564 respectively
309,955

 
288,356

Goodwill
508,273

 
507,172

Acquired intangible assets, less accumulated amortization
342,878

 
347,578

Other noncurrent assets
18,420

 
16,756

Total assets
$
1,902,972

 
$
1,888,769

 
 
 
 
LIABILITIES
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
227

 
$
233

Accounts payable
102,476

 
97,885

Accrued liabilities
102,360

 
120,036

Income taxes payable
4,871

 
6,226

Total current liabilities
209,934

 
224,380

 
 
 
 
Long-term debt, less current portion
417,800

 
411,330

Long-term pension and postretirement healthcare benefits liabilities
32,141

 
33,266

Deferred income taxes
104,057

 
104,250

Other long-term liabilities
13,868

 
8,853

Total liabilities
777,800

 
782,079

 
 
 
 
Contingencies (Note 10)


 


Redeemable noncontrolling interests
—

 
1,587

 
 
 
 
SHAREHOLDERS' EQUITY
 

 
 

Capital stock
50,119

 
50,204

Capital in excess of par value
6,944

 
10,644

Accumulated other comprehensive loss
(75,290
)
 
(54,080
)
Retained earnings
1,142,544

 
1,097,292

Total CLARCOR Inc. equity
1,124,317

 
1,104,060

Noncontrolling interests
855

 
1,043

Total shareholders' equity
1,125,172

 
1,105,103

Total liabilities and shareholders' equity
$
1,902,972

 
$
1,888,769




See Notes to Consolidated Condensed Financial Statements
Page 5


CLARCOR Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Six Months Ended
 
May 30,
2015
 
May 31,
2014
Cash flows from operating activities:
 
 
 
Net earnings
$
65,310

 
$
58,887

Depreciation
15,583

 
14,870

Amortization
12,523

 
7,943

Other noncash items
104

 
933

Net (gain) loss on disposition of assets
(1,418
)
 
73

Bargain purchase gain
—

 
(2,815
)
Stock-based compensation expense
6,994

 
3,654

Excess tax benefit from stock-based compensation
(995
)
 
(351
)
Change in assets and liabilities
(30,871
)
 
(40,444
)
Net cash provided by operating activities
67,230

 
42,750

 
 
 
 
Cash flows from investing activities:
 

 
 

Restricted cash
—

 
(642
)
Business acquisitions, net of cash acquired
(20,881
)
 
(595,621
)
Additions to plant assets
(37,992
)
 
(28,275
)
Proceeds from disposition of plant assets
4,792

 
148

Investment in affiliates
(525
)
 
(473
)
Net cash used in investing activities
(54,606
)
 
(624,863
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net borrowings (payments) on multicurrency revolving credit facility
15,000

 
(22,000
)
Borrowings under term loan facility
—

 
315,000

Payments on term loan facility
—

 
(20,000
)
Payments on long-term debt
(8,536
)
 
(1,487
)
Payment of financing costs
—

 
(723
)
Sale of capital stock under stock option and employee purchase plans
5,360

 
2,442

Acquisition of noncontrolling interest
(1,239
)
 
—

Payments for repurchase of common stock
(16,110
)
 
—

Excess tax benefit from stock-based compensation
995

 
351

Dividend paid to noncontrolling interests
(206
)
 
(166
)
Cash dividends paid
(20,124
)
 
(17,166
)
Net cash (used in) provided by financing activities
(24,860
)
 
256,251

Net effect of exchange rate changes on cash
9

 
(1,673
)
Net change in cash and cash equivalents
(12,227
)
 
(327,535
)
Cash and cash equivalents, beginning of period
94,064

 
411,562

Cash and cash equivalents, end of period
$
81,837

 
$
84,027

 
 
 
 
Cash paid during the period for:
 

 
 

Interest
$
2,478

 
$
598

Income taxes, net of refunds
$
26,505

 
$
28,812


See Notes to Consolidated Condensed Financial Statements
Page 6
CLARCOR Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands except share data)
(Unaudited)



1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation

CLARCOR Inc. and its subsidiaries (collectively, the “Company” or “CLARCOR”) is a global provider of filtration products, filtration systems and services, and consumer and industrial packaging products. As discussed further in Note 13, the Company has three reportable segments: Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging. The Consolidated Condensed Financial Statements include all domestic and foreign subsidiaries that were more than 50% owned and controlled as of each respective reporting period presented. All intercompany accounts and transactions have been eliminated.

The Consolidated Condensed Statements of Earnings, the Consolidated Condensed Statements of Comprehensive Earnings and the Consolidated Condensed Statements of Cash Flows for the periods ended May 30, 2015 and May 31, 2014 and the Consolidated Condensed Balance Sheet as of May 30, 2015 have been prepared by 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 29, 2014 (“2014 Form 10-K”).  The November 29, 2014 Consolidated Condensed Balance Sheet data was derived from the Company’s year-end audited Consolidated Financial Statements as presented in the 2014 Form 10-K but does not include all disclosures required by accounting principles generally accepted in the United States of America ("U.S. GAAP").  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 May 30, 2015, 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 2014 Form 10-K.

Cash and Cash Equivalents and Restricted Cash

Highly liquid investments with an original maturity of three months or less when purchased and that are readily saleable are considered to be cash and cash equivalents.  Restricted cash represents funds held in escrow and cash balances held by German banks as collateral for certain guarantees of overseas subsidiaries.  Restricted cash classified as current corresponds to funds held in escrow that will be used within one year or guarantees that expire within one year.  The Company had $1,294 of noncurrent restricted cash recorded in Other noncurrent assets as of both May 30, 2015 and November 29, 2014, corresponding to guarantees and escrow agreements that expire longer than one year from the dates of the Consolidated Condensed Balance Sheets.

Inventories

Inventories are valued at the lower of cost or market primarily determined on the first-in, first-out (“FIFO”) method of inventory costing, which approximates current cost. Inventories are summarized as follows:

 
May 30,
2015
 
November 29,
2014
Raw materials
$
107,300

 
$
101,848

Work in process
50,078

 
41,729

Finished products
143,507

 
131,141

 Inventories
$
300,885

 
$
274,718



Page 7

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



Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss by component for the three and six months ended May 30, 2015 are as follows:
 
Pension Benefits
 
Foreign Currency Translation Adjustments
 
Total
Balance at February 28, 2015, net of tax
$
(37,068
)
 
$
(33,027
)
 
$
(70,095
)
Other comprehensive loss before reclassifications and tax
(105
)
 
(5,720
)
 
(5,825
)
   Tax benefit
21

 
—

 
21

Other comprehensive loss before reclassifications, net of tax
(84
)
 
(5,720
)
 
(5,804
)
Reclassifications, before tax
965

(a)
—

 
965

   Tax expense
(356
)
 
—

 
(356
)
Reclassifications, net of tax
609

 
—

 
609

Other comprehensive income (loss), net of tax
525

 
(5,720
)
 
(5,195
)
Balance at May 30, 2015, net of tax
$
(36,543
)
 
$
(38,747
)
 
$
(75,290
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance at November 29, 2014, net of tax
$
(37,667
)
 
$
(16,413
)
 
$
(54,080
)
Other comprehensive loss before reclassifications and tax
(210
)
 
(22,334
)
 
(22,544
)
   Tax benefit
42

 
—

 
42

Other comprehensive loss before reclassifications, net of tax
(168
)
 
(22,334
)
 
(22,502
)
Reclassifications, before tax
1,932

(a)
—

 
1,932

   Tax expense
(640
)
 
—

 
(640
)
Reclassifications, net of tax
1,292

 
—

 
1,292

Other comprehensive income (loss), net of tax
1,124

 
(22,334
)
 
(21,210
)
Balance at May 30, 2015, net of tax
$
(36,543
)
 
$
(38,747
)
 
$
(75,290
)
___________
(a) Includes amortization of prior service cost and net actuarial loss included in net periodic benefit cost (see Note 8) that were reclassified from accumulated other comprehensive loss to selling and administrative expenses.

Derivative Instruments and Hedging Activities

The Company is exposed to various market risks that arise from transactions entered into in the normal course of business, including market risks associated with changes in foreign currency exchange rates and changes in interest rates. The Company may make use of derivative instruments to manage certain such risks, including derivatives designated as accounting hedges and/or those utilized as economic hedges which are not designated as accounting hedges. The Company does not hold or issue derivatives for trading or speculative purposes.

All derivatives are recorded at fair value in the Consolidated Balance Sheets. Each derivative is designated as either a fair value hedge or remains undesignated. Changes in the fair value of derivatives that are designated and effective as fair value hedges are recognized currently in net income. These changes are offset in net income to the extent the hedge was effective by fair value changes related to the risk being hedged on the hedged item. Changes in fair value of undesignated hedges are recognized currently in net income. All ineffective changes in derivative fair values are recognized currently in net income.

The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objective and strategy for undertaking hedge transactions. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, or the underlying hedge transaction is no longer likely to occur, the hedge designation is removed, or the derivative is

Page 8

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


terminated, the hedge accounting discussed above is discontinued. Further information related to derivatives and hedging activities is included in Note 5 of the Notes to Consolidated Condensed Financial Statements.

New Accounting Guidance

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods, and interim periods within that period, beginning after December 15, 2016 (fiscal year 2018 for the Company) and early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company has not yet determined the potential effects of the adoption of ASU 2014-09 on its Consolidated Financial Statements.

In June 2014, the FASB issued ASU 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718, Compensation-Stock Compensation, as it relates to such awards. ASU 2014-12 is effective for annual reporting periods and interim periods within that period, beginning after December 15, 2015 (fiscal year 2017 for the Company). The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.


2.
BUSINESS ACQUISITIONS, INVESTMENTS AND NONCONTROLLING INTERESTS

Business Acquisitions

Filter Resources
On December 17, 2014, the Company acquired 100% of the outstanding shares of Filter Resources, Inc., Filtration, Inc. and Fabrication Specialties, Inc. (collectively, "Filter Resources"). The purchase price for Filter Resources was approximately $21,861, which the Company funded with borrowings under the Company's revolving credit agreement.
Filter Resources has operating facilities located in the Texas gulf coast and Louisiana region, with approximately 75 total employees. The business is engaged in the manufacture and distribution of filtration products for petrochemical, refinery, pipeline and other industrial applications. The operations of Filter Resources have been merged into the Company's PECOFacet group of companies, headquartered in Mineral Wells, Texas. Its results are included as part of the Company's Industrial/Environmental Filtration segment from the date of acquisition.
A preliminary allocation of the purchase price to the assets acquired and liabilities assumed was made based on available information and incorporating management's best estimates. Assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition-date fair values. A contingent liability for a potential earn-out payment to the former owners, based on earnings from certain capital projects, has been recorded at its estimated fair value of $1,282, and is included in Other long-term liabilities in the Consolidated Condensed Balance Sheet. The Company assumed long-term debt of the business of $1,250, which was immediately repaid in connection with the closing. The Company is currently in the process of finalizing the valuations of all assets acquired and liabilities assumed. The Company expects to finalize the purchase price allocation within one year of the purchase date.

Page 9

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


The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition of Filter Resources:
Accounts receivable
$
3,180

Inventories
2,042

Other current assets
118

Property, plant and equipment
574

Goodwill
11,938

Intangible assets
10,880

 
Total assets acquired
28,732

Current liabilities
2,670

Noncurrent liabilities
4,201

 
Net assets acquired
$
21,861

Filter Resources was acquired primarily to expand the Company's access to petrochemical and refinery customers, particularly in the U.S. gulf coast region. Goodwill of $11,938 recorded in connection with the acquisition, which is not deductible for tax purposes, represents the estimated value of such future opportunities. A summary of the intangible assets acquired is shown in the following table:
 
Estimated
Weighted average
Amortization
Identifiable intangible assets
Value
Useful life
Method
Customer relationships
$
10,800

15 years
Straight-line
Trademarks
80

1 year
Straight-line
 
$
10,880

 
 
Net sales and operating profit for Filter Resources for the three and six months ended May 30, 2015 (which, in the case of the six month period ended May 30, 2015, includes the period from December 17, 2014 to May 30, 2015) were as follows:
 
Three Months Ended
 
Six Months Ended
 
May 30, 2015
 
May 30, 2015
Net sales
$
5,134

 
$
9,182

Operating profit
410

 
686

CLARCOR Engine Mobile Solutions
On May 1, 2014, the Company acquired Stanadyne Corporation's diesel fuel filtration business (the “Stanadyne Business”) through the acquisition of the stock of Stanadyne Holdings, Inc. The business, which now operates as “CLARCOR Engine Mobile Solutions,” is a leading supplier of original equipment and replacement fuel filtration products, primarily for heavy-duty diesel engines used in off-road, agricultural and construction applications.
CLARCOR Engine Mobile Solutions has approximately 200 employees and is headquartered in Windsor, Connecticut, with manufacturing operations in Washington, North Carolina. Its results are included as part of the Company’s Engine/Mobile Filtration segment from the date of acquisition. The purchase price paid was approximately $327,719 in cash (cash to Stanadyne Corporation of $327,719, net of $0 cash acquired), which the Company funded with cash on hand, a $315,000 term loan and $10,000 borrowed under the Company’s revolving credit agreement (see Note 7).

An allocation of the purchase price to the assets acquired and liabilities assumed was made based on available information and incorporating management’s best estimates. Assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred. During the three month period ended May 30, 2015, the Company completed the allocation of the purchase price to the assets and liabilities assumed and, as a result, retrospectively adjusted the valuation of certain assets and liabilities with a corresponding adjustment to

Page 10

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


goodwill as of the acquisition date. The retrospective adjustments were approximately $7,378 in the aggregate and primarily relate to updated deferred tax attributes based on the completion of the pre-acquisition tax return filings of the Stanadyne Business.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition of CLARCOR Engine Mobile Solutions:

Accounts receivable
$
19,098

Inventories
7,257

Deferred income taxes
4,445

Property, plant and equipment
10,176

Goodwill
187,611

Intangible assets
146,430

 
Total assets acquired
375,017

Current liabilities
9,105

Other noncurrent liabilities
2,000

  Deferred income taxes
36,193

 
Net assets acquired
$
327,719


The Stanadyne Business was acquired to significantly increase CLARCOR’s presence in the design, manufacture and supply of original equipment diesel fuel filtration products and the related original equipment services aftermarket, while also providing enhanced scale and market presence to support growth for CLARCOR’s other Engine/Mobile Filtration businesses — including the heavy-duty fuel, oil, hydraulic and air filtration products manufactured and marketed by Baldwin Filters — through original equipment customers and services channels. Goodwill of $187,611 recorded in connection with the acquisition, which is not deductible for tax purposes, represents the estimated value of such future opportunities. A summary of the intangible assets acquired is shown in the following table:
 
Estimated
Weighted average
Amortization
Identifiable intangible assets
Value
Useful life
Method
Customer relationships
$
135,250

13 years
Straight-line
Developed technology
11,000

10 years
Straight-line
Trademarks
180

Indefinite
Not amortized
 
$
146,430

 
 

Net sales and operating profit (loss) for CLARCOR Engine Mobile Solutions for the three and six month periods ended May 30, 2015 and May 31, 2014 (which, in the case of the periods ended May 31, 2014, includes the period from May 1, 2014 to May 31, 2014) were as follows:
 
Quarter Ended
 
Six Months Ended
 
May 30, 2015
 
May 31, 2014
 
May 30, 2015
 
May 31, 2014
Net sales
$
25,588

 
$
8,992

 
$
49,660

 
$
8,992

Operating profit (loss)
6,370

 
(1,927
)
 
11,211

 
(1,927
)
CLARCOR Industrial Air
On December 16, 2013, the Company acquired the Air Filtration business of General Electric Company’s (“GE”) Power and Water division through the acquisition of certain assets and the assumption of certain liabilities, as well as the acquisition of the stock of a subsidiary of GE. The business, which now operates as “CLARCOR Industrial Air”, was acquired to significantly increase the Company’s presence in air inlet filtration products for natural gas turbines and to expand the Company’s product offerings, technologies and customer base in industrial air filtration. CLARCOR Industrial Air employs approximately 700 people

Page 11

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


and is headquartered in Overland Park, Kansas, with manufacturing operations in Missouri and the United Kingdom. Its results are included as part of the Company’s Industrial/Environmental Filtration segment from the date of acquisition. The purchase price paid was approximately $260,312 in cash (cash to GE of $263,758, net of $3,446 cash acquired), which the Company funded with cash on hand, a $100,000 term loan and $50,000 of cash borrowed under the Company’s revolving credit agreement (see Note 7).
CLARCOR Industrial Air operates primarily in three markets — gas turbine filtration, industrial air filtration, and specialty membranes. In gas turbine filtration, CLARCOR Industrial Air designs and manufactures high performance inlet filter houses and replacement filter elements for gas turbines used in a wide range of applications, including on-shore power generation plants, on-shore and off-shore oil and gas platforms and pipelines, distributed power generation and commercial and military marine applications. In industrial air filtration, CLARCOR Industrial Air designs and manufactures high performance filter elements for use in a variety of industries, sold to a wide range of customers under various trade names. The specialty membrane business designs and manufactures high performance membranes for apparel and microfiltration.
An allocation of the purchase price to the assets acquired and liabilities assumed was made based on available information and incorporating management’s best estimates. Assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred. The allocation of the purchase price to the assets and liabilities assumed was finalized as of February 28, 2015.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition of CLARCOR Industrial Air:

Accounts receivable
$
34,453

Inventories
41,884

Other current assets
837

Property, plant and equipment
22,903

Goodwill
74,324

Intangible assets
133,020

 
Total assets acquired
307,421

Total liabilities
47,109

 
Net assets acquired
$
260,312


The Company believes the CLARCOR Industrial Air business provides it with a strong platform in the gas turbine filtration market from which to grow, both with respect to first-fit applications as well as the aftermarket, and a broad line of products, in-depth customer knowledge and service capabilities with which to grow in various industrial air filtration markets. Goodwill of $74,324 recorded in connection with the CLARCOR Industrial Air acquisition, which is deductible for tax purposes, represents the estimated value of such future opportunities. A summary of the intangible assets acquired, weighted-average useful lives and amortization methods is shown in the following table:
 
Estimated
Weighted average
Amortization
Identifiable intangible assets
Value
Useful life
Method
Trade names
$
35,100

Indefinite
Not amortized
Customer relationships
77,300

13 years
Straight-line
Developed technology
19,900

13 years
Straight-line
GE Transitional Trademark License
50

Less than 1 Year
Accelerated
Backlog
670

Less than 1 Year
Accelerated
 
$
133,020

 
 

Net sales and operating profit for CLARCOR Industrial Air for the three and six month periods ended May 30, 2015 and May 31, 2014 (which, in the case of the six-month period ended May 31, 2014, includes the period from December 16, 2013 to May 31, 2014) were as follows:

Page 12

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


 
Quarter Ended
 
Six Months Ended
 
May 30, 2015
 
May 31, 2014
 
May 30, 2015
 
May 31, 2014
Net sales
$
58,679

 
$
66,985

 
$
108,231

 
$
112,363

Operating profit
7,065

 
4,820

 
10,902

 
3,772

Pro Forma Results for CLARCOR giving effect to the acquisitions of CLARCOR Engine Mobile Solutions and CLARCOR Industrial Air
The following unaudited pro forma information presents the combined results of operations of CLARCOR, CLARCOR Industrial Air and CLARCOR Engine Mobile Solutions as if both acquisitions had been completed on the first day of fiscal 2013. The pro forma information is presented for information purposes only and does not purport to be indicative of the results of operations or future results that would have been achieved if the acquisitions and related borrowings had taken place at the beginning of fiscal 2013. The pro forma information combines the historical results of CLARCOR with the historical results of CLARCOR Industrial Air and CLARCOR Engine Mobile Solutions for the periods presented.
Prior to acquisition by CLARCOR, the business now operated as CLARCOR Industrial Air was a wholly-owned business of GE’s Power and Water division, and the business now operated as CLARCOR Engine Mobile Solutions was a wholly-owned business of Stanadyne Corporation. As such, neither business was a stand-alone entity for financial reporting purposes. Accordingly, the historical operating results of CLARCOR Industrial Air and CLARCOR Engine Mobile Solutions may not be indicative of the results that might have been achieved, historically or in the future, if CLARCOR Industrial Air and CLARCOR Engine Mobile Solutions had been stand-alone entities.
The unaudited pro forma results for the three-month and six-month periods ended May 31, 2014 include adjustments to amortization charges for acquired intangible assets, depreciation expense, interest expense, and transaction costs incurred, as well as adjustments to cost of sales related to the step-up of inventory to estimated acquisition-date fair values, other income and related tax effects. The unaudited pro forma results do not give effect to any synergies, operating efficiencies or cost savings that may result from these acquisitions.
 
Three Months Ended
 
May 31, 2014
 
As reported
CLARCOR
Engine Mobile Solutions
 
CLARCOR
Industrial Air
 
Pro forma
Net sales
$
386,642

$
19,781

 
$
—

 
$
406,423

Operating profit
51,147

10,209

(a)
1,020

(b)
62,376

Net earnings attributable to CLARCOR
34,552

6,240

 
746

 
41,538

Diluted earnings per share
$
0.68

$
0.12

 
$
0.01

 
$
0.82

 
 
Six Months Ended
 
May 31, 2014
 
As reported
CLARCOR
Engine Mobile Solutions
 
CLARCOR
Industrial Air
 
Pro forma
Net sales
$
699,327

$
46,837

 
$
15,422

 
$
761,586

Operating profit
82,413

17,677

(a)
8,643

(c)
108,733

Net earnings attributable to CLARCOR
58,873

10,485

 
6,426

 
75,784

Diluted earnings per share
$
1.16

$
0.21

 
$
0.13

 
$
1.49


(a)
Includes adjustments to remove transaction costs of $3,035 and cost of sales related to the step-up of inventory to its estimated acquisition-date fair value of $1,368, as such costs were pushed back to the three months ended March 2, 2013

Page 13

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


for pro forma presentation. Also includes adjustments to intangible asset amortization, depreciation expense and interest expense.
(b)
Includes adjustments to cost of sales related to the step-up of inventory to its estimated acquisition-date fair value of $664, as such costs were pushed back to the six months ended June 1, 2013 for pro forma presentation.
(c)
Includes adjustments to remove transaction costs of $2,089 and cost of sales related to the step-up of inventory to its estimated acquisition-date fair value of $4,216, as such costs were pushed back to the period ended March 2, 2013 for pro forma presentation. Also includes adjustments to intangible asset amortization, depreciation expense and interest expense.

Bekaert Business

On December 3, 2013, the Company acquired from NV Bekaert SA 100% of the outstanding shares of Bekaert Advanced Filtration SA (Belgium), 100% of the outstanding shares of PT Bekaert Advanced Filtration (Indonesia) and certain other assets in India, China and the U.S. (collectively, the “Bekaert Business”). The purchase price was approximately $7,297 in cash (net of cash acquired), which the Company paid with cash on hand.
The Bekaert Business has approximately 170 employees, and manufacturing facilities located in Belgium and Indonesia, as well as sales personnel in North and South America. The business is engaged in the manufacture and supply of engineered metal filters and systems used primarily in the polymer and plastics industry. The Bekaert Business was acquired to expand the Company’s technical capabilities, improve the Company's product offerings and help the Company continue to grow in Europe and in Asia. The business has been merged into the Company’s Purolator Advanced Filtration Group, headquartered in Greensboro, North Carolina. Its results are included as part of the Company’s Industrial/Environmental Filtration segment from the date of acquisition.
An allocation of the purchase price to the assets acquired and liabilities assumed was made based on available information and incorporating management’s best estimates. Assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred. The allocation of the purchase price to the assets and liabilities assumed was finalized as of February 28, 2015.
Acquired finite-lived intangible assets of $2,057 were recorded in connection with the purchase. The $2,815 excess of the fair value of the identifiable assets acquired and liabilities assumed over the purchase price was recorded as a bargain purchase gain and is included in Other, net income in the Consolidated Condensed Statements of Earnings. Prior to recording this gain, the Company reassessed its identification of assets acquired and liabilities assumed, including the use of independent valuation experts to assist the Company in appraising the personal property, real property and intangible assets acquired. The Company believes there were several factors that contributed to this transaction resulting in a bargain purchase gain, including the business falling outside of NV Bekaert SA’s core activities and historical losses incurred by the business.
Net sales and operating loss for the Bekaert business for the three and six months ended May 30, 2015 and May 31, 2014 (which in the case of the six month period ended May 31, 2014, includes the period from December 3, 2013 to May 31, 2014)were as follows:
 
Quarter Ended
 
Six Months Ended
 
May 30, 2015
 
May 31, 2014
 
May 30, 2015
 
May 31, 2014
Net sales
$
3,189

 
$
3,526

 
$
5,717

 
$
6,303

Operating loss
(83
)
 
(303
)
 
(519
)
 
(554
)
Investments

The Company owns 30.0% of BioProcessH2O LLC (“BPH”), a Rhode Island-based manufacturer of industrial waste water and water reuse filtration systems.  During the three and six months ended May 30, 2015 and May 31, 2014, respectively, the Company did not make any additional investments. The investment, with a carrying amount of $2,762 and $2,918 at May 30, 2015 and November 29, 2014, 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 and six months ended May 30, 2015 and May 31, 2014, the Company did not receive any dividends from BPH.  

Page 14

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



The Company also owns 14.6% of 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.  During the three and six months ended May 30, 2015 and May 31, 2014 the Company invested an additional $525 and $473, respectively into Algae. The investment, with a carrying amount of $3,802 and $3,277 at May 30, 2015 and November 29, 2014, respectively, included in Other noncurrent assets in the Consolidated Condensed Balance Sheets, 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 may have occurred.  During the three and six months ended May 30, 2015 and May 31, 2014, the Company did not receive any dividends from Algae.

Noncontrolling Interests

Noncontrolling interests changed as follows during the six months ended May 30, 2015 and May 31, 2014:
 
Six Months Ended
 
May 30, 2015
 
May 31, 2014
 
Redeemable
 
Non-Redeemable
 
Redeemable
 
Non-Redeemable
Noncontrolling interests at beginning of period
$
1,587

 
$
1,043

 
$
1,836

 
$
1,025

 
 
 
 
 
 
 
 
Noncontrolling interests (loss) earnings
(19
)
 
123

 
(101
)
 
115

Purchase of Noncontrolling interests
(1,432
)
 
—

 
—

 
—

Foreign currency translation
(136
)
 
(105
)
 
(5
)
 
18

Dividend
—

 
(206
)
 
—

 
(166
)
 
 
 
 
 
 
 
 
Noncontrolling interests at end of period
$
—

 
$
855

 
$
1,730

 
$
992

 
 
 
 
 
 
 
 
 
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 had the option to require the purchase of the remaining 20% ownership share by the Company after December 31, 2012.  During the three month period ended May 30, 2015, the Company exercised its option and acquired the remaining 20% ownership share for approximately $1,239, following which SINFA became a wholly owned subsidiary. The difference between the amount paid and the carrying value of the noncontrolling interest was recorded to Retained earnings in the Consolidated Condensed Balance Sheet.


3.
GOODWILL AND ACQUIRED INTANGIBLE ASSETS

All goodwill is stated on a gross basis, as the Company has not recorded any impairment charges against goodwill. The following table reconciles the activity for goodwill by segment for the six months ended May 30, 2015.  

 
Engine/Mobile
Filtration
 
Industrial/
Environmental
Filtration
 
Packaging
 
Total
Goodwill at beginning of year
$
216,114

 
$
291,058

 
$
—

 
$
507,172

Acquisitions and purchase accounting adjustments
(7,378
)
 
11,938

 
—

 
4,560

Currency translation adjustments
(934
)
 
(2,525
)
 
—

 
(3,459
)
Goodwill at end of period
$
207,802

 
$
300,471

 
$
—

 
$
508,273



Page 15

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


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
May 30, 2015
 
 
 
 
 
 
 
Indefinite Lived Intangibles:
 
 
 
 
 
 
 
Trademarks - indefinite lived
$
783

 
$
75,075

 
$
—

 
$
75,858

 
 
 
 
 
 
 
 
Finite Lived Intangibles:
 
 
 
 
 
 
 
Trademarks, gross - finite lived
$
276

 
$
568

 
$
—

 
$
844

Accumulated amortization
(125
)
 
(389
)
 
—

 
(514
)
Trademarks, net - finite lived
$
151

 
$
179

 
$
—

 
$
330

 
 
 
 
 
 
 
 
Customer relationships, gross
$
139,545

 
$
130,793

 
$
—

 
$
270,338

Accumulated amortization
(13,395
)
 
(34,123
)
 
—

 
(47,518
)
Customer relationships, net
$
126,150

 
$
96,670

 
$
—

 
$
222,820

 
 
 
 
 
 
 
 
Other acquired intangibles, gross
$
11,243

 
$
60,749

 
$
—

 
$
71,992

Accumulated amortization
(1,435
)
 
(26,687
)
 
—

 
(28,122
)
Other acquired intangibles, net
$
9,808

 
$
34,062

 
$
—

 
$
43,870

 
 
 
 
 
 
 
 
Total finite lived intangible assets, net
$
136,109

 
$
130,911

 
$
—

 
$
267,020

 
 
 
 
 
 
 
 
Acquired intangible assets, less accumulated amortization
$
136,892

 
$
205,986

 
$
—

 
$
342,878


The following table summarizes estimated amortization expense.
Fiscal year 2015
$
25,017

Fiscal year 2016
24,786

Fiscal year 2017
24,572

Fiscal year 2018
23,906

Fiscal year 2019
23,690


Amortization expense for the six months ended May 30, 2015 and May 31, 2014 was $12,523 and $7,943, respectively.


4.
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:

Page 16

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



•
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 fair value measurements are shown below:
 
Fair Value Measurements at Reporting Date
 
Total
 
Level 1
 
Level 2
 
Level 3
May 30, 2015
 
 
 
 
 
 
 
Restricted trust, included in Other noncurrent assets
 
 
 
 
 
 
 
Mutual fund investments - equities
$
404

 
$
404

 
$
—

 
$
—

Mutual fund investments - bonds
398

 
398

 
—

 
—

Cash and equivalents
14

 
14

 
—

 
—

Total restricted trust
$
816

 
$
816

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Filter Resources contingent earn-out, included in Other long-term liabilities
$
1,282

 
$
—

 
$
—

 
$
1,282

 
 
 
 
 
 
 
 
Foreign exchange contracts, included in Accrued liabilities
$
398

 
$
—

 
$
398

 
$
—


 
Fair Value Measurements at Reporting Date
 
Total

Level 1

Level 2

Level 3
November 29, 2014
 

 
 

 
 

 
 

Restricted trust, included in Other noncurrent assets
 

 
 

 
 

 
 

Mutual fund investments - equities
$
437

 
$
437

 
$
—

 
$
—

Mutual fund investments - bonds
442

 
442

 
—

 
—

Cash and equivalents
14

 
14

 
—

 
—

Total restricted trust
$
893

 
$
893

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Foreign exchange contracts, included in Prepaid expenses and other current assets
$
362

 
$
—

 
$
362

 
$
—

 
 
 
 
 
 
 
 
Foreign exchange contracts, included in Accrued liabilities
$
367

 
$
—

 
$
367

 
$
—


There were no changes in the fair value determination methods or significant assumptions used in those methods during the six months ended May 30, 2015.  There were no transfers between Level 1 and Level 2 and there were no transfers into or out of Level 3 during the six months ended May 30, 2015. The Company's policy is to recognize transfers on the actual date of transfer. 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 Company is liable for a contingent earn-out established in connection with the acquisition of Filter Resources on December 17, 2014. This earn-out, which is payable to the former owners of Filter Resources, has been recorded at its estimated fair-value of $1,282, and is recorded as an other long-term liability. The contingent liability for the earn-out will continue to be accounted for and measured at fair value until the contingency is settled during fiscal year 2017. The fair value measurement of

Page 17

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


the earn-out payment is based on estimated earnings from certain capital projects, which represent significant inputs not observed in the market and thus represents a Level 3 measurement.

The Company is liable for a contingent earn-out established in connection with the acquisition of TransWeb on December 29, 2010. This earn-out, which is payable to one of the former owners of TransWeb, had an acquisition-date estimated fair value of $1,018, which was recorded as an other long-term liability at that time.  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 earn-out payment is based primarily on 2014 and projected 2015 TransWeb adjusted earnings, which represent significant inputs not observed in the market and thus represents a Level 3 measurement. The contingent consideration payment is revalued to its current fair value at each reporting date. The fair value of the TransWeb contingent earn-out payment was $0 at May 30, 2015 and at November 29, 2014, based on the projected adjusted earnings of TransWeb.

Fair Values of Financial Instruments

The fair values of the Company’s financial instruments, which are cash and cash equivalents, restricted cash, accounts receivable, the restricted trust and accounts payable and accrued liabilities, approximated the carrying values of those financial instruments at both May 30, 2015 and November 29, 2014.  An expected present value technique is used to estimate the fair value of long-term debt, using a model that discounts future principal and interest payments at interest rates available to the Company at the end of the period for similar debt of the same maturity.  Long-term debt had a fair value estimate of $414,235 and $408,208 at May 30, 2015 and November 29, 2014, respectively. The Company's fair value estimate of its long-term debt represents a Level 2 measurement as it 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 May 30, 2015 and November 29, 2014 is $418,027 and $411,563, respectively.

See Note 5 for information related to the fair value of derivative and hedging instruments.

5.
DERIVATIVE INSTRUMENTS AND HEDGING

The Company is exposed to various market risks that arise from transactions entered into in the normal course of business. The Company selectively uses derivative instruments to manage certain such risks, including market risks associated with changes in foreign currency exchange rates and changes in interest rates. The Company does not hold or issue derivatives for trading or speculative purposes. A description of each type of derivative utilized by the Company to manage risk is included below. In addition, refer to Note 4 for information related to the fair value measurements utilized by the Company for each derivative type.

The Company may elect to designate certain derivatives as hedging instruments under the accounting standards for derivatives and hedging. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objective and strategy for undertaking hedge transactions.

All derivatives are recognized on the balance sheet at fair value and classified based on the instrument's maturity date. The total notional amount of derivatives outstanding at May 30, 2015 was $36,782, which consists of derivative instruments to manage foreign exchange risk related to inter-company advances, and derivatives to manage the risk of changes in foreign currency exchange rates — principally the Euro and British pound — on certain firm sales commitments expected to be settled at future dates.

The following table presents the fair values of derivative instruments included within the Consolidated Condensed Balance Sheets at May 30, 2015 and November 29, 2014:


Page 18

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


 
May 30, 2015
 
November 29, 2014
Prepaid expenses and other current assets
 
 
 
Designated as hedging instruments:
 
 
 
Unrecognized firm sales commitments
—

 
248

Total designated
$
—

 
$
248

Not designated as hedging instruments:
 
 
 
Foreign exchange contracts
—

 
362

Total not designated
$
—

 
$
362

Total derivatives
$
—

 
$
610

 
 
 
 
Accrued liabilities
 
 
 
Designated as hedging instruments:
 
 
 
Foreign exchange contracts
$
—

 
$
245

Total designated
$
—

 
$
245

Not designated as hedging instruments:
 
 
 
Foreign exchange contracts
398

 
122

Total not designated
$
398

 
$
122

Total derivatives
$
398

 
$
367



The following table presents the amounts of income (expense) from derivative instruments affecting the Consolidated Condensed Statements of Earnings for the six months ended May 30, 2015 and May 31, 2014:
 
May 30, 2015
 
May 31, 2014
Fair value hedges
 
 
 
Foreign exchange contracts - Selling and administrative expenses
$
19

 
$
—

Unrecognized firm sales commitments - Selling and administrative expenses
(51
)
 
—

Total designated
$
(32
)
 
$
—

 
 
 
 
Not designated as hedges
 
 
 
Foreign exchange contracts - Selling and administrative expenses
$
74

 
$
—

Foreign exchange contracts - Other, net income (expense)
(158
)
 
—

Total not designated
$
(84
)
 
$
—


As is reflected in the table above, the Company did not hold or issue any derivative instruments during the six months ended May 31, 2014.

Fair Value Hedges

The Company is exposed to changes in foreign currency exchange rates on certain unrecognized firm sales commitments expected to be settled at future dates. The Company may use foreign currency forward contracts to manage certain such risks. The Company designates each such contract as a fair value hedge from the date the firm sales commitment and derivative contract are entered into through the date the related sale occurs, at which point the foreign currency forward contract is de-designated as a fair value hedging instrument. All realized and unrealized gains or losses on such foreign currency forward contracts are recognized in income as incurred. Changes in the fair value of the related unrecognized firm sales commitments that arise due to fluctuations in foreign currency exchange rates are also reflected in income and as an asset or liability on the Consolidated Balance Sheets.

The total notional amount of foreign currency contracts designated as fair value hedges outstanding at May 30, 2015 was $0. There were no such fair value hedges entered into during the six months ended May 31, 2014. The cash flows associated with the

Page 19

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


periodic settlement of the Company's fair value hedges are reflected as a component of Cash flows from operating activities in the Consolidated Statements of Cash Flows.

Undesignated Derivative Instruments

The Company is exposed to changes in foreign currency exchange rates on certain inter-company advances. The Company may use foreign currency forward contracts to manage certain such risks. These forward contracts are not designated as hedging instruments under the accounting standards for derivatives and hedging. These undesignated instruments are recorded at fair value as an asset or liability on the Consolidated Balance Sheets and all realized and unrealized gains or losses on such foreign currency forward contracts are recognized in income as incurred.

The total notional amount of such foreign currency contracts not designated as hedging instruments outstanding as of May 30, 2015 was $36,782. Additionally, the total notional amount of foreign currency contracts de-designated as fair value hedges outstanding at May 30, 2015 was $0. There were no such foreign currency contracts during the six months ended May 31, 2014. The cash flows associated with the periodic settlement of the Company's undesignated derivative instruments are reflected as a component of Cash flows from operating activities in the Consolidated Statements of Cash Flows.

Counterparty credit risk

By using derivative instruments to manage certain of its risk exposures, the Company is subject, from time to time, to credit risk and market risk on such derivative instruments. Credit risk arises from the potential failure of the counterparty to perform under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty owes the Company, which creates credit risk for the Company. The Company mitigates this credit risk by entering into transactions with only creditworthy counterparties. Market risk arises from the potential adverse effects on the value of the derivative that result from changes in foreign currency exchange rates or interest rates, depending on the nature of the derivative. The Company mitigates this market risk by establishing and monitoring parameters that limit the types and degrees of market risk that may be undertaken.


6.
ACCRUED LIABILITIES

Accrued liabilities at May 30, 2015 and November 29, 2014 were as follows:
 
May 30,
2015
 
November 29,
2014
Accrued salaries, wages and commissions
$
15,491

 
$
29,621

Compensated absences
10,155

 
9,967

Accrued insurance liabilities
9,757

 
11,358

Warranties
8,595

 
9,405

Customer deposits
28,309

 
23,045

Other accrued liabilities
30,053

 
36,640

Accrued liabilities
$
102,360

 
$
120,036

 
The Company had letters of credit totaling $23,843 and $33,359 as of May 30, 2015 and November 29, 2014, 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.

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.




Page 20

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



Warranties

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:
 
Six Months Ended
 
May 30,
2015
 
May 31,
2014
Warranty accrual at beginning of period
$
9,405

 
$
1,599

Warranty accrual added through business acquisitions
100

 
10,677

Accruals for warranties issued during the period
827

 
1,605

Adjustments related to pre-existing warranties
(508
)
 
(134
)
Settlements made during the period
(1,090
)
 
(3,198
)
Other adjustments, including currency translation
(139
)
 
(1
)
Warranty accrual at end of period
$
8,595

 
$
10,548

     
Warranty accruals added through business acquisitions in the first six months of 2014 relate primarily to the CLARCOR Industrial Air business, whose sales agreements, particularly for air intake filtration systems for heavy-duty gas turbine applications, include product warranties customary for such types of products. Warranty accruals for this business are established for specifically identified warranty issues known to exist on products already sold, and on a non-specific basis based primarily on past experience.


7.
LONG-TERM DEBT

On April 5, 2012, the Company entered into a five-year multicurrency revolving credit agreement which included a revolving credit facility (the “Credit Facility”) with a group of financial institutions. Under the Credit Facility, the Company may borrow up to $150,000 which includes a $10,000 swing line sub-facility, as well as an accordion feature that allows the Company to increase the Credit Facility by a total of up to $100,000, subject to securing additional commitments from existing lenders or new lending institutions. On November 22, 2013, the Company entered into a credit agreement amendment to include a $100,000 term loan facility (the "Term Loan Facility") and on May 1, 2014, the Company entered into a second credit agreement amendment to include an additional $315,000 to the Term Loan Facility, whose maturity date will be the same as the maturity date of the Credit Facility. At the Company's election, loans made under the Credit Facility and Term Loan Facility bear interest at either (1) a defined base rate, which varies with the highest of the defined prime rate, the federal funds rate, or a specified margin over the one-month London Interbank Offered Rate (“LIBOR”), or (2) LIBOR plus an applicable margin. Swing line loans bear interest at the defined base rate plus an applicable margin. Commitment fees and letter of credit fees are also payable under the Credit Facility. Borrowings under the Credit Facility and Term Loan Facility are unsecured, but are guaranteed by substantially all of the Company's material domestic subsidiaries. The credit agreement also contains certain covenants customary to such agreements, including covenants that place limits on our ability to incur additional debt, require us to maintain levels of interest coverage, and restrict certain changes in ownership, as well as customary events of default.

At May 30, 2015, there was $395,000 outstanding on the Term Loan Facility with a weighted average interest rate of approximately 1.18% and there was $15,000 outstanding on the Credit Facility with a weighted average interest rate of approximately 0.98% and a remaining borrowing capacity of $127,479 on the Credit Facility. The Credit Facility includes a $50,000 letter of credit sub-facility, against which $7,521 in letters of credit had been issued at both May 30, 2015 and November 29, 2014.







Page 21

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


8.
PENSION AND OTHER POSTRETIREMENT BENEFITS
 
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 (income) and Company contributions for these plans were as follows:
 
 
Quarter Ended
 
Six Months Ended
 
 
May 30,
2015
 
May 31,
2014
 
May 30,
2015
 
May 31,
2014
Pension Benefits:
 
 
 
 
 
 
 
 
Components of net periodic benefit cost (income):
 
 
 
 
 
 
 
 
Service cost
 
$
534

 
$
498

 
$
1,069

 
$
996

Interest cost
 
1,871

 
1,933

 
3,747

 
3,864

Expected return on plan assets
 
(2,917
)
 
(2,834
)
 
(5,843
)
 
(5,665
)
Amortization of unrecognized:
 
 
 
 
 
 
 
 
Prior service cost
 
(1
)
 
(3
)
 
(2
)
 
(6
)
Net actuarial loss
 
966

 
721

 
1,934

 
1,442

Net periodic benefit cost
 
$
453

 
$
315

 
$
905

 
$
631

 
 
 
 
 
 
 
 
 
Cash contributions
 
$
117

 
$
62

 
$
253

 
$
127

 
 
 
 
 
 
 
 
 
Postretirement Healthcare Benefits:
 
 
 
 
 
 
 
 
Components of net periodic benefit cost (income):
 
 
 
 
 
 
 
 
Interest cost
 
$
2

 
$
2

 
$
4

 
$
4

Amortization of unrecognized:
 
 
 
 
 
 
 
 
Prior service cost
 
(31
)
 
(31
)
 
(62
)
 
(62
)
Net actuarial gain
 
(37
)
 
(37
)
 
(74
)
 
(74
)
Net periodic benefit income
 
$
(66
)
 
$
(66
)
 
$
(132
)
 
$
(132
)
 
 
 
 
 
 
 
 
 
Cash contributions
 
$
15

 
$
16

 
$
30

 
$
32

 
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 the following amounts to its various plans to pay benefits during 2015:

U.S. Qualified Plans
$
—

U.S. Combined Nonqualified Plans
221

Non-U.S. Plan
394

Postretirement Healthcare Benefit Plan
58

Total expected contributions
$
673


During the three and six months ended May 30, 2015, the Company contributed $132 and $283 to its various plans. In addition to the plan assets related to its qualified plans, the Company has a funded balance of $816 and $893 at May 30, 2015 and November 29, 2014, respectively, in a restricted trust for its U.S. combined nonqualified plans (see Note 4).  This trust is included in Other noncurrent assets in the Consolidated Condensed Balance Sheets.


Page 22

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


9.
INCOME TAXES

The following is a reconciliation of the beginning and ending amounts of gross unrecognized tax benefits for uncertain tax positions, including positions which impact only the timing of tax benefits.
 
Six Months Ended
 
May 30,
2015
 
May 31,
2014
Unrecognized tax benefits at beginning of year
$
2,487

 
$
2,155

Additions for current period tax positions
284

 
158

Additions related to acquired tax positions
1,052

 
—

Changes in interest and penalties
99

 
72

Unrecognized tax benefits at end of period
$
3,922

 
$
2,385

 
At May 30, 2015, the amount of unrecognized tax benefit that would impact the effective tax rate, if recognized, was $2,852.  The Company recognizes interest and penalties related to unrecognized benefits in income tax expense. At May 30, 2015, the Company had $338 accrued for the payment of interest and penalties.

The Company believes it is reasonably possible that the total amount of unrecognized tax benefits will decrease by $250 over the next twelve months as a result of expected settlements with taxing authorities or the expiration of the statue of limitations in certain jurisdictions. 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 Company's federal income tax returns for tax years subsequent to fiscal year 2010 are open for examination. With few exceptions, the Company is no longer subject to income tax examinations by state or foreign tax jurisdictions for years prior to 2009.

During the three month period ended May 30, 2015, the Company finalized its allocation of the purchase price to the assets acquired and liabilities assumed with respect to the Stanadyne Business acquisition. Based upon the completed pre-acquisition tax return filings, the Company received and recorded approximately $70,220 of federal net operating loss carryforwards and $2,365 of general business credit carryforwards, which are subject to certain annual restrictions on utilization. These loss and credit carryforwards are subject to expiration beginning in 2031. The Company also received approximately $26,685 of capital loss carryforwards which are subject to a full valuation allowance as the Company does not anticipate that such carryforwards will be utilized prior to their expiration in 2018.


10.
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.  Certain significant 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 reasonably estimable outcomes of the items discussed below and other applicable matters.  Any recorded liabilities were not material to the Company’s financial position, results of operation or liquidity for the periods presented, 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.

TransWeb/3M

On May 21, 2010, 3M Company and 3M Innovative Properties (“3M”) brought a lawsuit against TransWeb, LLC ("TransWeb") in the United States District Court for the District of Minnesota, alleging that certain TransWeb products infringe multiple claims of certain 3M patents. Shortly after receiving service of process in this litigation, TransWeb filed its own complaint against 3M

Page 23

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


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 litigated 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.

During the litigation TransWeb sought judgment that (i) the asserted 3M patents are invalid, the TransWeb products in question do not infringe, and the 3M patents are unenforceable due to inequitable conduct by 3M in obtaining the patents, and (ii) 3M violated U.S. federal antitrust laws under theories of Walker Process fraud and sham litigation. Following a 2012 trial in which a six-member jury unanimously found in TransWeb's favor on all counts other than sham litigation, on April 21, 2014 the U.S. District Court for the District of New Jersey issued a ruling in favor of TransWeb and awarded TransWeb approximately $26,147 in damages.

3M timely exercised its automatic right to appeal the court's judgment to the US Court of Appeals for the Federal Circuit, and the matter is currently under active appeal before such tribunal.

Other

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 Comprehensive Environmental Response, Compensation, and Liability Act (commonly referred to as the federal Superfund statute).  Additionally, the North Carolina Department of Environmental Protection has identified the property on which one of the Company's subsidiaries, CLARCOR Engine Mobile Solutions, LLC, currently operates as having concentrations of certain chemicals in groundwater that are above regulatory action levels.

Although it is not certain what future environmental claims, if any, may be asserted in connection with these known environmental matters, the Company currently believes that its potential liability for known environmental matters is not material and that it has adequately reserved for any probable and reasonably estimable liabilities based on the information available to the Company.  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, the continuing advancement of remediation technology, and the potential imposition of 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 the extent applicable, to reflect the status of a particular matter.

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.


11.
INCENTIVE PLANS AND STOCK-BASED COMPENSATION

On March 25, 2014, the shareholders of CLARCOR approved the 2014 Incentive Plan, which replaced the 2009 Incentive Plan. The 2014 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 6,600,000 shares during a ten-year period that ends in April 2024.  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 M of the Company’s Consolidated Financial Statements included in the 2014 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

Page 24

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


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, however, beginning in 2013 stock-based compensation for the Company's Board of Directors has been in the form of restricted stock, rather than stock options.  All options expire ten years from the date of grant unless otherwise terminated.

The following table summarizes information related to stock options and stock option exercises during the three and six months ended May 30, 2015 and May 31, 2014.

 
 
Quarter Ended
 
Six Months Ended
 
 
May 30,
2015

May 31,
2014
 
May 30,
2015

May 31,
2014
Pre-tax compensation expense
 
$
1,716

 
$
921

 
$
3,564

 
$
2,032

Deferred tax benefits
 
(624
)
 
(328
)
 
(1,296
)
 
(723
)
Excess tax benefits associated with tax deductions over the amount of compensation expense recognized in the consolidated condensed financial statements
 
392

 
88

 
784

 
250

Fair value of stock options on date of grant
 
—

 
96

 
3,196

 
4,650

Total intrinsic value of stock options exercised
 
1,413

 
398

 
3,164

 
1,156

Cash received upon exercise of stock options
 
1,485

 
582

 
4,596

 
1,824

Addition to capital in excess of par value due to exercise of stock options
 
1,831

 
653

 
5,249

 
2,016


The following table summarizes activity for the six months ended May 30, 2015 with respect to stock options granted by the Company and includes options granted under the 1994 Incentive Plan, the 2004 Incentive Plan, the 2009 Incentive Plan and the 2014 Incentive Plan.

 
Options Granted
Under Incentive
Plans
 
Weighted
Average
Exercise Price
Outstanding at beginning of year
2,310,720
 
$
45.71

Granted
311,500
 
$
63.22

Exercised
(120,922)
 
$
39.61

Surrendered
(3,263)
 
$
42.93

Outstanding at end of period
2,498,035
 
$
48.19

 
 
 
 
Exercisable at end of period
1,616,304
 
$
42.90


 At May 30, 2015, there was $4,364 of unrecognized compensation cost related to option awards which the Company expects to recognize over a weighted-average period of 2.28 years.

The following table summarizes information about the Company’s outstanding and exercisable options at May 30, 2015.


Page 25

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


 
 
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
$25.31 - $28.79
 
47,325
 
$
26.28

 
$
1,672

 
2.92
 
47,325

 
$
26.28

 
$
1,672

 
2.92

$31.96 - $36.48
 
486,059
 
$
33.66

 
13,584

 
3.18
 
486,059

 
$
33.66

 
13,584

 
3.18

$42.86 - $49.91
 
1,216,251
 
$
46.24

 
18,697

 
6.68
 
968,570

 
$
46.16

 
14,967

 
6.47

$55.01 - $61.57
 
436,900
 
$
61.46

 
66

 
8.55
 
114,350

 
$
61.49

 
14

 
8.55

$63.22
 
311,500
 
$
63.22

 
—

 
9.63
 
—

 
$
—

 
—

 
—

 
 
2,498,035
 
$
48.19

 
$
34,019

 
6.62
 
1,616,304

 
$
42.90

 
$
30,237

 
5.52


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.
 
 
Six Months Ended
 
 
May 30,
2015
 
May 31,
2014
Weighted average fair value per option at the date of grant for options granted
 
$
10.26

 
$
11.50

Risk-free interest rate
 
1.31
%
 
1.55
%
Expected dividend yield
 
1.27
%
 
1.10
%
Expected volatility factor
 
19.50
%
 
21.38
%
Expected option term in years
 
5.0

 
5.0


The expected option term in years selected for options granted during each period 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 7,997 and 19,457 vested and deferred shares at May 30, 2015 and November 29, 2014, respectively.

The following table summarizes information related to restricted stock unit awards during the three and six months ended May 30, 2015 and May 31, 2014.
 
 
Quarter Ended

Six Months Ended
 
 
May 30,
2015

May 31,
2014

May 30,
2015

May 31,
2014
Pre-tax compensation expense
 
$
788

 
$
338

 
$
1,623

 
$
742

Deferred tax benefits
 
(286
)
 
(120
)
 
(590
)
 
(264
)
Excess tax benefits associated with tax deductions over the amount of compensation expense recognized in the consolidated condensed financial statements
 
3

 
—

 
211

 
101

Fair value of restricted stock unit awards on date of grant
 
3

 
58

 
3,183

 
1,524

Fair value of restricted stock unit awards vested
 
—

 
—

 
979

 
765


Page 26

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



The following table summarizes activity for the six months ended May 30, 2015 with respect to the restricted stock unit awards.
 
Units
 
Weighted
Average
Grant Date
Fair Value
Nonvested at beginning of year
51,012
 
$
53.12

Granted
50,345
 
$
63.23

Vested
(19,223)
 
$
50.91

Nonvested at end of period
82,134
 
$
59.83

 
As of May 30, 2015, there was $1,687 of total unrecognized compensation cost related to restricted stock unit awards which the Company expects to recognize over a weighted-average period of 3.10 years.

Restricted Stock Unit Awards with Performance Conditions

Beginning in 2015, performance awards were issued to officers and certain key employees as an incentive to achieve revenue growth and operating profit margin goals over a three-year period. The awards are in the form of restricted stock units, which vest at the end of the three-year period if the specified sales growth and operating margin goals are achieved. These restricted stock unit awards are considered nonvested share awards.  The restricted stock unit awards require no payment from the employee.  Fair value of the restricted stock units is determined based on the market price of the stock on the grant date. Compensation cost is recorded equally over the three-year period in which the stock units are earned, based on a periodic determination of the probable performance outcome.  There were no vested shares at May 30, 2015 and November 29, 2014, respectively.

The following table summarizes information related to restricted stock unit awards with performance conditions during the three and six months ended May 30, 2015 and May 31, 2014.
 
 
Quarter Ended

Six Months Ended
 
 
May 30,
2015

May 31,
2014

May 30,
2015

May 31,
2014
Pre-tax compensation expense
 
$
463

 
$
—

 
$
927

 
$
—

Deferred tax benefits
 
(168
)
 
—

 
(337
)
 
—

Excess tax benefits associated with tax deductions over the amount of compensation expense recognized in the consolidated condensed financial statements
 
—

 
—

 
—

 
—

Fair value of restricted stock unit awards on date of grant
 
—

 
—

 
5,857

 
—

Fair value of restricted stock unit awards vested
 
—

 
—

 
—

 
—


The following table summarizes activity for the three months ended May 30, 2015 with respect to the restricted stock unit awards with performance conditions.
 
Units
 
Weighted
Average
Grant Date
Fair Value
Nonvested at beginning of year
—

 
$
—

Granted
92,650

 
$
63.22

Vested
—

 
$
—

Nonvested at end of period
92,650

 
$
63.22

 

Page 27

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


As of May 30, 2015, there was $4,637 of total unrecognized compensation cost related to restricted stock unit awards with performance conditions, which the Company expects to recognize over a weighted-average period of 2.50 years.

Directors' Restricted Stock Compensation

The incentive plans provide for grants of shares of common stock to all non-employee directors for annual incentive awards, and for grants of shares of common stock to all non-employee directors equal to a one-year annual retainer in lieu of cash at the directors’ option. The directors’ rights to the shares vest immediately on the date of grant; however, shares issued on annual retainer fees cannot be sold for a six-month period from the date of grant.  The following table summarizes information related to directors' stock compensation during the three and six months ended May 30, 2015 and May 31, 2014, respectively.

 
 
Quarter Ended
 
Six Months Ended
 
 
May 30,
2015
 
May 31,
2014
 
May 30,
2015
 
May 31,
2014
Pre-tax compensation expense
 
$
880

 
$
880

 
$
880

 
$
880

Shares of Company common stock issued under the plans
 
13,352

 
15,400

 
13,352

 
15,400



12.
EARNINGS PER SHARE AND STOCK REPURCHASE ACTIVITY

The Company calculates basic earnings per share by dividing net earnings by the weighted average number of shares outstanding.  Diluted earnings per share reflects the impact of outstanding stock options, restricted stock and other stock-based arrangements.  The FASB has issued guidance requiring unvested share-based payment awards containing nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) be considered participating securities and included in the computation of earnings per share pursuant to the two-class method.  The Company’s unvested restricted stock unit awards discussed in Note 11 qualify as participating securities under this guidance.  However, the unvested restricted stock unit awards do not materially impact the calculation of basic or diluted earnings per share; therefore, the Company does not present the two-class method computation.  The following table provides a reconciliation of the numerators and denominators utilized in the calculation of basic and diluted earnings per share.
 
 
Quarter Ended
 
Six Months Ended
 
 
May 30,
2015
 
May 31,
2014
 
May 30,
2015
 
May 31,
2014
Weighted average number of shares outstanding - Basic
 
50,209,215

 
50,513,588

 
50,232,565

 
50,488,651

Dilutive effect of stock-based arrangements
 
581,983

 
431,502

 
559,275

 
446,117

Weighted average number of shares outstanding - Diluted
 
50,791,198

 
50,945,090

 
50,791,840

 
50,934,768

 
 
 
 
 
 
 
 
 
Net earnings attributable to CLARCOR Inc.
 
$
38,497

 
$
34,552

 
$
65,206

 
$
58,873

 
 
 
 
 
 
 
 
 
Net earnings per share attributable to CLARCOR Inc. - Basic
 
$
0.77

 
$
0.68

 
$
1.30

 
$
1.17

Net earnings per share attributable to CLARCOR Inc. - Diluted
 
$
0.76

 
$
0.68

 
$
1.28

 
$
1.16

 
 The following table provides additional information regarding the calculation of earnings per share and stock repurchase activity.

Page 28

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


 
 
Quarter Ended
 
Six Months Ended
 
 
May 30,
2015
 
May 31,
2014
 
May 30,
2015
 
May 31,
2014
Number of antidilutive options with exercise prices greater than the average market price excluded from the computation of dilutive earnings per share
 
—

 
450,200

 
—

 
445,825

Common stock repurchased and retired pursuant to the Company's stock repurchase program
 
$
8,161

 
$
—

 
$
16,110

 
$
—

Number of shares repurchased and retired pursuant to the Company's stock repurchase program
 
126,000

 
—

 
248,000

 
—

 
At May 30, 2015, there remained $192,350 authorized for future purchases under the Company’s $250,000 stock repurchase program that was approved by the Company's Board of Directors on June 25, 2013.


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.

Segment information is summarized as follows:

 
 
Quarter Ended
 
Six Months Ended
 
 
May 30,
2015
 
May 31,
2014
 
May 30,
2015
 
May 31,
2014
Net sales:
 
 
 
 
 
 
 
 
Engine/Mobile Filtration
 
$
161,290

 
$
148,398

 
$
305,748

 
$
270,895

Industrial/Environmental Filtration
 
218,676

 
219,592

 
409,592

 
394,455

Packaging
 
19,833

 
18,652

 
35,582

 
33,977

 
 
$
399,799

 
$
386,642

 
$
750,922

 
$
699,327

 
 
 
 
 
 
 
 
 
Operating profit:
 
 
 
 
 
 

 
 

Engine/Mobile Filtration
 
$
30,564

 
$
26,972

 
$
55,310

 
$
49,846

Industrial/Environmental Filtration
 
26,604

 
23,005

 
40,612

 
31,151

Packaging
 
1,775

 
1,170

 
2,214

 
1,416

 
 
58,943

 
51,147

 
98,136

 
82,413

Other income (expense), net
 
(1,888
)
 
(400
)
 
(2,934
)
 
3,278

Earnings before income taxes
 
$
57,055

 
$
50,747

 
$
95,202

 
$
85,691



Page 29

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


 
May 30,
2015
 
November 29,
2014
Identifiable assets:
 
 
 
Engine/Mobile Filtration
$
790,360

 
$
781,204

Industrial/Environmental Filtration
1,029,298

 
1,022,996

Packaging
41,544

 
41,817

Corporate
41,770

 
42,752

 
$
1,902,972

 
$
1,888,769




Page 30




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 accompanying notes and with the audited Consolidated Financial Statements and accompanying notes included in the 2014 Form 10-K.  Except as otherwise set forth herein, references to particular years or quarters refer to our applicable fiscal year or quarter.  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 thousands, except per share data)

 
 
Second Quarter
 
First Six Months
 
 
 
 
 
 
Change
 
 
 
 
 
Change
 
 
 
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
 
Net sales
 
$
399,799

 
$
386,642

 
$
13,157

 
3
 %

$
750,922

 
$
699,327

 
$
51,595

 
7
 %
 
Cost of sales
 
266,189

 
261,272

 
4,917

 
2
 %
 
504,337

 
477,370

 
26,967

 
6
 %
 
Gross profit
 
133,610

 
125,370

 
8,240

 
7
 %
 
246,585

 
221,957

 
24,628

 
11
 %
 
Selling and administrative expenses
 
74,667

 
74,223

 
444

 
1
 %
 
148,449

 
139,544

 
8,905

 
6
 %
 
Operating profit
 
58,943

 
51,147

 
7,796

 
15
 %
 
$
98,136

 
$
82,413

 
$
15,723

 
19
 %
 
Other income (expense)
 
(1,888
)
 
(400
)
 
(1,488
)
 
 

 
$
(2,934
)
 
$
3,278

 
$
(6,212
)
 


 
Provision for income taxes
 
18,482

 
16,201

 
2,281

 
14
 %
 
$
29,892

 
$
26,804

 
$
3,088

 
12
 %
 
Net earnings attributable to CLARCOR
 
38,497

 
34,552

 
3,945

 
11
 %
 
$
65,206

 
$
58,873

 
$
6,333

 
11
 %
 
Weighted average diluted shares
 
50,791

 
50,945

 
(154
)
 
—
 %
 
50,792

 
50,935

 
(143
)
 
—
 %
 
Diluted earnings per share attributable to CLARCOR
 
$
0.76

 
$
0.68

 
$
0.08

 
12
 %
 
$
1.28

 
$
1.16

 
$
0.12

 
10
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentages:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
33.4
%
 
32.4
%
 
 
 
1.0

pt
32.8
%
 
31.7
%
 
 
 
1.1

pt
Selling and administrative percentage
 
18.7
%
 
19.2
%
 
 
 
(0.5
)
pt
19.8
%
 
20.0
%
 
 
 
(0.2
)
pt
Operating margin
 
14.7
%
 
13.2
%
 
 
 
1.5

pt
13.1
%
 
11.8
%
 
 
 
1.3

pt
Effective tax rate
 
32.4
%
 
31.9
%
 
 
 
0.5

pt
31.4
%
 
31.3
%
 
 
 
0.1

pt
Net earnings margin
 
9.6
%
 
8.9
%
 
 
 
0.7

pt
8.7
%
 
8.4
%
 
 
 
0.3

pt

Page 31




Second Quarter

Net Sales

Net sales increased $13.2 million, or 3%, in the second quarter of 2015 from the second quarter of 2014. Estimated components of this 3% increase in net sales are as follows:
Business acquisitions
 
6
 %
Organic volume
 
1
 %
Pricing
 
—
 %
Foreign exchange
 
(4
)%
 
 
3
 %

The increase in net sales in the second quarter of 2015 from the second quarter of 2014 was driven primarily by the following factors:

•
Increased net sales of $18.0 million due to the May 2014 acquisition of the Stanadyne Business (now operated as CLARCOR Engine Mobile Solutions), which is included in the Company's Engine/Mobile Filtration segment from the date of acquisition. Net sales for this business in the second quarter decreased approximately 11% in comparison to the prior year period, including the portion of that prior year period during which the business was owned by Stanadyne Corporation, primarily reflecting declines in sales of first-fit fuel filter assemblies and aftermarket filter elements due to lower demand from off-highway original equipment manufacturers and dealers.

•
Increased net sales of $5.1 million due to the December 2014 acquisition of Filter Resources, which is included in the Company's Industrial/Environmental Filtration segment from the date of acquisition.

•
Excluding net sales arising from the acquisition of Filter Resources, net sales volume increased $2.6 million, or 1%, at our Industrial/Environmental Filtration segment. This net sales growth resulted from a $9.3 million, or 7%, increase in sales within the U.S., partly offset by a $6.7 million, or 9%, decrease in foreign net sales, excluding the impact of changes in foreign currency exchange rates. The 7% increase in sales volume within the U.S. resulted primarily from increased sales of natural gas filtration vessels and aftermarket elements, as well as increased sales of industrial air filtration products and HVAC air filters. The 9% decrease in foreign net sales primarily resulted from lower sales of gas turbine air intake filtration systems.

•
Excluding net sales arising from the acquisition of the Stanadyne Business, net sales volume decreased $0.1 million, or less than 1%, at our Engine/Mobile Filtration segment. This net sales decrease resulted from a $4.6 million, or 9%, decrease in foreign net sales excluding the impact of changes in foreign currency exchange rates, partly offset by a $4.5 million, or 5%, increase in sales within the U.S. The 9% decrease in foreign net sales volume primarily resulted from lower export sales of heavy-duty engine filters to customers in Southeast Asia, South America and the Middle East, as well as an approximately 24% decline in heavy-duty engine filter sales in China due to slowing macroeconomic activity in China and lower end-market diesel engine sales. The 5% increase in sales volume within the U.S. resulted primarily from a 22% increase in sales of heavy-duty engine filters to the U.S. aftermarket, which included sales to a significant new customer.

•
Net sales at our Packaging segment increased $1.1 million, or 6%, due primarily to higher sales of smokeless tobacco packaging products, spice containers and decorated flat sheet metal products.

•
Net sales in the second quarter of 2015 compared to the second quarter of 2014 also reflect a $13.1 million reduction due to changes in foreign currency exchange rates, primarily reflecting strengthening of the U.S. dollar against the Euro, British Pound and most other foreign currencies with respect to which our foreign income and cash flows are derived.

Cost of Sales

Cost of sales increased $4.9 million, or 2%, in the second quarter of 2015 from the second quarter of 2014. This 2% increase in cost of sales was less than the 3% increase in net sales. As a result, our gross margin increased to 33.4% in the second quarter of 2015 from 32.4% in the second quarter of 2014. This 1.0 percentage point increase in gross margin included a 0.5 percentage

Page 32



point increase due to the impact of $2.2 million of increased cost of sales in the second quarter of 2014 resulting from the step-up of inventory values to reflect their estimated fair values as of the respective dates of acquisition of the GE Air Filtration business and the Stanadyne Business, which did not recur in the second quarter of 2015. Gross margin was also favorably impacted in the second quarter of 2015 by approximately 0.3 percentage points due to favorable sales mix from the fiscal 2014 acquisition of the Stanadyne Business, and by 0.3 percentage points due to lower material costs, resulting primarily from our ongoing cost reduction and continuous improvement initiatives across each of our businesses. These favorable effects were partly offset by an approximately 0.1 percentage point decrease in gross margin due to lower fixed cost leverage and unfavorable sales mix at certain of our businesses.

Selling and Administrative Expenses

Selling and administrative expenses increased $0.4 million, or 1%, in the second quarter of 2015 from the second quarter of 2014. This increase was primarily the result of $3.7 million of increased operating costs (including $1.9 million of increased intangible asset amortization) related to the May 2014 acquisition of the Stanadyne Business, reflecting our ownership of this business for the full three month period ended May 30, 2015 versus only one month of ownership in the three month period ended May 31, 2014. Other selling and administrative expense increases in the second quarter of 2015 versus the comparable prior year period include $1.7 million of increased costs related to stock-based compensation (including the impact of accelerated vesting of awards granted to retirement-eligible employees), $1.1 million of increased research and development expenses, $1.1 million of other increased employee costs (including headcount related to strategic growth initiatives) and $0.4 million of other net increased costs. These increases were partly offset by a $4.2 million decrease resulting from legal, investment advisory and other professional services costs incurred in the second quarter of 2014 related to the acquisitions of the Stanadyne Business and the GE Air Filtration business, which did not recur in 2015. Lower selling and administrative expenses in the second quarter of 2015 versus the comparable prior year period also reflected $1.8 million of decreased costs resulting from a gain on the sale of an administrative facility in the second quarter of 2015, as well as $1.7 million of decreased compensation expense related to our company-wide profit sharing program. Since selling and administrative expenses increased 1% while net sales increased 3%, our selling and administrative expenses as a percentage of net sales decreased to 18.7% in the second quarter of 2015 from 19.2% in last year's second quarter.

First Six Months

Net Sales

Net sales increased $51.6 million, or 7%, in the first six months of 2015 from the first six months of 2014. Estimated components of this 7% increase in net sales are as follows:
Business acquisitions
 
7
 %
Organic volume
 
3
 %
Pricing
 
—
 %
Foreign exchange
 
(3
)%
 
 
7
 %

The increase in net sales in the first six months of 2015 from the first six months of 2014 was driven primarily by the following factors:

•
Increased net sales of $42.1 million due to the May 2014 acquisition of the Stanadyne Business (now operated as CLARCOR Engine Mobile Solutions), which is included in the Company's Engine/Mobile Filtration segment from the date of acquisition. Net sales for this business in the first six months of 2014 decreased approximately 11% versus the comparable prior year period, including the portion of that prior year period during which the business was owned by Stanadyne Corporation. This decrease primarily reflects lower sales of first-fit fuel filter assemblies and aftermarket filter elements, due to decreased demand from off-highway original equipment manufacturers and dealers.

•
Increased net sales of $9.2 million due to the December 2014 acquisition of Filter Resources, which is included in the Company's Industrial/Environmental Filtration segment from the date of acquisition.

•
Excluding net sales arising from the acquisition of Filter Resources, net sales increased $19.2 million, or 5%, at our Industrial/Environmental Filtration segment. This net sales growth resulted from a $19.1 million, or 7%, increase in sales within the U.S., and a $0.1 million, or less than 1%, increase in foreign net sales, excluding the impact of changes in

Page 33



foreign currency exchange rates. The 7% increase in sales volume within the U.S. resulted primarily from increased sales of natural gas filtration vessels and aftermarket elements, as well as increased sales of dust collection and other industrial air filtration products. The change in foreign net sales reflects increased sales of natural gas filtration vessels and aftermarket elements and increased sales of industrial air filtration products, offset by lower sales of gas turbine air intake filtration systems.

•
Excluding net sales arising from the acquisition of the Stanadyne Business, net sales declined $0.9 million, or less than 1%, at our Engine/Mobile Filtration segment. This net sales decrease resulted from a $10.4 million, or 11%, decrease in foreign net sales excluding the impact of changes in foreign currency exchange rates, partly offset by a $9.5 million, or 5%, increase in sales within the U.S. The 11% decrease in foreign net sales volume in this segment primarily resulted from lower export sales of heavy-duty engine filters to customers in Southeast Asia, South America and the Middle East, as well as an approximately 25% decline in sales of heavy-duty engine filters in China, reflecting lower demand from original equipment manufacturers. The 5% increase in sales volume within the U.S. resulted primarily from a 17% increase in sales of heavy-duty engine filters to the U.S. aftermarket, which includes sales to a significant new customer. This growth was partly offset by lower sales of heavy-duty engine filters to filtration companies and to original equipment dealers, as well as decreased sales of automotive filtration products.

•
Net sales at our Packaging segment increased $1.6 million, or 5%, due primarily to higher sales of smokeless tobacco packaging products and spice containers.

•
Net sales in the first six months of 2015 compared to the first six months of 2014 also reflect a $20.9 million reduction due to changes in foreign currency exchange rates, primarily reflecting strengthening of the U.S. dollar relative to the Euro, British Pound and most other foreign currencies where our foreign income and cash flows are derived.


Cost of Sales

Cost of sales increased $27.0 million, or 6%, in the first six months of 2015 from the first six months of 2014. This 6% increase in cost of sales was less than the 7% increase in net sales. As a result, our gross margin increased to 32.8% in the first six months of 2015 from 31.7% in the first six months of 2014. This 1.1 percentage point increase in gross margin includes a 0.8 percentage point increase due to the impact of $5.8 million of increased cost of sales in the first six months of 2014 resulting from the step-up of inventory values to reflect their estimated fair values as of the respective dates of acquisition of the GE Air Filtration business and the Stanadyne Business, which did not recur in the first six months of 2015. Gross margin was also favorably impacted in the first six months of 2015 by approximately 0.5 percentage points due to the favorable impact on sales mix from the fiscal 2014 acquisition of the Stanadyne Business and by 0.2 percentage points from increases in the selling prices of our products. These favorable effects were partly offset by a 0.3 percentage point decrease in gross margin due to lower fixed cost leverage and unfavorable sales mix at certain of our businesses, and by a 0.1 percentage point decrease in gross margin resulting from costs related to the start-up of production and support for a significant new customer.

Selling and Administrative Expenses

Selling and administrative expenses increased $8.9 million, or 6%, in the first six months of 2015 from the first six months of 2014. This increase was primarily the result of $9.3 million of increased operating costs (including $4.8 million of increased intangible asset amortization) related to the May 2014 acquisition of the Stanadyne Business, reflecting our ownership of this business for the entire six month period ended May 30, 2015 in comparison to only one month of ownership in the six month period ended May 31, 2014. Other selling and administrative expense increases in the first six months of 2015 versus the comparable prior year period include $3.3 million of increased costs related to stock-based compensation (including the impact of accelerated vesting of awards granted to retirement-eligible employees), $1.9 million of increased research and development expenses, and $3.5 million of other increased employee costs (including new headcount related to strategic growth initiatives). These increases were partly offset by a $7.3 million decrease resulting from legal, investment advisory and other professional services costs incurred in the first six months of 2014 related to the acquisitions of the Stanadyne Business and the GE Air Filtration business, which did not recur in 2015. Selling and administrative expenses in the first six months of 2015 versus the comparable prior year period also reflect $1.9 million of decreased costs due to a gain realized in the second quarter of 2015 resulting from the sale of an administrative facility, as well as $1.7 million of decreased compensation expense related to our company-wide profit sharing program. Since selling and administrative expenses increased 6% while net sales increased 7%, our selling and administrative expenses as a percentage of net sales decreased to 19.8% in the first six months of 2015 from 20.0% in the first six months of 2014.



Page 34



Other Items

Other significant items impacting the comparison between the periods presented are as follows:

•
Significant Acquisitions

On December 16, 2013, the Company acquired the GE Air Filtration business, which is now operated as CLARCOR Industrial Air. The impact of including CLARCOR Industrial Air's results, which are reported within our Industrial/Environmental Filtration segment, from the date of acquisition, on our net sales and operating profit in the second quarter and first six months of 2015 compared to the second quarter and first six months of 2014 was as follows:
 
 
Second Quarter
 
First Six Months
(Dollars in thousands)
 
2015
2014
Change
 
2015
2014
Change
Net sales
 
$
58,679

$
66,985

$
(8,306
)
 
$
108,231

$
112,363

$
(4,132
)
Operating profit
 
7,065

4,820

2,245

 
10,902

3,772

7,130

  
Net sales and operating profit for CLARCOR Industrial Air in the first six months of fiscal 2014 reflect results from December 16, 2013, the date of acquisition, through May 31, 2014. Operating profit for the second quarter and first six months of 2014 included approximately $0.6 million and $4.2 million, respectively, of cost of sales related to the recording of inventory acquired in the transaction at estimated acquisition date fair values, as well as approximately $1.1 million and $4.3 million, respectively, of selling and administrative expenses related to the acquisition execution and integration. These costs did not recur in 2015.

On May 1, 2014 the Company acquired Stanadyne Corporation's diesel fuel filtration business, which is now operated as CLARCOR Engine Mobile Solutions. The impact of including CLARCOR Engine Mobile Solutions' results, which are reported within our Engine/Mobile Filtration segment, from the date of acquisition, on our net sales and operating profit in the second quarter and first six months of 2015 compared with the second quarter and first six months of 2014 was as follows:

 
 
Second Quarter
 
First Six Months
(Dollars in thousands)
 
2015
2014
Change
 
2015
2014
Change
Net sales
 
$
25,558

$
8,992

$
16,566

 
$
49,660

$
8,992

$
40,668

Operating profit (loss)
 
6,370

(1,927
)
8,297

 
11,211

(1,927
)
13,138


Net sales and operating profit for CLARCOR Engine Mobile Solutions in the second quarter and first six months of fiscal 2014 reflect results from May 1, 2014, the date of acquisition, through May 31, 2014. Operating profit for the second quarter and first six months of 2014 included approximately $1.4 million of cost of sales related to the recording of inventory acquired in the transaction at estimated acquisition date fair values, as well as approximately $3.0 million of selling and administrative expenses related to acquisition execution. These costs did not recur in 2015.

•
Foreign Exchange

The average exchange rates for foreign currencies versus the U.S. dollar unfavorably impacted our 2015 translated U.S. dollar value of net sales and operating profit compared to the same periods in 2014 as follows:
(Dollars in thousands)
 
Second Quarter
 
First Six Months
Net sales
 
$
(13,055
)
 
$
(20,875
)
Operating profit (loss)
 
(1,092
)
 
(2,014
)

•
Other income (expense)

Interest expense

We recognized net interest expense in other income (expense) as follows:

Page 35



(Dollars in thousands)
 
Second Quarter
 
First Six Months
2015
 
$
(1,466
)
 
$
(2,396
)
2014
 
(574
)
 
(867
)

Net interest expense primarily reflects $1.3 million of interest expense in the second quarter of 2015 and $2.4 million of interest expense in the first six months of 2015, respectively, related to borrowings on the Term Loan Facility and on the Credit Facility, which borrowings were undertaken to fund a portion of the cost of our acquisitions of the GE Air Filtration Business and the Stanadyne Business in 2014. At the end of the second quarter of 2015, we had $395.0 million outstanding on the Term Loan Facility -- including $315.0 million outstanding in connection with the Stanadyne Business acquisition and $80.0 million outstanding in connection with the GE Air Filtration acquisition -- and we had $15.0 million outstanding on the Credit Facility.

Foreign currency gains and (losses)

We recognized foreign currency gains (losses) in other income (expense) as follows:
(Dollars in thousands)
 
Second Quarter
 
First Six Months
2015
 
$
(300
)
 
$
(452
)
2014
 
140

 
1,098


Foreign currency losses in the second quarter and first six months of 2015 primarily reflect the translation of cash accounts at certain foreign subsidiaries denominated in currencies other than their functional currencies. Foreign currency gains in the second quarter and first six months of 2014 primarily reflect the translation of inter-company loans -- in cases where such loans are expected to be settled in cash at some point in the future -- at certain foreign subsidiaries denominated in currencies other than their functional currencies.

Other income (expense)

There was no significant other income (expense) in the second quarter or first six months of 2015.

Other income of approximately $3.3 million in the first six months of 2014 primarily reflected a $2.8 million bargain purchase gain that resulted from the Company's acquisition of the Bekaert Business in the first quarter of 2014. As the Company maintains a permanent reinvestment strategy for all foreign operations, this gain was not subject to tax.

•
Provisions for income taxes

Our effective tax rate increased 0.5 percentage points to 32.4% in the second quarter of 2015 from 31.9% in the second quarter of 2014, primarily due to a decrease in foreign earnings in the current year, which are generally subject to lower statutory tax rates.

Our effective tax rate increased 0.1 percentage points to 31.4% in the first six months of 2015 from 31.3% in the first six months of 2014. Our effective tax rate in the first six months of 2014 reflected a 1.1 percentage point favorable impact resulting from a $2.8 million bargain purchase gain recognized in the first quarter of 2014 which was not subject to tax, which did not recur in the first six months of 2015. This impact was partly offset by a 0.8 percentage point favorable impact on our effective tax rate in the first six months of 2015 related to the extension of the research and development tax credit in December 2014.

•
Shares outstanding

Average diluted shares outstanding decreased by approximately 0.1 million shares in the second quarter and first six months of 2015 from the comparable prior year periods of 2014, as our repurchases of common stock offset the amount of incremental dilutive shares related to stock option exercises and the issuance of stock options.




Page 36



SEGMENT ANALYSIS 

 
 
Second Quarter
 
First Six Months
(Dollars in thousands)
 
2015
 
%
Total
 
2014
 
%
Total
 
2015
 
%
Total
 
2014
 
%
Total
Net sales:
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Engine/Mobile Filtration
 
$
161,290

 
40
%
 
$
148,398

 
38
%
 
$
305,748

 
41
%
 
$
270,895

 
39
%
Industrial/Environmental Filtration
 
218,676

 
55
%
 
219,592

 
57
%
 
409,592

 
55
%
 
394,455

 
56
%
Packaging
 
19,833

 
5
%
 
18,652

 
5
%
 
35,582

 
4
%
 
33,977

 
5
%
 
 
$
399,799

 
100
%
 
$
386,642

 
100
%
 
$
750,922

 
100
%
 
$
699,327

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

Engine/Mobile Filtration
 
$
56,668

 
42
%
 
$
50,735

 
40
%
 
$
107,068

 
43
%
 
$
91,709

 
41
%
Industrial/Environmental Filtration
 
73,053

 
55
%
 
71,462

 
57
%
 
133,301

 
54
%
 
124,983

 
56
%
Packaging
 
3,889

 
3
%
 
3,173

 
3
%
 
6,216

 
3
%
 
5,265

 
3
%
 
 
$
133,610

 
100
%
 
$
125,370

 
100
%
 
$
246,585

 
100
%
 
$
221,957

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit:
 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

Engine/Mobile Filtration
 
$
30,564

 
52
%
 
$
26,972

 
53
%
 
$
55,310

 
56
%
 
$
49,846

 
60
%
Industrial/Environmental Filtration
 
26,604

 
45
%
 
23,005

 
45
%
 
40,612

 
41
%
 
31,151

 
38
%
Packaging
 
1,775

 
3
%
 
1,170

 
2
%
 
2,214

 
3
%
 
1,416

 
2
%
 
 
$
58,943

 
100
%
 
$
51,147

 
100
%
 
$
98,136

 
100
%
 
$
82,413

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Engine/Mobile Filtration
 
35.1
%
 
 

 
34.2
%
 
 
 
35.0
%
 
 

 
33.9
%
 
 
Industrial/Environmental Filtration
 
33.4
%
 
 

 
32.5
%
 
 
 
32.5
%
 
 

 
31.7
%
 
 
Packaging
 
19.6
%
 
 

 
17.0
%
 
 
 
17.5
%
 
 

 
15.5
%
 
 
 
 
33.4
%
 
 

 
32.4
%
 
 
 
32.8
%
 
 

 
31.7
%
 
 
 
 


 
 
 


 
 
 
 
 
 
 
 
 
 
Operating margin:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Engine/Mobile Filtration
 
18.9
%
 
 

 
18.2
%
 
 

 
18.1
%
 
 

 
18.4
%
 
 

Industrial/Environmental Filtration
 
12.2
%
 
 

 
10.5
%
 
 

 
9.9
%
 
 

 
7.9
%
 
 

Packaging
 
8.9
%
 
 

 
6.3
%
 
 

 
6.2
%
 
 

 
4.2
%
 
 

 
 
14.7
%
 
 

 
13.2
%
 
 

 
13.1
%
 
 

 
11.8
%
 
 




Page 37



Engine/Mobile Filtration Segment

 
 
Second Quarter
 
First Six Months
 
 
 
 
 
 
Change
 
 
 
 
 
Change
 
(Dollars in thousands)
 
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
 
Net sales
 
$
161,290

 
$
148,398

 
$
12,892

 
9
%
 
$
305,748

 
$
270,895

 
$
34,853

 
13
%
 
Cost of sales
 
104,622

 
97,663

 
6,959

 
7
%
 
198,680

 
179,186

 
19,494

 
11
%
 
Gross profit
 
56,668

 
50,735

 
5,933

 
12
%
 
107,068

 
91,709

 
15,359

 
17
%
 
Selling and administrative expenses
 
26,104

 
23,763

 
2,341

 
10
%
 
51,758

 
41,863

 
9,895

 
24
%
 
Operating profit
 
30,564

 
26,972

 
3,592

 
13
%
 
55,310

 
49,846

 
5,464

 
11
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
35.1%
 
34.2%
 
 
 
0.9
pt
35.0%
 
33.9%
 
 
 
1.1
pt
Selling and administrative percentage
 
16.2%
 
16.0%
 
 
 
0.2
pt
16.9%
 
15.5%
 
 
 
1.4
pt
Operating margin
 
18.9%
 
18.2%
 
 
 
0.7
pt
18.1%
 
18.4%
 
 

 
(0.3)
pt

Our Engine/Mobile Filtration segment primarily sells original equipment and aftermarket filters for heavy-duty trucks and off-highway vehicles, locomotives and automobiles.  The largest market included in this segment includes heavy-duty engine filters produced at our Baldwin and CLARCOR Engine Mobile Solutions business units.
  
Net Sales

The changes in net sales for our Engine/Mobile Filtration segment in the second quarter and first six months of 2015 from the comparable periods of 2014 are detailed in the following tables:     
 
 
Second Quarter
 
First Six Months
Stanadyne Business acquisition
 
12
 %
 
16
 %
Pricing
 
—
 %
 
—
 %
Organic volume
 
—
 %
 
—
 %
Foreign exchange
 
(3
)%
 
(3
)%
 
 
9
 %
 
13
 %

(Dollars in millions)
 
Second Quarter
 
First Six Months
2014
 
$
148.4

 
$
270.9

 
 
 
 
 
U.S. net sales
 
15.0

 
34.2

Foreign net sales (including export)
 
2.3

 
7.7

Foreign exchange
 
(4.4
)
 
(7.1
)
Net increase
 
12.9

 
34.8

 
 
 
 
 
2015
 
$
161.3

 
$
305.7

  


Page 38



The changes in U.S. net sales for our Engine/Mobile Filtration segment in the second quarter and first six months of 2015 from the comparable periods of 2014 are detailed as follows:
(Dollars in millions)
 
Second Quarter
 
First Six Months
Stanadyne Business acquisition
 
$
10.9

 
$
24.3

Heavy-duty engine filtration aftermarket
 
11.1

 
16.2

Light duty (automotive) engine filter sales
 
(1.5
)
 
(1.7
)
Heavy-duty engine filter sales to OES channel
 
(2.9
)
 
(0.9
)
Other
 
(2.6
)
 
(3.7
)
Increase in U.S. net sales
 
$
15.0

 
$
34.2

  
Our U.S. net sales increased 16% in the second quarter of 2015 compared with the second quarter of 2014. The acquisition of Stanadyne's diesel fuel filtration business (now operated as CLARCOR Engine Mobile Solutions) in May 2014 resulted in $10.9 million of increased U.S. net sales in the second quarter of 2015. The remaining increase in U.S. sales of $4.1 million was primarily the result of an $11.1 million, or 22%, increase in heavy-duty engine filter aftermarket sales. This growth includes initial sales to a significant new customer with whom we have contracted to supply a full line of private-branded aftermarket products for sale through this customer's national retail network. Sales to this new customer resulted in our second quarter U.S. aftermarket growth rate exceeding the 5% year-over-year growth in U.S. heavy-duty truck tonnage for the preceding three months (December 2014 through February 2015) as measured by the American Trucking Association, which we believe is usually a leading indicator of heavy-duty engine filter aftermarket demand.

Our U.S. net sales increased 20% in the first six months of 2015 compared with the first six months of 2014. The acquisition of Stanadyne's diesel fuel filtration business (now operated as CLARCOR Engine Mobile Solutions) in May 2014 resulted in $24.3 million of increased U.S. net sales in the second quarter of 2015. The remaining increase in U.S. sales of $9.9 million was primarily the result of a $16.2 million, or 17%, increase in heavy-duty engine filter aftermarket sales. This growth includes initial sales to the significant new customer referenced in the preceding paragraph.

The changes in foreign net sales (including export sales and adjusted for changes in foreign currencies) for our Engine/Mobile Filtration segment in the second quarter and first six months of 2015 from the comparable periods of 2014 are detailed as follows:
(Dollars in millions)
 
Second Quarter
 
First Six Months
Stanadyne Business acquisition
 
$
7.1

 
$
17.8

Heavy-duty engine filter sales in China
 
(1.9
)
 
(3.7
)
Export sales primarily to the Middle East, Southeast Asia and Latin America
 
(2.6
)
 
(6.8
)
Other
 
(0.3
)
 
0.4

Increase in foreign net sales
 
$
2.3

 
$
7.7


Our foreign net sales increased 4% in the second quarter of 2015 compared with the second quarter of 2014, adjusted for changes in foreign currencies. The acquisition of Stanadyne's diesel fuel filtration business (now operated as CLARCOR Engine Mobile Solutions) in May 2014 resulted in $7.1 million of increased foreign net sales in the second quarter of 2015. This increase was partly offset by a $2.6 million decrease in export sales of heavy-duty engine filters, primarily arising from lower sales to the Middle East, Southeast Asia and Latin America, as well as a decrease of $1.9 million in heavy-duty engine filter sales in China primarily due to slowing macroeconomic activity in China and lower end-market diesel engine sales.

Our foreign net sales increased 8% in the first six months of 2015 compared with the first six months of 2014, adjusted for changes in foreign currencies. The acquisition of Stanadyne's diesel fuel filtration business (now operated as CLARCOR Engine Mobile Solutions) in May 2014 resulted in $17.8 million of increased foreign net sales in the first six months of 2015. This increase was partly offset by a $6.8 million decrease in export sales of heavy-duty engine filters to the Middle East, Southeast Asia and Latin America, as well as a decrease of $3.7 million in heavy-duty engine filter sales in China, for the same reasons cited above.

Cost of Sales

Cost of sales increased $7.0 million, or 7%, in the second quarter of 2015 from the second quarter of 2014. This increase was less than the 9% increase in net sales. As a result, our gross margin increased to 35.1% in the second quarter of 2015 from 34.2% in the second quarter of 2014. This 0.9 percentage point increase in gross margin primarily reflects a 1.6 percentage point

Page 39



increase due to the Stanadyne Business acquisition (including 0.8 percentage points from favorable sales mix and 0.8 percentage points due to $1.4 million of increased cost of sales in the second quarter of 2014 related to the step-up of inventory values as of the purchase date to reflect their estimated fair values, which did not recur in the second quarter of 2015). This favorable impact was partly offset by a 0.5 percentage point decrease in gross margin resulting from lower fixed cost leverage and lower production efficiencies (including costs related to new customers, new products and expanded capacity brought into service to support expected future growth) in the second quarter of 2015 compared to the second quarter of 2014.

Cost of sales increased $19.5 million, or 11%, in the first six months of 2015 from the first six months of 2014. This increase was less than the 13% increase in net sales. As a result, our gross margin increased to 35.0% in the first six months of 2015 from 33.9% in the first six months of 2014. This 1.1 percentage point increase primarily reflects a 1.2 percentage point increase due to the Stanadyne Business acquisition (including 0.8 percentage points from favorable sales mix and 0.4 percentage points due to $1.4 million of increased cost of sales in the first six months of 2014 related to the step-up of inventory values as of the purchase date to reflect their estimated fair values, which did not recur in the first six months of 2015), a 0.3 percentage point improvement from increases in the selling prices of our products and a 0.2 percentage point improvement from lower material costs resulting from our ongoing cost reduction and continuous improvement initiatives. Those impacts were partly offset by a 0.6 percentage point decrease resulting from lower fixed cost leverage and lower production efficiencies (including costs related to new customers, new products and expanded capacity brought into service to support expected future growth) in the first six months of 2015 compared to the first six months of 2014.

Selling and Administrative Expenses

Selling and administrative expenses increased $2.3 million, or 10%, in the second quarter of 2015 from the second quarter of 2014. This increase was primarily the result of $4.5 million of increased selling and administrative expenses at the CLARCOR Engine Mobile Solutions business, including approximately $1.9 million of increased intangible asset amortization, reflecting our ownership of this business for the full three month period ended May 30, 2015 in comparison to one month of ownership in the three month period ended May 31, 2014. Selling and administrative expenses also reflect $0.5 million of increased costs related to strategic growth initiatives, including costs for research & development and information technology activities. These increases were partly offset by a $3.0 million reduction in selling and administrative expenses due to legal, investment advisory and other professional services costs incurred in the second quarter of 2014 related to the Stanadyne Business acquisition, which did not recur in the second quarter of 2015. With selling and administrative expenses in this segment increasing 10% while segment net sales increased 9%, our selling and administrative expenses as a percentage of net sales increased to 16.2% in the second quarter of 2015 from 16.0% in the second quarter of 2014.

Selling and administrative expenses increased $9.9 million, or 24%, in the first six months of 2015 from the first six months of 2014. This increase was primarily the result of $9.2 million of increased selling and administrative expenses at the CLARCOR Engine Mobile Solutions business, including approximately $4.8 million of intangible asset amortization, reflecting our ownership of this business for the full six month period ended May 30, 2015 in comparison to only one month of ownership during the six month period ended May 31, 2014. Selling and administrative expenses also increased in the first six months of 2015 from the comparable prior year period due to $1.1 million of increased costs related to strategic growth initiatives, including costs for research & development and information technology activities and $1.1 million of unfavorable foreign currency translation losses. These increases were partly offset by a $3.0 million reduction in selling and administrative expenses due to the increased legal, investment advisory and other professional services costs incurred in the first six months of 2014 referenced in the paragraph above. With selling and administrative expenses in this segment increasing 24% while segment net sales increased 13%, our selling and administrative expenses as a percentage of net sales increased to 16.9% in the first six months of 2015 from 15.5% in the first six months of 2014.














Page 40



Industrial/Environmental Filtration Segment

 
 
Second Quarter
 
First Six Months
 
 
 
 
 
 
Change
 
 
 
 
 
Change
 
(Dollars in thousands)
 
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
 
Net sales
 
$
218,676

 
$
219,592

 
$
(916
)
 
—
 %
 
$
409,592

 
$
394,455

 
$
15,137

 
4
 %
 
Cost of sales
 
145,623

 
148,130

 
(2,507
)
 
(2
)%
 
276,291

 
269,472

 
6,819

 
3
 %
 
Gross profit
 
73,053

 
71,462

 
1,591

 
2
 %
 
133,301

 
124,983

 
8,318

 
7
 %
 
Selling and administrative expenses
 
46,449

 
48,457

 
(2,008
)
 
(4
)%
 
92,689

 
93,832

 
(1,143
)
 
(1
)%
 
Operating profit
 
26,604

 
23,005

 
3,599

 
16
 %
 
40,612

 
31,151

 
9,461

 
30
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
33.4%
 
32.5%
 
 
 
0.9
pt
32.5%
 
31.7%
 
 
 
0.8
pt
Selling and administrative percentage
 
21.2%
 
22.1%
 
 
 
(0.9)
pt
22.6%
 
23.8%
 
 
 
(1.2)
pt
Operating margin
 
12.2%
 
10.5%
 
 

 
1.7
pt
9.9%
 
7.9%
 
 

 
2.0
pt

Our Industrial/Environmental Filtration segment sells a variety of filtration products to various end-markets.  Included in these markets are HVAC filters, natural gas filtration vessels and aftermarket filters, aviation fuel filters and filter systems, filtration systems and replacement filters for gas turbine air intake applications, industrial air filters, and other markets including oil drilling, aerospace, fibers and resins and dust collector systems.

Net Sales

The changes in net sales for our Industrial/Environmental Filtration segment in the second quarter and first six months of 2015 from the comparable periods of 2014 are detailed in the following tables:
 
 
Second Quarter
 
First Six Months
Organic volume
 
2
 %
 
6
 %
Filter Resources acquisition
 
2
 %
 
2
 %
Pricing
 
—
 %
 
—
 %
Foreign exchange
 
(4
)%
 
(4
)%
 
 
—
 %
 
4
 %

(Dollars in millions)
 
Second Quarter
 
First Six Months
2014
 
$
219.6

 
$
394.5

 
 
 
 
 
U.S. net sales
 
14.5

 
28.8

Foreign net sales (including export)
 
(6.7
)
 
0.1

Foreign exchange
 
(8.7
)
 
(13.8
)
Net (decrease) increase
 
(0.9
)
 
15.1

 
 
 
 
 
2015
 
$
218.7

 
$
409.6



Page 41



The changes in U.S. net sales for our Industrial/Environmental Filtration segment in the second quarter and first six months of 2015 from the comparable periods of 2014 are detailed as follows:

(Dollars in millions)
 
Second Quarter
 
First Six Months
Natural gas filtration vessels and aftermarket elements
 
$
7.2

 
$
11.6

Dust collection and other industrial air filtration products
 
0.3

 
10.2

Filter Resources acquisition
 
5.1

 
9.2

Gas turbine air intake filtration systems
 
1.2

 
(2.0
)
All other, net
 
0.7

 
(0.2
)
Increase in U.S. net sales
 
$
14.5

 
$
28.8


•
Higher sales of natural gas filtration vessels and aftermarket elements in the second quarter and first six months of 2015 from the comparable periods of 2014 reflect continued strong demand for filtration housings and cartridges for use in the extraction, transportation and processing of natural gas and natural gas liquids (such as ethane, propane and butane) throughout the U.S.

•
Higher sales of dust collection and other industrial air filtration products in the second quarter and first six months of 2015 from the comparable periods in 2014 were driven primarily by increased sales of panel, cartridge, bag and other industrial air replacement filters as well as increased sales of ClearCurrent® filters and replacement cartridges for gas turbine air intake applications.

•
The acquisition of Filter Resources in December 2014, whose operations have been merged into the Company's PECOFacet group of companies, resulted in approximately $5.1 million of increased U.S. net sales in the second quarter of 2015, and approximately $9.2 million of increased U.S. net sales in the first six months of 2015, reflecting sales of filtration vessels and replacement elements primarily for use in petrochemical, refining, pipeline and other industrial applications.

•
Sales of gas turbine air intake filtration systems increased in the second quarter of 2015 from the comparable prior year period, while such sales decreased in first six months of 2015 from the comparable prior year period. Both comparisons were driven by the timing of large system sales.

The changes in foreign net sales (including export sales and excluding the impact of changes in foreign currency exchange rates) for the Industrial/Environmental Filtration segment in the second quarter and first six months of 2015 from the comparable periods of 2014 are detailed as follows:
(Dollars in millions)
 
Second Quarter
 
First Six Months
Dust collection and other industrial air filtration products
 
$
3.2

 
$
5.2

Natural gas filtration vessels and aftermarket filters
 
(0.2
)
 
2.6

Gas turbine air intake filtration systems
 
(8.1
)
 
(8.9
)
All other, net
 
(1.6
)
 
1.2

(Decrease) increase in foreign net sales
 
$
(6.7
)
 
$
0.1


•
Higher foreign net sales of dust collection and other industrial air filtration products in the second quarter and first six months of 2015 from the comparable periods of 2014 reflect increased sales through our CLARCOR Industrial Air subsidiary, including sales of BHA pleated filters, bag filters and other industrial air filters, and increased sales of ClearCurrent® filters and replacement cartridge filters for gas turbine air intake applications, as well as higher sales by our United Air Specialists subsidiary due to increased sales of industrial dust, fume and oil mist collectors in China and Europe.

•
Higher foreign net sales of natural gas vessels and aftermarket filters in the first six months of 2015 from the comparable period of 2014 reflect continued global growth in the extraction, transportation and processing of natural gas and natural gas liquids (such as ethane, propane and butane).


Page 42



•
Lower sales of gas turbine air intake filtration systems by our CLARCOR Industrial Air subsidiary in the second quarter and first six months of 2015 from the comparable periods of 2014 reflect relatively strong sales in the second quarter and first six months of 2014, coupled with the timing of several large system sales which have not yet occurred in 2015.

Cost of Sales

Cost of sales decreased $2.5 million, or 2%, in the second quarter of 2015 from the second quarter of 2014. This decrease was greater than the less than 1% decrease in net sales. As a result, our gross margin increased to 33.4% in the second quarter of 2015 from 32.5% in the second quarter of 2014. This 0.9 percentage point increase in gross margin primarily reflects a 0.5 percentage point increase in gross margin due favorable sales mix -- primarily higher sales of aftermarket industrial air filters in comparison to gas turbine air intake filtration systems -- at our CLARCOR Industrial Air subsidiary, a 0.4 percentage point increase in gross margin resulting from increases in the selling prices of our products, and a 0.4 percentage point increase in gross margin due to the impact of $0.8 million of increased cost of sales in the second quarter of 2014 resulting from the step-up of inventory values at the GE Air Filtration business to reflect their estimated fair value as of the purchase date, which did not recur in the second quarter of 2015. These favorable impacts were partially offset by a 0.4 percentage point reduction in gross margin due to unfavorable sales mix -- primarily higher sales of filter vessels in comparison to replacement filter elements -- at our PECOFacet subsidiary.

Cost of sales increased $6.8 million, or 3%, in the first six months of 2015 from the first six months of 2014. This increase was less than the 4% increase in net sales. As a result, our gross margin increased to 32.5% in the first six months of 2015 from 31.7% in the first six months of 2014. This 0.8 percentage point increase in gross margin primarily reflects a 1.1 percentage point increase in gross margin due to the impact of $4.4 million of increased cost of sales in the first six months of 2014 resulting from the step-up of inventory values at the GE Air Filtration business to reflect their estimated fair value as of the purchase date, as well as a 0.3 percentage point increase due to approximately $1.2 million of restructuring costs incurred in the first six months of 2014 in our HVAC air filtration business, which did not recur in the first six months of 2015. Gross margin in this reporting segment was also favorably impacted by 0.2 percentage points in the first six months of 2015 due to customer price increases on certain of our products and lower material costs. These favorable impacts were partially offset by a 0.8 percentage point reduction in gross margin due to unfavorable changes in sales mix across various businesses.

Selling and Administrative Expenses

Selling and administrative expenses decreased $2.0 million, or 4%, in the second quarter of 2015 from the second quarter of 2014. This decrease resulted primarily from a $1.9 million decrease in costs due to a gain realized in the second quarter of 2015 resulting from the sale of a facility primarily used for selling and administrative activities, a $1.2 million decrease resulting from legal, investment advisory and consulting costs incurred in the second quarter of 2014 related to the acquisition of the CLARCOR Industrial Air business, which did not recur in the second quarter of 2015, and a $0.7 million decrease in compensation expense related to our company-wide profit sharing program. These decreases were partially offset by $1.7 million of increased costs related to strategic growth initiatives, including costs for research & development and information technology activities. With selling and administrative expenses decreasing 4% while our net sales decreased less than 1%, our selling and administrative expenses as a percentage of net sales decreased to 21.2% in the second quarter of 2015 from 22.1% in last year's second quarter.

Selling and administrative expenses decreased $1.1 million, or 1%, in the first six months of 2015 from the first six months of 2014. This decrease was primarily the result of $4.3 million of legal, investment advisory and consulting costs incurred in the first six months of 2014 related to the acquisition of the CLARCOR Industrial Air business, which did not recur in the first six months of 2015. The decrease also reflects a $1.9 million decrease in costs due to a gain realized in the first six months of 2015 resulting from the sale of a facility primarily used for selling and administrative activities. These decreases were partially offset by $2.5 million of increased costs related to strategic growth initiatives, including costs for research and development and information technology activities, $1.6 million of other employee costs and $1.0 million of other selling and administrative expense increases. With selling and administrative expenses decreasing 1% while our net sales increased 4%, our selling and administrative expenses as a percentage of net sales decreased to 22.6% in the first six months of 2015 from 23.8% in the first six months of 2014.









Page 43



Packaging Segment
  
 
 
Second Quarter
 
First Six Months
 
 
 
 
 
 
Change
 
 
 
 
 
Change
 
(Dollars in thousands)
 
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
 
Net sales
 
$
19,833

 
$
18,652

 
$
1,181

 
6
%
 
$
35,582

 
$
33,977

 
$
1,605

 
5
%
 
Cost of sales
 
15,944

 
15,479

 
465

 
3
%
 
29,366

 
28,712

 
654

 
2
%
 
Gross profit
 
3,889

 
3,173

 
716

 
23
%
 
6,216

 
5,265

 
951

 
18
%
 
Selling and administrative expenses
 
2,114

 
2,003

 
111

 
6
%
 
4,002

 
3,849

 
153

 
4
%
 
Operating profit
 
1,775

 
1,170

 
605

 
52
%
 
2,214

 
1,416

 
798

 
56
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
19.6%
 
17.0%
 
 
 
2.6
pt
17.5%
 
15.5%
 
 
 
2.0
pt
Selling and administrative percentage
 
10.7%
 
10.7%
 
 
 
—
pt
11.2%
 
11.3%
 
 
 
(0.1)
pt
Operating margin
 
8.9%
 
6.3%
 
 
 
2.6
pt
6.2%
 
4.2%
 
 
 
2.0
pt

Our Packaging segment manufactures and sells consumer and industrial packaging products.

Net Sales

The changes in net sales in the second quarter and first six months of 2015 at our Packaging segment from the comparable periods of 2014 are detailed in the following table:
(Dollars in millions)
 
Second Quarter
 
First Six Months
Smokeless tobacco packaging
 
$
0.6

 
$
1.1

Spice packaging
 
0.5

 
0.6

Decorated flat sheet metal products
 
0.4

 
0.1

Other, net
 
(0.3
)
 
(0.2
)
Increase in net sales
 
$
1.2

 
$
1.6


Higher sales of smokeless tobacco packaging products in the second quarter and first six months of 2015 from the comparable periods of 2014 reflect growth of new smokeless tobacco products and sales of premium packaging products such as embossed metal lids. The changes in sales of spice packaging and decorated flat sheet metal products in the second quarter and first six months of 2015 from the comparable periods of 2014 primarily reflect normal variability in the timing of customer order patterns within the year.

Cost of Sales

Cost of sales increased $0.5 million, or 3%, in the second quarter of 2015 from the second quarter of 2014. This increase was less than the 6% increase in net sales. As a result, our gross margin increased to 19.6% in the second quarter of 2015 from 17.0% in the second quarter of 2014. This 2.6 percentage point increase in gross margin was primarily driven by reduced variable manufacturing expenses, including lower utility costs and repair costs, improved absorption of fixed manufacturing costs due to higher sales volume, and lower production scrap costs.

Cost of sales increased $0.7 million, or 2%, in the first six months of 2015 from the comparable period of 2014. This increase was less than the 5% increase in net sales. As a result, our gross margin increased to 17.5% in the first six months of 2015 from 15.5% in the comparable period of 2014. This 2.0 percentage point increase in gross margin was primarily driven by reduced variable manufacturing expenses, including lower utility costs and repair costs, improved absorption of fixed manufacturing costs due to higher sales volume, and lower production scrap costs.




Page 44



Selling and Administrative Expenses

Selling and administrative expenses increased $0.1 million, or 6%, in the second quarter of 2015 from the second quarter of 2014. There were no individually significant changes in selling and administrative expenses in the second quarter of 2015 in comparison to the prior year. With selling and administrative expenses increasing 6% while our net sales increased 6%, our selling and administrative expenses as a percentage of net sales was flat at approximately 10.7% in both the second quarter of 2015 and the second quarter of 2014.

Selling and administrative expenses increased $0.2 million, or 4%, in the first six months of 2015 from the comparable period of 2014. There were no individually significant changes in selling and administrative expenses in the first six months of 2015 in comparison to the prior year. With selling and administrative expenses increasing 4% while our net sales increased 5%, our selling and administrative expenses as a percentage of net sales decreased to 11.2% in the first six months of 2015 from 11.3% in the comparable period of 2014.


FINANCIAL CONDITION

Liquidity and Capital Resources

We believe that our operations will continue to generate cash and that sufficient cash, cash equivalents and borrowings under our credit agreement, including our five-year multicurrency revolving credit facility ("Credit Facility"), will be available to fund operating needs, pay dividends, invest in the development of new products and filter media, fund planned capital expenditures, including the expansion of facilities, provide for interest and principal payments related to debt agreements, fund pension contributions and fund potential repurchases of our common stock. We completed two acquisitions in December 2013, the acquisitions of the GE Air Filtration business and the Bekaert Advanced Filtration business, we acquired Stanadyne Corporation's diesel fuel filtration business in May 2014, and we acquired Filter Resources in December 2014, and we intend to continue to assess acquisition opportunities in related filtration businesses. Any such acquisitions could affect operating cash flows and require changes in our debt and capitalization. In addition, capital market disruptions may affect the cost or availability of future borrowings. 

We had cash, cash equivalents and restricted cash of $81.8 million at the end of the second quarter of 2015.  Approximately $74.1 million of this cash was held at entities outside the U.S.  Although we plan to use this cash at our non-U.S. entities, if we repatriated this cash to the U.S., we could incur significant tax expense since most of this cash is considered permanently invested for U.S. tax purposes.  Cash and cash equivalents are held by financial institutions throughout the world.  We regularly review the credit worthiness of these institutions and believe our funds are not at significant risk.  

Our current ratio of 3.4 at the end of the second quarter of 2015 increased from 3.2 at year-end 2014.  This increase reflects a $26.2 million increase in inventories, due primarily to production build schedules in anticipation of sales growth as we progress through the fiscal year, and a $14.1 million decrease in accrued salaries, wages and commissions, due primarily to the annual payment of awards earned under our company-wide profit sharing program in the first quarter of the year. These effects were partially offset by a $25.0 million reduction in accounts receivable, partly due to company-wide efforts to improve collection of past due receivables, as well as a $12.2 million decrease in cash, cash equivalents and restricted cash, due primarily to our acquisition of Filter Resources, whose operations have been merged into the Company's PECOFacet group of companies, in December 2014 for approximately $21.9 million ($20.9 million of which was paid in cash at closing).

We entered into the Credit Facility in April 2012, under which we may borrow up to $150.0 million under a selection of currencies and rate formulas. The Credit Facility also includes a $10.0 million swing line sub-facility and a $50.0 million letter of credit sub-facility, as well as an accordion feature that allows the Company to increase the Credit Facility by a total of up to $100.0 million, subject to securing additional commitments from existing lenders or new lending institutions. In November 2013, we entered into a credit amendment to include a $100.0 million term loan facility (the "Term Loan Facility") and in May 2014, we entered into a second credit agreement amendment to include an additional $315.0 million to the Term Loan Facility, whose maturity date is April 2017. We believe the financial institutions that are party to this agreement have adequate capital resources and will be able to fund future borrowings under the Credit Facility and Term Loan Facility.  At our election, the interest rate under the Credit Facility and Term Loan Facility is based upon either a defined base rate or LIBOR plus an applicable margin.  Commitment fees and letter of credit fees are also payable under the Credit Facility. Borrowings under the Credit Facility and Term Loan Facility are unsecured, but are guaranteed by substantially all of the Company's material domestic subsidiaries. The Credit Facility and Term Loan Facility also contain certain covenants customary to such agreements, as well as customary events of default.


Page 45



At the end of the second quarter of 2015, we had $395.0 million outstanding on the Term Loan Facility with a weighted average interest rate including margin of approximately 1.18% and we had $15.0 million outstanding on the Credit Facility with a weighted average interest rate including margin of approximately 0.98%. We borrowed $100.0 million under the Term Loan Facility in November 2013 to fund a portion of the cost of the acquisition of the GE Air Filtration business, now operated as CLARCOR Industrial Air, of which $80.0 million was outstanding at the end of the second quarter of 2015. We borrowed $315.0 million under the Term Loan Facility in April 2014 to fund the majority of the cost of the acquisition of Stanadyne Corporation's diesel fuel filtration business, now operated as CLARCOR Engine Mobile Solutions, of which $315.0 million was outstanding at the end of the second quarter of 2015. At May 30, 2015, we also had approximately $7.5 million outstanding on a $50.0 million letter of credit sub-facility.  Accordingly, we had $127.5 million available for further borrowing at the end of the second quarter of 2015. Our Term Loan Facility expires in April 2017.

Total long-term debt of $418.0 million at the end of the second quarter of 2015 included $395.0 million outstanding on the Term Loan Facility, $15.0 million outstanding on the Credit Facility, $7.4 million outstanding on industrial revenue bonds and $0.6 million of other long-term debt.  At the end of the second quarter of 2015, we were in compliance with all financial covenants as included in our Credit Facility and Term Loan Facility. The ratio of total debt to total capitalization (defined as long-term debt plus total shareholders’ equity) was 27.1% at the end of the second quarter of 2015, which was consistent with the ratio of 27.1% at year-end 2014.

We had 50.1 million shares of common stock outstanding at the end of the second quarter of 2015 and we had 50.2 million shares outstanding at year-end 2014.  This 0.1 million decrease was due to the repurchase of 0.2 million shares during the first six months of 2015, offset in part by our issuance of 0.1 million shares in conjunction with stock based incentive plans during the first six months of 2015.  Shareholders’ equity increased to $1,125.2 million at the end of the second quarter of 2015 from $1,105.1 million at year-end 2014.  This $20.1 million increase resulted mainly from additional net earnings of $65.3 million and items related to stock compensation and option activity pursuant to incentive plans of $12.3 million, partially offset by a reduction of $22.4 million related to foreign currency translation adjustments, dividend payments of $20.3 million and our repurchase of common stock of $16.1 million.

Cash Flow

Net cash provided by operating activities increased $24.4 million to $67.2 million in the first six months of 2015 from $42.8 million in the first six months of 2014.  This increase was primarily due to a $6.4 million increase in net earnings and a $9.6 million reduction in cash used to fund working capital.

Net cash used in investing activities decreased $570.3 million in the first six months of 2015 from the first six months of 2014 primarily due to a $574.7 million decrease in payments related to business acquisitions as $260.3 million of net cash was paid in the first six months of 2014 for the acquisition of the GE Air Filtration business (now operated as CLARCOR Industrial Air), $7.3 million of net cash was paid in the first six months of 2014 for the acquisition of the Bekaert Business and $327.7 million of net cash was paid in the first six months of 2014 for the acquisition of Stanadyne Corporation's diesel fuel filtration business (now operated as CLARCOR Engine Mobile Solutions), in comparison to $20.9 million of net cash payments related to the Filter Resources acquisition in the first six months of 2015. This decrease was partially offset by an increase of $9.7 million in capital expenditures in the first six months of 2015 in comparison to the first six months of 2014.

Net cash used in financing activities increased $281.1 million to net cash used in financing activities of $25.0 million in the first six months of 2015 compared to net cash provided by financing activities of $256.3 million in the first six months of 2014. This change was primarily the result of $6.5 million of net borrowings in the first six months of 2015, in comparison to $270.8 million of net borrowings in the first six months of 2014. This increase in net cash used in financing activities also reflected an increase of $16.1 million in payments for the repurchase of common stock in the first six months of 2015 in comparison to the prior year period.
 
We intend to continue to assess repurchases of our common stock. In June 2013, our Board of Directors authorized a $250.0 million stock repurchase program of our common stock in the open market and through private transactions over a three-year period. During the first six months of 2015 we repurchased and retired 0.2 million shares of our common stock for $16.1 million at an approximate average price of $64.96.  At the end of the second quarter of 2015, there was approximately $192.4 million available for repurchase under the current authorization.  Future repurchases of our common stock may be made after considering cash flow requirements for further repayment of outstanding borrowings on the Term Loan Facility and Credit Facility, internal growth, capital expenditures, acquisitions, interest rates and the market price of our common stock.

At the end of the second quarter of 2015, our gross liability for uncertain income tax provisions was $3.9 million including interest and penalties.  Due to the high degree of uncertainty regarding the timing of potential future cash outflows associated with

Page 46



these liabilities, we were unable to make a reasonably reliable estimate of the amount and period in which these remaining liabilities might be paid.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements relate to various operating leases as discussed in Note I to the Consolidated Financial Statements in our 2014 Form 10-K.  We had no variable interest entity or special purpose entity agreements during the first six months of 2015 or 2014.


OTHER MATTERS

Critical Accounting Policies

Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in our 2014 Form 10-K in Management’s Discussion and Analysis of Financial Condition and Results of Operations.  There have been no material changes in our critical accounting policies set forth in our 2014 Form 10-K.  These policies have been consistently applied in all material respects.  While the estimates and judgments associated with the application of these policies may be affected by different assumptions or conditions, we believe the estimates and judgments associated with the reported amounts are appropriate in the circumstances. 

Environmental Matters and Climate Change and Energy Legislation and Regulation
 
Our operations are subject to U.S. and non-U.S. environmental laws and regulations governing emissions to air; discharges to water; the generation, handling, storage, transportation, treatment and disposal of waste materials; and the cleanup of contaminated properties.  Currently, we believe that any potential environmental liabilities with respect to known environmental matters involving our former or existing operations are not material, but there is no assurance that we will not be adversely impacted by such liabilities, costs or claims in the future, either under present laws and regulations or those that may be adopted or imposed in the future.

Foreign, federal, state and local regulatory and legislative bodies have proposed various legislative and regulatory measures relating to climate change, regulating greenhouse gas emissions and energy policies.  Due to the uncertainty in the regulatory and legislative processes, as well as the scope of such requirements and initiatives, we cannot currently determine the effect such legislation and regulation may have on our operations.

The potential physical impacts of climate change on our operations are also highly uncertain and would vary depending on type of physical impact and geographic location.  Climate change physical impacts could include changing temperatures, water shortages, changes in weather and rainfall patterns, and changing storm patterns and intensities.  The occurrence of one or more natural disasters, whether due to climate change or naturally occurring, such as tornadoes, hurricanes, earthquakes and other forms of severe weather in the U.S. or in a country in which we operate or in which our suppliers or customers are located could adversely impact our operations and financial performance.  Such events could result in:

•
physical damage to and complete or partial closure of one or more of our manufacturing facilities
•
temporary or long-term disruption in the supply of raw materials from our suppliers
•
disruption in the transport of our products to customers and end users
•
delay in the delivery of our products to our customers

Recent Relevant Accounting Pronouncements

A discussion of recent relevant accounting pronouncements is included in Note 1 to the Consolidated Condensed Financial Statements.

Forward-Looking Information is Subject to Risk and Uncertainty

This Second Quarter 2015 Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements made in this Form 10-Q, other than statements of historical fact, are forward-looking statements. You can identify these statements from use of words such as “may,” “should,” “could,” “potential,” “continue,” “plan,” “forecast,” “estimate,” “project,” “believe,” “intent,” “anticipate,” “expect,” “target,” “is likely,” “will,” or the negative of these terms, and similar expressions.  These statements are

Page 47



made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements may include, among other things:

•
statements and assumptions relating to anticipated future growth, earnings, earnings per share, future cash flows and other financial performance measures;
•
statements regarding management's short-term and long-term performance goals;
•
statements regarding anticipated order patterns and demand for products from our customers and our backlog or the anticipated economic conditions of the industries and markets that we serve;
•
statements related to the performance of the U.S., European and other economies generally;
•
statements relating to the anticipated effects on results of operations or financial condition from recent and expected developments or events, including the acquisitions of Filter Resources, the Stanadyne Business, the GE Air Filtration business and the Bekaert Business and potential future acquisition opportunities;
•
statements regarding our current cost structure positions and ability to capitalize on anticipated development and growth initiatives, including the expansion of facilities and other planned capital expenditures;
•
statements relating to our research and development activities, including the development of new products and filter media;
•
statements related to future dividends or repurchases of our common stock;
•
statements related to tax positions and unrecognized tax benefits;
•
statements related to our cash resources and borrowing capacity under the Credit Facility and the Term Loan Facility;
•
statements regarding anticipated contributions and other payments pursuant to our pension plans and for other post-retirement benefits;
•
statements related to potential liability for environmental matters;
•
statements related to pending claims or litigation, including the 3M lawsuit referenced in Note 10;
•
statements relating to the availability of raw materials and other supplies; and
•
any other statements or assumptions that are not historical facts.

We believe that our expectations are based on reasonable assumptions.  However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from our expectations of future results, performance or achievements expressed or implied by these forward-looking statements.  These factors include, but are not only limited to, risks associated with: (1) world economic factors and the ongoing economic uncertainty impacting many regions of the world, (2) reductions in sales volume and orders, (3) our customers’ financial condition, (4) the health of the markets we serve, including the oil & gas market, (5) customer concentration issues in certain geographic locations and in respect of certain of our businesses, (6) our ability to integrate the businesses we have acquired, (7) currency fluctuations, particularly increases or decreases in the U.S. dollar against other currencies, (8) commodity price increases and/or limited availability of raw materials and component products, including steel, (9) compliance costs associated with environmental laws and regulations, (10) political factors, (11) our international operations, (12) highly competitive markets, (13) governmental laws and regulations, (14) potential information systems interruptions and intrusions, (15) potential global events resulting in instability and unpredictability in the world’s markets, including financial bailouts of sovereign nations, political changes, military and terrorist activities, health outbreaks and other factors, (16) changes in accounting standards or adoption of new accounting standards, (17) adverse effects of natural disasters, (18) legal challenges with respect to intellectual property, (19) product liability exposure, (20) changes in tax rates or exposure to additional income tax liabilities, (21) potential labor disruptions, and (22) other factors described in more detail in the “Risk Factors” section of our 2014 Form 10-K.  In addition, our past results of operations do not necessarily indicate our future results.  Our future results may differ materially from our past results as a result of various risks and uncertainties, including these and other risk factors detailed from time to time in our filings with the Securities and Exchange Commission.

You should not place undue reliance on any forward-looking statements. These statements speak only as of the date of this Second Quarter 2015 Form 10-Q.  Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements, the risks described in this Second Quarter 2015 Form 10-Q, or any other information in this Second Quarter 2015 Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Second Quarter 2015 Form 10-Q.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our interest expense on long-term debt is sensitive to changes in interest rates.  In addition, changes in foreign currency exchange rates may affect assets, liabilities and commitments that are to be settled in cash and are denominated in foreign currencies.  Market risks are also discussed in our 2014 Form 10-K in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.”  There have been no material changes to the disclosure regarding market risk set forth in our 2014 Form 10-K.

Page 48





Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We have established disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”).  Our management, with the supervision and participation of Christopher L. Conway, President and Chief Executive Officer, and David J. Fallon, Chief Financial Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures as of May 30, 2015.  

Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures pursuant to Rules 13a–15(e) and 15d-15(e) of the Exchange Act were effective as of May 30, 2015.  

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No change in our internal control over financial reporting occurred during our most recent fiscal quarter ended May 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Page 49




Part II. OTHER INFORMATION


Item 1. Legal Proceedings

Any information that may be required by this Item is incorporated by reference from Note 10 included in Part I, Item 1 of this Second Quarter 2015 Form 10-Q.


Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in “Item 1A. Risk Factors” in our 2014 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On June 25, 2013, our Board of Directors approved a three-year, $250 million stock repurchase program. Pursuant to the authorization, we may purchase shares from time to time in the open market or through privately negotiated transactions through June 25, 2016.  We have no obligation to repurchase shares under the authorization, and the timing, actual number and values of shares to be purchased will depend on our stock price and market conditions.  As set forth in the table below, we repurchased 126,000 shares of our common stock during the fiscal quarter ended May 30, 2015.  The Company had remaining authorization of approximately $192.4 million to repurchase shares as of May 30, 2015 under its stock repurchase program.
 
COMPANY PURCHASES OF EQUITY SECURITIES
 
 
(a)
 
(b)
 
(c)
 
(d)
Period
 
Total
number of
shares
purchased
 
Average
price paid
per share
 
Total number of
shares purchased
as part of the
Company's publicly
announced plan
 
Maximum approximate
dollar value of shares that
may yet be purchased
under the Plan
March 1, 2015 through April 4, 2015
 
48,000

 
$
65.52

 
48,000

 
$
197,366,465

April 5, 2015 through May 2, 2015
 
40,000

 
$
66.02

 
40,000

 
$
194,725,560

May 3, 2015 through May 30, 2015
 
38,000

 
$
62.51

 
38,000

 
$
192,350,153

Total
 
126,000

 
 

 
126,000

 
 



Item 6. Exhibits

a.
Exhibits:
 
* 10.1
Amendment No. 3 to Credit Agreement, dated as of June 1, 2015, by and among the Company, certain subsidiaries of the Company, the lenders party thereto and Bank of America, N.A., as administrative agent, as swing line lender and as a letter of credit issuer.
 
* 31.1
Certification of Christopher L. Conway pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
* 31.2
Certification of David J. Fallon pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
** 32
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
*** 101.INS
XBRL Instance Document
 
*** 101.SCH
XBRL Taxonomy Extension Schema Document
 
*** 101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
*** 101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
*** 101.LAB
XBRL Taxonomy Extension Label Linkbase
 
*** 101.PRE
XBRL Taxonomy Extension Presentation Linkbase


Page 50



 
 
 
 
*
Filed herewith.
 
**
Furnished herewith.
 
***
Submitted electronically with this 2014 Quarterly Report on Form 10-Q.
 
 
 


Page 51




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CLARCOR Inc.
(Registrant)

June 19, 2015
 
By
/s/ Christopher L. Conway
(Date)
 
 
Christopher L. Conway
 
 
 
President and Chief Executive Officer
 
 
 
 
June 19, 2015
 
By
/s/ David J. Fallon
(Date)
 
 
David J. Fallon
 
 
 
Chief Financial Officer and Chief Accounting Officer


Page 52