CLC 2014 Q3 August 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 August 30, 2014

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 September 15, 2014, 50,125,358 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
 
Nine Months Ended
 
 
August 30,
2014
 
August 31,
2013
 
August 30,
2014
 
August 31,
2013
Net sales
 
$
400,152

 
$
289,126

 
$
1,099,479

 
$
832,980

Cost of sales
 
264,827

 
197,226

 
742,197

 
561,380

 
 
 
 
 
 
 
 
 
Gross profit
 
135,325

 
91,900

 
357,282

 
271,600

 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
73,099

 
49,915

 
212,643

 
146,399

 
 
 
 
 
 
 
 
 
Operating profit
 
62,226

 
41,985

 
144,639

 
125,201

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(1,336
)
 
(139
)
 
(2,406
)
 
(451
)
Interest income
 
101

 
221

 
304

 
528

Other, net
 
(279
)
 
153

 
3,866

 
(70
)
 
 
(1,514
)
 
235

 
1,764

 
7

 
 
 
 
 
 
 
 
 
Earnings before income taxes
 
60,712

 
42,220

 
146,403

 
125,208

 
 
 
 
 
 
 
 
 
Provision for income taxes
 
18,947

 
13,447

 
45,751

 
39,754

 
 
 
 
 
 
 
 
 
Net earnings
 
41,765

 
28,773

 
100,652

 
85,454

 
 
 
 
 
 
 
 
 
Net earnings attributable to noncontrolling interests
 
(62
)
 
(66
)
 
(76
)
 
(234
)
 
 
 
 
 
 
 
 
 
Net earnings attributable to CLARCOR Inc.
 
$
41,703

 
$
28,707

 
$
100,576

 
$
85,220

 
 
 
 
 
 
 
 
 
Net earnings per share attributable to CLARCOR Inc. - Basic
 
$
0.83

 
$
0.57

 
$
1.99

 
$
1.71

Net earnings per share attributable to CLARCOR Inc. - Diluted
 
$
0.82

 
$
0.57

 
$
1.98

 
$
1.69

 
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding - Basic
 
50,395,007

 
50,092,548

 
50,457,436

 
49,917,939

Weighted average number of shares outstanding - Diluted
 
50,881,594

 
50,604,809

 
50,917,020

 
50,481,049

 
 
 
 
 
 
 
 
 
Dividends paid per share
 
$
0.1700

 
$
0.1350

 
$
0.5100

 
$
0.4050




See Notes to Consolidated Condensed Financial Statements
Page 3



CLARCOR Inc.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE EARNINGS
(Dollars in thousands)
(Unaudited)
 
 
Quarter Ended
 
Nine Months Ended
 
 
August 30,
2014
 
August 31,
2013
 
August 30,
2014
 
August 31,
2013
Net earnings
 
$
41,765

 
$
28,773

 
$
100,652

 
$
85,454

 
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
 
Pension and other postretirement benefits --
 
 
 
 
 
 
 
 
Pension and other postretirement benefits liability adjustments
 
621

 
4,432

 
1,904

 
7,074

Pension and other postretirement benefits liability adjustments tax amounts
 
(241
)
 
(1,580
)
 
(748
)
 
(2,522
)
Pension and other postretirement benefits liability adjustments, net of tax
 
380

 
2,852

 
1,156

 
4,552

 
 
 
 
 
 
 
 
 
Foreign currency translation --
 
 
 
 
 
 
 
 
Translation adjustments
 
(4,379
)
 
(614
)
 
(1,818
)
 
(4,549
)
Translation adjustments tax amounts
 

 

 

 

Translation adjustments, net of tax
 
(4,379
)
 
(614
)
 
(1,818
)
 
(4,549
)
 
 
 
 
 
 
 
 
 
Comprehensive earnings
 
37,766

 
31,011

 
99,990

 
85,457

 
 
 
 
 
 
 
 
 
Comprehensive earnings attributable to non-redeemable noncontrolling interests
 
139

 
(27
)
 
6

 
(168
)
Comprehensive earnings attributable to redeemable noncontrolling interests
 
44

 
(28
)
 
150

 
(60
)
 
 
 
 
 
 
 
 
 
Comprehensive earnings attributable to CLARCOR Inc.
 
$
37,949

 
$
30,956

 
$
100,146

 
$
85,229

 
 
 
 
 
 
 
 
 



See Notes to Consolidated Condensed Financial Statements
Page 4



CLARCOR Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
 
August 30,
2014
 
November 30,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
77,625

 
$
411,562

Restricted cash

 
763

Accounts receivable, less allowance for losses of $11,400 and $9,183, respectively
313,745

 
224,829

Inventories
280,961

 
218,786

Deferred income taxes
30,540

 
25,313

Income taxes receivable

 
1,000

Prepaid expenses and other current assets
18,221

 
9,868

Total current assets
721,092

 
892,121

 
 
 
 
Property, plant and equipment, at cost, less accumulated depreciation of $354,735
  and $332,787 respectively
276,924

 
208,953

Goodwill
511,212

 
241,299

Acquired intangible assets, less accumulated amortization
357,955

 
89,881

Other noncurrent assets
17,324

 
16,589

Total assets
$
1,884,507

 
$
1,448,843

 
 
 
 
LIABILITIES
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
233

 
$
50,223

Accounts payable and accrued liabilities
224,898

 
157,538

Income taxes payable
4,665

 

Total current liabilities
229,796

 
207,761

 
 
 
 
Long-term debt, less current portion
425,268

 
116,413

Long-term pension and postretirement healthcare benefits liabilities
18,743

 
19,792

Deferred income taxes
105,424

 
64,415

Other long-term liabilities
9,262

 
5,753

Total liabilities
788,493

 
414,134

 
 
 
 
Contingencies (Note 11)


 


Redeemable noncontrolling interests
1,686

 
1,836

 
 
 
 
SHAREHOLDERS' EQUITY
 

 
 

Capital stock
50,143

 
50,371

Capital in excess of par value
9,560

 
22,278

Accumulated other comprehensive loss
(30,244
)
 
(29,814
)
Retained earnings
1,063,838

 
989,013

Total CLARCOR Inc. equity
1,093,297

 
1,031,848

Noncontrolling interests
1,031

 
1,025

Total shareholders' equity
1,094,328

 
1,032,873

Total liabilities and shareholders' equity
$
1,884,507

 
$
1,448,843




See Notes to Consolidated Condensed Financial Statements
Page 5



CLARCOR Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Nine Months Ended
 
August 30,
2014
 
August 31,
2013
Cash flows from operating activities:
 
 
 
Net earnings
$
100,652

 
$
85,454

Depreciation
22,359

 
19,885

Amortization
14,126

 
4,454

Other noncash items
972

 
1,800

Net loss on disposition of assets
67

 
3,824

Bargain purchase gain
(2,815
)
 

Stock-based compensation expense
4,909

 
4,074

Excess tax benefit from stock-based compensation
(705
)
 
(7,313
)
Deferred income taxes
(1,166
)
 
6,610

Change in assets and liabilities
(39,550
)
 
(47,592
)
Net cash provided by operating activities
98,849

 
71,196

 
 
 
 
Cash flows from investing activities:
 

 
 

Restricted cash
1,364

 
(9,207
)
Business acquisitions, net of cash acquired
(595,328
)
 

Additions to plant assets
(52,524
)
 
(25,491
)
Proceeds from disposition of plant assets
354

 
2,673

Investment in affiliates
(473
)
 
(615
)
Net cash used in investing activities
(646,607
)
 
(32,640
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net payments on multicurrency revolving credit facility
(36,000
)
 

Borrowings under term loan facility
315,000

 

Payments on term loan facility
(20,000
)
 

Payments on long-term debt, including business acquisition-related seller financing
(1,562
)
 
(3,979
)
Payment of financing costs
(723
)
 

Sale of capital stock under stock option and employee purchase plans
4,208

 
24,204

Payments for repurchase of common stock
(21,959
)
 
(24,149
)
Excess tax benefit from stock-based compensation
705

 
7,313

Dividend paid to noncontrolling interests
(166
)
 
(206
)
Cash dividends paid
(25,751
)
 
(20,219
)
Net cash provided by (used in) financing activities
213,752

 
(17,036
)
Net effect of exchange rate changes on cash
69

 
(157
)
Net change in cash and cash equivalents
(333,937
)
 
21,363

Cash and cash equivalents, beginning of period
411,562

 
185,496

Cash and cash equivalents, end of period
$
77,625

 
$
206,859

 
 
 
 
Cash paid during the period for:
 

 
 

Interest
$
1,831

 
$
301

Income taxes, net of refunds
$
44,226

 
$
29,947



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.
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
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 August 30, 2014 and August 31, 2013 and the Consolidated Condensed Balance Sheet as of August 30, 2014 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 30, 2013 (“2013 Form 10-K”).  The November 30, 2013 Consolidated Condensed Balance Sheet data was derived from the Company’s year-end audited Consolidated Financial Statements as presented in the 2013 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 August 30, 2014, 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 2013 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 also has $1,294 and $1,896 of noncurrent restricted cash recorded in Other noncurrent assets as of August 30, 2014 and November 30, 2013, respectively, 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:

 
August 30,
2014
 
November 30,
2013
Raw materials
$
108,685

 
$
80,741

Work in process
43,923

 
34,402

Finished products
128,353

 
103,643

 Inventories
$
280,961

 
$
218,786



Page 7


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


Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component for three and nine months ended August 30, 2014 are as follows:

 
Pension Benefits
 
Foreign Currency Translation Adjustments
 
Total
Balance at May 31, 2014, net of tax
$
(29,102
)
 
$
2,612

 
$
(26,490
)
Other comprehensive income (loss) before reclassifications and tax
(97
)
 
(4,134
)
 
(4,231
)
   Tax benefit
26

 

 
26

Other comprehensive income (loss) before reclassifications, net of tax
(71
)
 
(4,134
)
 
(4,205
)
Reclassifications, before tax
718

(a)

 
718

   Tax expense
(267
)
 

 
(267
)
Reclassifications, net of tax
451

 

 
451

Other comprehensive income, net of tax
380

 
(4,134
)
 
(3,754
)
Balance at August 30, 2014, net of tax
$
(28,722
)
 
$
(1,522
)
 
$
(30,244
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance at November 30, 2013, net of tax
$
(29,878
)
 
$
64

 
$
(29,814
)
Other comprehensive income (loss) before reclassifications and tax
(250
)
 
(1,586
)
 
(1,836
)
   Tax benefit
86

 

 
86

Other comprehensive income (loss) before reclassifications, net of tax
(164
)
 
(1,586
)
 
(1,750
)
Reclassifications, before tax
2,154

(a)

 
2,154

   Tax expense
(834
)
 

 
(834
)
Reclassifications, net of tax
1,320

 

 
1,320

Other comprehensive income, net of tax
1,156

 
(1,586
)
 
(430
)
Balance at August 30, 2014, net of tax
$
(28,722
)
 
$
(1,522
)
 
$
(30,244
)
___________
(a) Includes amortization of prior service cost and net actuarial loss included in net periodic benefit cost (see Note 9) that were reclassified from accumulated other comprehensive income (loss) to selling and administrative expenses.

Derivatives

From time-to-time, the Company may make use of derivative financial instruments to manage certain foreign currency risks, including foreign currency forward contracts. The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not accounted for as hedges are adjusted to fair value through income, with realized and unrealized gains and losses on such instruments recorded in Other, net income in the Condensed Consolidated Statements of Earnings. Periodic settlement payments and receipts are recorded as a component of cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows.

New Accounting Guidance

In February 2013, the Financial Accounting Standards Board ("FASB") updated the disclosure requirements for accumulated other comprehensive income ("AOCI"). The updated guidance requires companies to disclose amounts reclassified out of AOCI by component. The updated guidance does not affect how net income or other comprehensive income are calculated or presented. The adoption of this guidance on December 1, 2013 did not have a material impact on the Consolidated Financial Statements. For additional information, refer to "Accumulated Other Comprehensive Income (Loss)" above.


Page 8


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

In April 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-08, "Presentation of Financial Statements and Property, Plant and Equipment; Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 modifies the requirements for reporting discontinued operations. Under the amendments in ASU 2014-08, the definition of discontinued operation has been modified to only include those disposals of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results. ASU 2014-08 also expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. ASU 2014-08 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2014 (fiscal year 2016 for the Company). The adoption of this update is not expected to have a material impact on the Company's Consolidated Financial Statements.

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.

Revisions to Previously Issued Financial Statements

The Company revised its Condensed Consolidated Statement of Cash Flows for the nine months ended August 31, 2013 to properly reflect payments made for business acquisition-related seller financing amounts. The revision resulted in a decrease in the previously reported caption "Business acquisitions, net of cash acquired," a cash outflow from investing activities, of approximately $3,811 and an increase in the caption "Payments on long-term debt, including business acquisition-related seller financing," a cash outflow from financing activities, of approximately $3,811. This revision is not material to the Condensed Consolidated Statement of Cash Flows for the nine months ended August 31, 2013 and has no impact on the Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Earnings or Condensed Consolidated Statement of Comprehensive Earnings.


2.
BUSINESS ACQUISITIONS AND INVESTMENTS

Business Acquisitions

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 8).

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, while transaction costs associated with the acquisition were expensed as incurred. The Company is currently in the process of finalizing the valuation of the assets acquired and liabilities assumed. The actual allocation of the final purchase price and the resulting effect on income from operations may differ from the unaudited pro forma amounts included herein. 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 CLARCOR Engine Mobile Solutions:

Accounts receivable
$
19,548

Inventories
7,367

Deferred income taxes
4,121

Property, plant and equipment
10,176

Goodwill
194,618

Intangible assets
146,430

 
Total assets acquired
382,260

Current liabilities
8,476

Other noncurrent liabilities
2,000

  Deferred income taxes
44,065

 
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 $194,618 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 for CLARCOR Engine Mobile Solutions subsequent to the date it was acquired by the Company for the three and nine months ended August 30, 2014 (which, in the case of the nine-month period ended August 30, 2014, includes the period from May 1, 2014, to August 30, 2014) were as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 30, 2014
 
August 30, 2014
Net sales
$
28,014

 
$
37,006

Operating profit
7,275

 
5,348


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 and is headquartered in Overland Park, Kansas, with manufacturing operations in Missouri and the U.K. Its results are included

Page 10


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

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.
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.
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, while transaction costs associated with the acquisition were expensed as incurred. The Company is currently in the process of finalizing the valuations of assets acquired and liabilities assumed. The actual allocation of the final purchase price and the resulting effect on income from operations may differ from the unaudited pro forma amounts included herein. The Company expects to finalize the purchase price allocation within one year of the purchase date.

The following table summarizes the preliminary estimated 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

 
 


Page 11


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

Net sales and operating profit for CLARCOR Industrial Air subsequent to the date it was acquired by the Company for the three and nine months ended August 30, 2014 (which, in the case of the nine-month period ended August 30, 2014, includes the period from December 16, 2013 to August 30, 2014) were as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 30, 2014
 
August 30, 2014
Net sales
$
59,842

 
$
172,205

Operating profit
5,038

 
8,810

        
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 December 2, 2012, the beginning 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 nine-month periods ended August 30, 2014 and August 31, 2013 include amortization charges for acquired intangible assets, and adjustments to depreciation expense, interest expense, transaction costs incurred, adjustments to cost of sales to reflect the estimated fair values of inventory at the acquisition date, 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. These pro forma amounts are based on a preliminary allocation of the purchase price to estimates of the fair values of the assets acquired and liabilities assumed. The pro forma amounts include the Company’s preliminary determination of purchase accounting adjustments based on available information and certain assumptions that the Company believes are reasonable.

Page 12


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

 
Three Months Ended
 
Three Months Ended
 
August 30, 2014
 
August 31, 2013
 
As reported
CLARCOR
Engine Mobile Solutions
 
CLARCOR
Industrial Air
 
Pro forma
 
As reported
CLARCOR
Engine Mobile Solutions
 
CLARCOR
Industrial Air
 
Pro forma
Net sales
$
400,152

$

 
$

 
$
400,152

 
$
289,126

$
27,384

 
$
63,019

 
$
379,529

Operating profit
62,226


 
171

(b)
62,397

 
41,985

8,325

(d)
6,467

(f)
56,777

Net earnings attributable to CLARCOR
41,703


 
125

 
41,828

 
28,707

4,849

 
4,586

 
38,142

Diluted earnings per share
$
0.82

$

 
$

 
$
0.82

 
$
0.57

$
0.10

 
$
0.09

 
$
0.76

 
 
Nine Months Ended
 
Nine Months Ended
 
August 30, 2014
 
August 31, 2013
 
As reported
CLARCOR
Engine Mobile Solutions
 
CLARCOR
Industrial Air
 
Pro forma
 
As reported
CLARCOR
Engine Mobile Solutions
 
CLARCOR
Industrial Air
 
Pro forma
Net sales
$
1,099,479

$
46,837

 
$
15,422

 
$
1,161,738

 
$
832,980

$
77,843

 
$
163,618

 
$
1,074,441

Operating profit
144,639

17,677

(a)
8,814

(c)
171,130

 
125,201

17,602

(e)
3,213

(g)
146,016

Net earnings attributable to CLARCOR
100,576

10,485

 
6,551

 
117,612

 
85,220

9,650

 
1,956

 
96,826

Diluted earnings per share
$
1.98

$
0.21

 
$
0.13

 
$
2.32

 
$
1.69

$
0.19

 
$
0.04

 
$
1.92


(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, which have been pushed back to the nine months ended August 31, 2013 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 $126, which have been pushed back to the three and nine month periods ended August 31, 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 $4,342, which have been pushed back to the nine months ended August 31, 2013 for pro forma presentation. Also includes adjustments to intangible asset amortization, depreciation expense and interest expense.
(d)
Includes adjustments to intangible asset amortization, depreciation expense and interest expense.
(e)
Includes adjustments to push back transaction costs of $3,075 and cost of sales related to the step-up of inventory to its estimated acquisition-date fair value of $1,368. Also includes adjustments to intangible asset amortization, depreciation expense and interest expense.
(f)
Includes adjustments to push back cost of sales related to the step-up of inventory to its estimated acquisition-date fair value of $126. Also includes adjustments to intangible asset amortization, depreciation expense and interest expenese.
(g)
Includes adjustments to push back transaction costs of $3,740 and cost of sales related to the step-up of inventory to its estimated acquisition-date fair value of $4,468. 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

Page 13


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

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.
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, while transaction costs associated with the acquisition were expensed as incurred. 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.
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.

Net sales and operating loss for the Bekaert business subsequent to the date it was acquired by the Company for the three and nine months ended August 30, 2014 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 30, 2014
 
August 30, 2014
Net sales
$
2,809

 
$
9,111

Operating loss
(125
)
 
(679
)
Modular
On May 9, 2012, the Company acquired 100% of the shares in Modular Engineering Company Pty Ltd. ("Modular") for $7,875. An initial payment of $5,237 was made at closing with the remaining purchase price to be paid in two installments on the first and second anniversaries of the original closing date. The first installment of $1,530 was made on May 8, 2013 and the second installment of $1,391 was paid on May 8, 2014.

Investments

The Company owns 30% of BioProcessH2O LLC (“BPH”), a Rhode Island-based manufacturer of industrial waste water and water reuse filtration systems.  During the three and nine months ended August 30, 2014 and August 31, 2013, the Company did not make any additional investments. The Company has $21 accrued which has not yet been funded and is included in Accounts payable and accrued liabilities in the accompanying Consolidated Condensed Balance Sheets at both August 30, 2014 and November 30, 2013. The investment, with a carrying amount of $3,032 and $3,097, at August 30, 2014 and November 30, 2013, 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 nine months ended August 30, 2014 and August 31, 2013, the Company did not receive any dividends from BPH.

The Company also owns 15.65% 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 nine months ended August 30, 2014, the Company invested an additional $600 and $1,073, respectively, into Algae.

Page 14


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

The investment, with a carrying amount of $3,277 and $2,204 at August 30, 2014 and November 30, 2013, respectively, included in Other noncurrent assets, is being accounted for under the cost method of accounting.  Under the cost method, the Company recognizes dividends as income when received and reviews the cost basis of the investment for impairment if factors indicate that a decrease in value of the investment has occurred.  During the three and nine months ended August 30, 2014 and August 31, 2013, the Company did not receive any dividends from Algae.


3.
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. Previously, on March 23, 2009, the shareholders of CLARCOR approved the 2009 Incentive Plan, which replaced the 2004 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 2013 Form 10-K.

Stock Options

Nonqualified stock options are granted at exercise prices equal to the market price of CLARCOR common stock at the date of grant, which is the date the Company’s Board of Directors approves the grant and the participants receive it.  The Company’s Board of Directors determines the vesting requirements for stock options at the time of grant and may accelerate vesting.  In general, options granted to key employees vest 25% per year beginning at the end of the first year; therefore, they become fully exercisable at the end of four years.  Vesting may be accelerated in the event of retirement, disability or death of a participant or change in control of the Company.  Options granted to non-employee directors vest immediately.  All options expire ten years from the date of grant unless otherwise terminated. Beginning in 2013, stock-based compensation for the Company's Board of Directors is in the form of a grant of shares of stock, rather than stock options.

The following table summarizes information related to stock options and stock option exercises during the three and nine months ended August 30, 2014 and August 31, 2013.

 
 
Quarter Ended
 
Nine Months Ended
 
 
August 30,
2014

August 31,
2013
 
August 30,
2014

August 31,
2013
Pre-tax compensation expense
 
$
925

 
$
775

 
$
2,957

 
$
2,436

Deferred tax benefits
 
(330
)
 
(276
)
 
(1,053
)
 
(867
)
Excess tax benefits associated with tax deductions over the amount of compensation expense recognized in the consolidated condensed financial statements
 
354

 
3,119

 
604

 
6,018

Fair value of stock options on date of grant
 

 
32

 
4,650

 
3,868

Total intrinsic value of stock options exercised
 
1,253

 
11,417

 
2,409

 
20,297

Cash received upon exercise of stock options
 
1,430

 
16,091

 
3,254

 
23,275

Addition to capital in excess of par value due to exercise of stock options
 
1,740

 
18,707

 
3,756

 
27,520



Page 15


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

The following table summarizes activity for the nine months ended August 30, 2014 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
2,208,314
 
$
40.76

Granted
450,700
 
$
61.49

Exercised
(94,411)
 
$
34.47

Surrendered
(20,610)
 
$
53.05

Outstanding at end of period
2,543,993
 
$
44.56

 
 
 
 
Exercisable at end of period
1,612,484
 
$
39.39


 At August 30, 2014, there was $7,087 of unrecognized compensation cost related to option awards which the Company expects to recognize over a weighted-average period of 2.59 years.

The following table summarizes information about the Company’s outstanding and exercisable options at August 30, 2014.

 
 
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
 
133,900
 
$
26.98

 
$
4,850

 
1.92
 
133,900

 
$
26.98

 
$
4,851

 
1.92
$31.96 - $38.06
 
675,883
 
$
33.85

 
19,842

 
3.77
 
675,883

 
$
33.85

 
19,842

 
3.77
$40.73 - $49.91
 
1,291,010
 
$
46.20

 
21,965

 
7.42
 
802,076

 
$
46.12

 
13,704

 
7.10
$55.01 - $61.57
 
443,200
 
$
61.45

 
780

 
9.30
 
625

 
$
55.01

 
5

 
8.75
 
 
2,543,993
 
$
44.56

 
$
47,437

 
6.49
 
1,612,484

 
$
39.39

 
$
38,402

 
5.28

    
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.
 
 
Nine Months Ended
 
 
August 30,
2014
 
August 31,
2013
Weighted average fair value per option at the date of grant for options granted
 
$
11.50

 
$
9.98

Risk-free interest rate
 
1.55
%
 
1.19
%
Expected dividend yield
 
1.10
%
 
1.19
%
Expected volatility factor
 
21.38
%
 
25.80
%
Expected option term in years
 
5.0

 
5.4


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.


Page 16


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

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 16,986 and 14,760 vested and deferred shares at August 30, 2014 and November 30, 2013, respectively.

The following table summarizes information related to restricted stock unit awards during the three and nine months ended August 30, 2014 and August 31, 2013.
 
 
Quarter Ended

Nine Months Ended
 
 
August 30,
2014

August 31,
2013

August 30,
2014

August 31,
2013
Pre-tax compensation expense
 
$
330

 
$
209

 
$
1,072

 
$
678

Deferred tax benefits
 
(118
)
 
(75
)
 
(382
)
 
(242
)
Excess tax (expense) benefits associated with tax deductions (under) over the amount of compensation expense recognized in the consolidated condensed financial statements
 

 
(74
)
 
101

 
1,280

Fair value of restricted stock unit awards on date of grant
 

 

 
1,524

 
1,068

Fair value of restricted stock unit awards vested
 

 

 
765

 
621


The following table summarizes activity for the nine months ended August 30, 2014 with respect to the restricted stock unit awards.
 
Units
 
Weighted
Average
Grant Date
Fair Value
Nonvested at beginning of year
48,044
 
$
45.18

Granted
24,808
 
$
61.42

Vested
(17,685)
 
$
43.27

Nonvested at end of period
55,167
 
$
53.09

 
As of August 30, 2014, there was $1,628 of total unrecognized compensation cost related to restricted stock unit awards 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 nine months ended August 30, 2014 and August 31, 2013.

 
 
Quarter Ended
 
Nine Months Ended
 
 
August 30,
2014
 
August 31,
2013
 
August 30,
2014
 
August 31,
2013
Pre-tax compensation expense
 
$

 
$
460

 
$
880

 
$
960

Shares of Company common stock issued under the plans
 

 

 
15,400

 
18,256




Page 17


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


4.
NONCONTROLLING INTERESTS

Noncontrolling interests changed as follows during the nine months ended August 30, 2014 and August 31, 2013:
 
Nine Months Ended
 
August 30, 2014
 
August 31, 2013
 
Redeemable
 
Non-Redeemable
 
Redeemable
 
Non-Redeemable
Noncontrolling interests at beginning of period
$
1,836

 
$
1,025

 
$
1,754

 
$
986

 
 
 
 
 
 
 
 
Noncontrolling interests (loss) earnings
(96
)
 
172

 
35

 
199

Foreign currency translation
(54
)
 

 
25

 
(31
)
Dividend

 
(166
)
 

 
(206
)
 
 
 
 
 
 
 
 
Noncontrolling interests at end of period
$
1,686

 
$
1,031

 
$
1,814

 
$
948

 
 
 
 
 
 
 
 
 
Redeemable Noncontrolling Interests

In March 2007, the Company acquired an 80% ownership share in Sinfa SA (“SINFA”), a manufacturer of automotive and heavy-duty engine filters based in Casablanca, Morocco.  As part of the purchase agreement, the Company and the noncontrolling owners each have an option to require the purchase of the remaining 20% ownership shares by the Company after December 31, 2012 which would result in SINFA becoming a wholly owned subsidiary.  As of August 30, 2014, neither the Company nor the noncontrolling owners have exercised the purchase option. The remaining 20% of SINFA owned by the noncontrolling owners has been reported as Redeemable noncontrolling interests and classified as mezzanine equity in the Consolidated Condensed Balance Sheets.  The Redeemable noncontrolling interests is reflected at its carrying value, which is greater than its estimated redemption price. If applicable, the Redeemable noncontrolling interests will be accreted to the redemption price, through equity, at the point at which the redemption becomes probable.  The Company has not recorded any accretion to date.



Page 18


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


5.
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 nine months ended August 30, 2014.  

 
Engine/Mobile
Filtration
 
Industrial/
Environmental
Filtration
 
Packaging
 
Total
Goodwill at beginning of year
$
21,868

 
$
219,431

 
$

 
$
241,299

Acquisition
194,618

 
74,324

 

 
268,942

Currency translation adjustments
(135
)
 
1,106

 

 
971

Goodwill at end of period
$
216,351

 
$
294,861

 
$

 
$
511,212


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
August 30, 2014
 
 
 
 
 
 
 
Indefinite Lived Intangibles:
 
 
 
 
 
 
 
Trademarks - indefinite lived
$
783

 
$
77,048

 
$

 
$
77,831

 
 
 
 
 
 
 
 
Finite Lived Intangibles:
 
 
 
 
 
 
 
Trademarks, gross - finite lived
$
301

 
$
488

 
$

 
$
789

Accumulated amortization
(115
)
 
(339
)
 

 
(454
)
Trademarks, net - finite lived
$
186

 
$
149

 
$

 
$
335

 
 
 
 
 
 
 
 
Customer relationships, gross
$
139,547

 
$
124,768

 
$

 
$
264,315

Accumulated amortization
(5,399
)
 
(27,001
)
 

 
(32,400
)
Customer relationships, net
$
134,148

 
$
97,767

 
$

 
$
231,915

 
 
 
 
 
 
 
 
Other acquired intangibles, gross
$
11,243

 
$
61,172

 
$

 
$
72,415

Accumulated amortization
(603
)
 
(23,938
)
 

 
(24,541
)
Other acquired intangibles, net
$
10,640

 
$
37,234

 
$

 
$
47,874

 
 
 
 
 
 
 
 
Total finite lived intangible assets, net
$
144,974

 
$
135,150

 
$

 
$
280,124

 
 
 
 
 
 
 
 
Acquired intangible assets, less accumulated amortization
$
145,757

 
$
212,198

 
$

 
$
357,955



Page 19


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

The following table summarizes estimated amortization expense.
Fiscal year 2014
$
20,334

Fiscal year 2015
24,686

Fiscal year 2016
24,553

Fiscal year 2017
24,315

Fiscal year 2018
23,652



6.
FAIR VALUE MEASUREMENTS

Fair Value Measurements

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

Level 1 – Quoted active market prices for identical assets
Level 2 – Significant other observable inputs, such as quoted prices for similar (but not identical) instruments in active markets, quoted prices for identical or similar instruments in markets which are not active and model determined valuations in which all significant inputs or significant value-drivers are observable in active markets
Level 3 – Significant unobservable inputs, such as model determined valuations in which one or more significant inputs or significant value-drivers are unobservable

Assets or liabilities that have recurring fair value measurements are shown below:
 
Fair Value Measurements at Reporting Date
 
Total
 
Level 1
 
Level 2
 
Level 3
August 30, 2014
 
 
 
 
 
 
 
Restricted trust, included in Other noncurrent assets
 
 
 
 
 
 
 
Mutual fund investments - equities
$
444

 
$
444

 
$

 
$

Mutual fund investments - bonds
454

 
454

 

 

Cash and equivalents
16

 
16

 

 

Total restricted trust
$
914

 
$
914

 
$

 
$

 
 
 
 
 
 
 
 
Foreign currency forward contracts
$
812

 
$

 
$
812

 
$


 
Fair Value Measurements at Reporting Date
 
Total

Level 1

Level 2

Level 3
November 30, 2013
 

 
 

 
 

 
 

Restricted trust, included in Other noncurrent assets
 

 
 

 
 

 
 

Mutual fund investments - equities
$
593

 
$
593

 
$

 
$

Mutual fund investments - bonds
400

 
400

 

 

Cash and equivalents
31

 
31

 

 

Total restricted trust
$
1,024

 
$
1,024

 
$

 
$


Page 20


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


There were no changes in the fair value determination methods or significant assumptions used in those methods during the nine months ended August 30, 2014.  There were no transfers between Level 1 and Level 2 and there were no transfers into or out of Level 3 during the nine months ended August 30, 2014. 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 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 projected 2014 and 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.  Any increase or decrease in the fair value, as a result of changes in significant inputs such as the discount rate, the discount period or other factors used in the calculation, is recognized in Selling and administrative expenses in the Consolidated Condensed Statements of Earnings in the period the estimated fair value changes. The fair value of the contingent consideration was estimated using a probability-weighted discounted cash flow model with a discount rate of 13.2%. The fair value of the TransWeb contingent earn-out payment was $0 at August 30, 2014 and at November 30, 2013, 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 August 30, 2014 and November 30, 2013.  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 $423,601 and $166,288 at August 30, 2014 and November 30, 2013, 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 August 30, 2014 and November 30, 2013 is $425,501 and $166,636, respectively.

Fair Value of Hedging Instruments

When the Company acquired CLARCOR Industrial Air, approximately $50,000 of the $260,312 purchase price was paid through a U.K. subsidiary of the Company, using funds advanced from one of the Company's U.S. subsidiaries through a European holding company. The Company intends to settle the underlying inter-company advances in cash, therefore gains and losses on translation of the inter-company advances are recognized in Other, net income on the Consolidated Condensed Statements of Earnings. The Company has entered into foreign currency forward contracts to manage its exposure to translational foreign exchange risk related to these inter-company advances. The forward contracts have a three-month duration, which the Company anticipates rolling forward until such time as the underlying inter-company advances have been settled. Hedge accounting was not applied to the forward contracts and therefore unrealized gains or losses are recorded in Other, net income in the Consolidated Condensed Statements of Earnings. In the third quarter of 2014 the Company recorded unrealized losses of $39 on the forward contracts as well as a loss of $149 on the translation of the underlying inter-company advances. In the first nine months of 2014 the Company recorded unrealized gains of $195 on the forward contracts, as well as a gain of $1,174 on the translation of the underlying inter-company advances. As of August 30, 2014 forward contracts are recorded at their estimated fair value of $812 within Prepaid expenses and other current assets on the Consolidated Condensed Balance Sheets.


Page 21


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


7.
ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND GUARANTEES

Accounts payable and accrued liabilities at August 30, 2014 and November 30, 2013 were as follows:

 
August 30,
2014
 
November 30,
2013
Accounts payable
$
113,905

 
$
79,164

Accrued salaries, wages and commissions
22,095

 
14,908

Pension and postretirement healthcare benefits liabilities
216

 
278

Compensated absences
9,655

 
8,600

Accrued insurance liabilities
11,182

 
7,599

Customer deposits
24,544

 
16,081

Other accrued liabilities
43,301

 
30,908

Accounts payable and accrued liabilities
$
224,898

 
$
157,538

 
The Company has letters of credit totaling $31,230 and $28,541 as of August 30, 2014 and November 30, 2013, 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.


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:
 
Nine Months Ended
 
August 30,
2014
 
August 31,
2013
Warranty accrual at beginning of period
$
1,599

 
$
1,533

Warranty accrual added through business acquisitions
10,946

 

Accruals for warranties issued during the period
1,691

 
222

Adjustments related to pre-existing warranties
(96
)
 
(257
)
Settlements made during the period
(4,945
)
 
(334
)
Other adjustments, including currency translation
(136
)
 
(2
)
Warranty accrual at end of period
$
9,059

 
$
1,162

     
Warranty accruals added through business acquisitions in the first nine 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.


Page 22


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


Restructuring and other charges

In the first quarter of 2014 the Company recorded a restructuring charge of $1,315, $1,186 of which was included in Cost of sales and $129 of which was included in Selling and administrative expenses in the Consolidated Condensed Statement of Earnings, related to the planned closure of one of its HVAC air filtration manufacturing facilities -- which is included in its Industrial/Environmental Filtration segment -- and the involuntary separation of certain employees at its air filtration headquarters, to better align manufacturing capacity and workforce levels with the business's growth strategy and to support our continual focus on cost reductions and productivity improvements. The charge consisted of approximately $863 related to the impairment of long-lived assets and leasehold improvements and approximately $452 related to severance and employee termination costs, all of which have been paid as of August 30, 2014.


8.
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 August 30, 2014, there was $395,000 outstanding on the Term Loan Facility with a weighted average interest rate of approximately 1.06% and there was $14,000 outstanding on the Credit Facility with a weighted average interest rate of approximately 0.85% and a remaining borrowing capacity of $119,988 on the Credit Facility. The Credit Facility includes a $50,000 letter of credit sub-facility, against which $16,012 in letters of credit had been issued at both August 30, 2014 and November 30, 2013.



Page 23


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


9.
PENSION AND OTHER POSTRETIREMENT PLANS
 
The Company provides various retirement benefits, including defined benefit plans and postretirement healthcare plans covering certain current and retired employees in the U.S. and abroad.  Components of net periodic benefit cost (income) and Company contributions for these plans were as follows:
 
 
Quarter Ended
 
Nine Months Ended
 
 
August 30,
2014
 
August 31,
2013
 
August 30,
2014
 
August 31,
2013
Pension Benefits:
 
 
 
 
 
 
 
 
Components of net periodic benefit cost (income):
 
 
 
 
 
 
 
 
Service cost
 
$
499

 
$
622

 
$
1,495

 
$
1,865

Interest cost
 
1,934

 
1,727

 
5,798

 
5,183

Expected return on plan assets
 
(2,835
)
 
(2,694
)
 
(8,500
)
 
(8,086
)
Settlement cost
 

 
3,111

 

 
3,111

Amortization of unrecognized:
 
 
 
 
 
 
 
 
Prior service cost
 
(3
)
 
(3
)
 
(9
)
 
(8
)
Net actuarial loss
 
721

 
1,516

 
2,163

 
4,547

Net periodic benefit cost
 
$
316

 
$
4,279

 
$
947

 
$
6,612

 
 
 
 
 
 
 
 
 
Cash contributions
 
$
66

 
$
7,709

 
$
193

 
$
24,216

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

 
$
2

 
$
6

 
$
6

Amortization of unrecognized:
 
 
 
 
 
 
 
 
Prior service cost
 
(31
)
 
(31
)
 
(93
)
 
(93
)
Net actuarial gain
 
(37
)
 
(37
)
 
(111
)
 
(111
)
Net periodic benefit income
 
$
(66
)
 
$
(66
)
 
$
(198
)
 
$
(198
)
 
 
 
 
 
 
 
 
 
Cash contributions
 
$
16

 
$
18

 
$
48

 
$
54

 
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 2014:

U.S. Qualified Plans
$

U.S. Combined Nonqualified Plans
216

Non-U.S. Plan
409

Postretirement Healthcare Benefit Plan
62

Total expected contributions
$
687


During the three months and nine months ended August 30, 2014, the Company contributed $82 and $241 to its various plans. In addition to the plan assets related to its qualified plans, the Company has also funded $914 and $1,024 at August 30, 2014 and

Page 24


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

November 30, 2013, respectively, into a restricted trust for its U.S. combined nonqualified plans (see Note 6).  This trust is included in Other noncurrent assets in the Consolidated Condensed Balance Sheets.


10.
INCOME TAXES

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

 
Nine Months Ended
 
August 30,
2014
 
August 31,
2013
Unrecognized tax benefits at beginning of year
$
2,155

 
$
2,209

Additions for current period tax positions
237

 
348

Reductions for prior period tax positions

 

Reductions for lapse of statue of limitations / settlements
(22
)
 
(334
)
Changes in interest and penalties
53

 
(226
)
Unrecognized tax benefits at end of period
$
2,423

 
$
1,997

 
At August 30, 2014, the amount of unrecognized tax benefit, that would impact the effective tax rate if recognized, was $1,521.  At August 30, 2014, the Company had $256 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 $175 over the next twelve months as a result of expected settlements with taxing authorities or the lapse 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 tax returns for years subsequent to August 31, 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.


11.
CONTINGENCIES

Legal Contingencies

From time to time, the Company is subject to lawsuits, investigations and disputes (some of which involve substantial claimed amounts) arising out of the conduct of its business, including matters relating to commercial transactions, product liability, intellectual property and other matters.  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 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 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.

Page 25


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


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. On June 3, 2011, TransWeb filed a Second Amended Complaint against 3M, (i) seeking declaratory judgment that 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, (ii) alleging patent infringement by 3M of a patent held by TransWeb, and (iii) alleging antitrust violations by 3M in connection with certain upstream and downstream markets for fluorinated polymeric filtration media under theories of Walker Process fraud and sham litigation. TransWeb later dropped its patent infringement allegations against 3M, but continued to allege and pursue its inequitable conduct and antitrust claims. Prior to trial, 3M voluntarily dismissed with prejudice the majority of the patent claims 3M had originally brought against TransWeb, but continued to allege infringement by TransWeb of two claims of one of the patents in suit.

Following a trial in which a six-member jury unanimously found in TransWeb's favor on substantially all counts and a procedure whereby a third party Special Master quantified and qualified TransWeb's attorneys' fees to be awarded as damages, on April 21, 2014 the court issued a ruling in favor of TransWeb on all counts, and awarded TransWeb approximately $26,147 in damages. 3M then moved the court for a new trial, alleging that the jury's verdicts were against the manifest weight of the evidence presented at trial. The court denied 3M's motion on June 11, 2014.

As anticipated, 3M timely exercised its automatic right to appeal the court's judgment to the US Court of Appeals for the Federal Circuit. 3M currently has until November 3, 2014 to file its opening appellate brief.

The Company acquired TransWeb on December 29, 2010.  The $30,017 base purchase price included a $17,000 liability due to the former owners of TransWeb, which payment could be reduced dollar-for-dollar for qualifying costs incurred by the Company in connection with the 3M litigation. Since the acquisition date, the Company has expensed legal costs in connection with the 3M litigation and simultaneously recorded the recovery of such costs from the former owners through a reduction of the liability due to the former owners and a corresponding reduction in legal expense. Qualifying costs incurred by the Company have exceeded $17,000 and, as such, the Company believes that no further payments are due to the former owners of TransWeb. The Company does not anticipate incurring any liability in connection with the litigation, due to the fact that the district court ruled in TransWeb's favor on all counts. The Company does anticipate incurring additional litigation related expenses in connection with the appeal by 3M referenced above. The Company does not accrue for such expenses, but recognizes them as they are incurred.

Other

Additionally, the Company is party to various proceedings relating to environmental issues.  The U.S. Environmental Protection Agency and/or other responsible state agencies have designated the Company as a potentially responsible party, along with other companies, in remedial activities for the cleanup of waste sites under the 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 associated 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 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.


Page 26


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


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 3 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
 
Nine Months Ended
 
 
August 30,
2014
 
August 31,
2013
 
August 30,
2014
 
August 31,
2013
Weighted average number of shares outstanding - Basic
 
50,395,007

 
50,092,548

 
50,457,436

 
49,917,939

Dilutive effect of stock-based arrangements
 
486,587

 
512,261

 
459,584

 
563,110

Weighted average number of shares outstanding - Diluted
 
50,881,594

 
50,604,809

 
50,917,020

 
50,481,049

 
 
 
 
 
 
 
 
 
Net earnings attributable to CLARCOR Inc.
 
$
41,703

 
$
28,707

 
$
100,576

 
$
85,220

 
 
 
 
 
 
 
 
 
Net earnings per share attributable to CLARCOR Inc. - Basic
 
$
0.83

 
$
0.57

 
$
1.99

 
$
1.71

Net earnings per share attributable to CLARCOR Inc. - Diluted
 
$
0.82

 
$
0.57

 
$
1.98

 
$
1.69

 
 The following table provides additional information regarding the calculation of earnings per share and stock repurchase activity.
 
 
Quarter Ended
 
Nine Months Ended
 
 
August 30,
2014
 
August 31,
2013
 
August 30,
2014
 
August 31,
2013
Number of antidilutive options with exercise prices greater than the average market price excluded from the computation of dilutive earnings per share
 
431,450

 
2,500

 
441,003

 
166,846

Common stock repurchased and retired pursuant to the Company's stock repurchase program
 
$
21,959

 
$
6,785

 
$
21,959

 
$
24,149

Number of shares repurchased and retired pursuant to the Company's stock repurchase program
 
362,502

 
124,000

 
362,502

 
470,100

 
At August 30, 2014, there remained $219,322 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.



Page 27


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


13.
SEGMENT INFORMATION

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

Segment information is summarized as follows:

 
 
Quarter Ended
 
Nine Months Ended
 
 
August 30,
2014
 
August 31,
2013
 
August 30,
2014
 
August 31,
2013
Net sales:
 
 
 
 
 
 
 
 
Engine/Mobile Filtration
 
$
165,910

 
$
129,148

 
$
436,805

 
$
379,195

Industrial/Environmental Filtration
 
213,752

 
139,659

 
608,207

 
398,945

Packaging
 
20,490

 
20,319

 
54,467

 
54,840

 
 
$
400,152

 
$
289,126

 
$
1,099,479

 
$
832,980

 
 
 
 
 
 
 
 
 
Operating profit:
 
 
 
 
 
 

 
 

Engine/Mobile Filtration
 
$
36,741

 
$
28,611

 
$
86,587

 
$
81,156

Industrial/Environmental Filtration
 
23,873

 
11,315

 
55,024

 
39,404

Packaging
 
1,612

 
2,059

 
3,028

 
4,641

 
 
62,226

 
41,985

 
144,639

 
125,201

Other income (expense), net
 
(1,514
)
 
235

 
1,764

 
7

Earnings before income taxes
 
$
60,712

 
$
42,220

 
$
146,403

 
$
125,208


 
August 30,
2014
 
November 30,
2013
Identifiable assets:
 
 
 
Engine/Mobile Filtration
$
771,687

 
$
397,545

Industrial/Environmental Filtration
1,036,768

 
715,759

Packaging
41,894

 
41,030

Corporate
34,158

 
294,509

 
$
1,884,507

 
$
1,448,843




Page 28





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 2013 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. All references in this Management's Discussion and Analysis of Financial Condition and Results of Operations to "organic" financial results, at the consolidated or reporting segment level, refer to our consolidated or segment results without giving effect to the three fiscal year 2014 acquisitions.


EXECUTIVE SUMMARY

  Management Discussion Snapshot
(In thousands, except per share data)

 
 
Third Quarter
 
First Nine Months
 
 
 
 
 
 
Change
 
 
 
 
 
Change
 
 
 
2014
 
2013
 
$
 
%
 
2014
 
2013
 
$
 
%
 
Net sales
 
$
400,152

 
$
289,126

 
$
111,026

 
38
 %

$
1,099,479

 
$
832,980

 
$
266,499

 
32
 %
 
Cost of sales
 
264,827

 
197,226

 
67,601

 
34
 %
 
742,197

 
561,380

 
180,817

 
32
 %
 
Gross profit
 
135,325

 
91,900

 
43,425

 
47
 %
 
357,282

 
271,600

 
85,682

 
32
 %
 
Selling and administrative expenses
 
73,099

 
49,915

 
23,184

 
46
 %
 
212,643

 
146,399

 
66,244

 
45
 %
 
Operating profit
 
62,226

 
41,985

 
20,241

 
48
 %
 
$
144,639

 
$
125,201

 
$
19,438

 
16
 %
 
Other income (expense)
 
(1,514
)
 
235

 
(1,749
)
 
 

 
$
1,764

 
$
7

 
$
1,757

 


 
Provision for income taxes
 
18,947

 
13,447

 
5,500

 
41
 %
 
$
45,751

 
$
39,754

 
$
5,997

 
15
 %
 
Net earnings attributable to CLARCOR
 
41,703

 
28,707

 
12,996

 
45
 %
 
$
100,576

 
$
85,220

 
$
15,356

 
18
 %
 
Weighted average diluted shares
 
50,882

 
50,605

 
277

 
1
 %
 
50,917

 
50,481

 
436

 
1
 %
 
Diluted earnings per share attributable to CLARCOR
 
$
0.82

 
$
0.57

 
$
0.25

 
44
 %
 
$
1.98

 
$
1.69

 
$
0.29

 
17
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentages:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
33.8
%
 
31.8
%
 
 
 
2.0

pt
32.5
%
 
32.6
%
 
 
 
(0.1
)
pt
Selling and administrative percentage
 
18.3
%
 
17.3
%
 
 
 
1.0

pt
19.3
%
 
17.6
%
 
 
 
1.7

pt
Operating margin
 
15.6
%
 
14.5
%
 
 
 
1.1

pt
13.2
%
 
15.0
%
 
 
 
(1.8
)
pt
Effective tax rate
 
31.2
%
 
31.8
%
 
 
 
(0.6
)
pt
31.3
%
 
31.8
%
 
 
 
(0.5
)
pt
Net earnings margin
 
10.4
%
 
9.9
%
 
 
 
0.5

pt
9.1
%
 
10.2
%
 
 
 
(1.1
)
pt

Page 29





Third Quarter

Net Sales

Net sales increased $111.0 million, or 38%, in the third quarter of 2014 from the third quarter of 2013. Estimated components of this 38% increase in net sales are as follows:
Organic volume
 
6
%
Pricing
 
1
%
Foreign exchange
 
%
Business acquisitions
 
31
%
 
 
38
%

The increase in net sales in the third quarter of 2014 from the third quarter of 2013 was driven primarily by the following factors:

Increased net sales of $59.8 million due to the December 2013 acquisition of GE's air filtration business (now operated as CLARCOR Industrial Air), which is included in the Company's Industrial/Environmental Filtration segment from the date of acquisition. Net sales for this business in the third quarter increased approximately 3% in comparison to the prior year period in which the business was owned by GE, reflecting approximately 13% growth in sales of replacement filters for gas turbine air intake and industrial air filtration applications, partly offset by declines in sales of gas turbine air intake filtration systems and membrane products.

Increased net sales of $28.0 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 third quarter increased approximately 3% in comparison to the prior year period in which the business was owned by Stanadyne Corporation, reflecting approximately 6% growth in sales of replacement filter elements, partially offset by declines in sales of first-fit fuel filter assemblies due to lower demand from OEM customers.

Increased net sales of $2.8 million due to the December 2013 acquisition of the Bekaert Business, which is included in the Company's Industrial/Environmental Filtration segment from the date of acquisition.

Increased organic net sales volume of $10.2 million, or 7%, at our Industrial/Environmental Filtration segment. This net sales growth resulted from a $13.0 million, or 13%, increase in sales within the U.S., which was partly offset by a $2.8 million, or 7%, decrease in foreign net sales, excluding the impact of changes in foreign currency exchange rates. The 13% increase in sales volume within the U.S. resulted primarily from increased sales of natural gas filtration vessels and aftermarket elements, higher sales of dust collector systems and air pollution control products, higher HVAC air filter sales and increased filter sales through our Total Filtration Services ("TFS") distribution business. The 7% decrease in foreign net sales primarily resulted from lower sales of natural gas filtration vessels in Latin America and the Middle East due to several large filtration vessel sales in the third quarter of 2013 that did not recur in 2014.

Increased organic net sales volume of $6.7 million, or 5%, at our Engine/Mobile Filtration segment. This net sales growth resulted from a $3.8 million, or 5%, increase in sales within the U.S. and a $2.9 million, or 6%, increase in foreign net sales, excluding the impact of changes in foreign currency exchange rates. The 5% increase in sales volume within the U.S. resulted primarily from an 8% increase in sales of heavy-duty engine filters to the U.S. aftermarket and a 10% increase in sales of locomotive filters. The 6% increase in foreign net sales volume in this segment reflected increased volumes in Canada, Mexico, China and South Africa, partially offset by volume declines in Europe.

Net sales at our Packaging segment increased $0.2 million, or 1%, due primarily to higher sales of decorated flat sheet metal products and selling price increases on certain products, partially offset by lower sales volume of spice containers, battery jackets and film packaging products.

Page 30





Cost of Sales

Cost of sales increased $67.6 million, or 34%, in the third quarter of 2014 from the third quarter of 2013. This 34% increase in cost of sales was less than the 38% increase in net sales. As a result, our gross margin increased to 33.8% in the third quarter of 2014 from 31.8% in the third quarter of 2013. This 2.0 percentage point increase in gross margin primarily reflects a 1.2 percentage point increase due to the impact of a $4.6 million loss on disposal of equipment at our air filtration operations in the third quarter of 2013 which did not recur in 2014, and a 1.0 percentage point increase due to the acquisitions of the Stanadyne Business and GE's air filtration business. These benefits were partly offset by a 0.4 percentage point decrease in gross margin from sales mix at our Engine/Mobile Filtration and Packaging businesses and a 0.2 percentage point decrease due to higher compensation expense related to our company-wide profit sharing plan. Also, gross margin was negatively impacted by 0.1 percentage points due to higher material costs in the third quarter of 2014 compared with the third quarter of 2013, primarily reflecting higher media and steel pricing; however this was more than offset by a 0.7 percentage point favorable impact from increases in the selling prices of our products.

Selling and Administrative Expenses

Selling and administrative expenses increased $23.2 million, or 46%, in the third quarter of 2014 from the third quarter of 2013. This increase was primarily the result of a $13.6 million increase due to the December 2013 acquisition of GE's air filtration business (including $1.8 million of intangible asset amortization), a $5.6 million increase due to the May 2014 acquisition of the Stanadyne Business (including $2.8 million of intangible asset amortization), and a $1.1 million increase due to the December 2013 acquisition of the Bekaert Business (including $0.1 million of intangible asset amortization). The remaining organic increase of $2.9 million in the third quarter of 2014 from the third quarter of 2013 primarily resulted from $2.5 million of increased employee and professional services costs (including costs related to strategic growth initiatives), $2.0 million of increased compensation expense related to our company-wide profit sharing plan and $1.4 million due to an expense reduction in the third quarter of 2013 -- related to a net change in the estimated contingent liability for a potential earn-out related to one of the former owners of our TransWeb subsidiary -- which did not recur in 2014. These increases were partly offset by a $3.0 million decrease in pension expense, which was primarily the result of a $3.1 million pension settlement charge in the third quarter of 2013 which did not recur in 2014. Since selling and administrative expenses increased 46% while net sales increased 38%, our selling and administrative expenses as a percentage of net sales increased to 18.3% in the third quarter of 2014 from 17.3% in last year's third quarter. Of this 1.0 percentage point increase, approximately 1.2 percentage points was driven by the $4.7 million increase in intangible asset amortization related to the three businesses acquired in fiscal 2014, with all other selling and administrative expenses driving a 0.2 percentage point decrease in costs as a percentage of net sales.

First Nine Months

Net Sales

Net sales increased $266.5 million, or 32%, in the first nine months of 2014 from the first nine months of 2013. Estimated components of this 32% increase in net sales are as follows:

Organic volume
 
5
%
Pricing
 
1
%
Foreign exchange
 
%
Business acquisitions
 
26
%
 
 
32
%

The increase in net sales in the first nine months of 2014 from the first nine months of 2013 was driven primarily by the following factors:

Increased net sales of $172.2 million due to the December 2013 acquisition of GE's air filtration business (now operated as CLARCOR Industrial Air), which is included in the Company's Industrial/Environmental Filtration segment from the date of acquisition. Net sales for this business, from the date of acquisition, reflect significant year-over-year growth in sales of gas turbine air intake filtration systems and replacement filters, as well as industrial air filtration products, in comparison to the prior year period in which this business was owned by GE.


Page 31




Increased net sales of $37.0 million due to the May 2014 acquisition of the Stanadyne Business, which is included in the Company's Engine/Mobile Filtration segment from the date of acquisition. Net sales for this business, from the date of acquisition, reflect increased sales of replacement filter elements, partly offset by declines in sales of first-fit fuel filter assemblies due to lower demand from OEM customers, in comparison to the prior year period in which the business was owned by Stanadyne Corporation.

Increased net sales of $9.1 million due to the December 2013 acquisition of the Bekaert Business, which is included in the Company's Industrial/Environmental Filtration segment from the date of acquisition.

Increased organic net sales of $26.7 million, or 7%, at our Industrial/Environmental Filtration segment. This net sales growth resulted from a $21.7 million, or 9%, increase in sales within the U.S. and a $5.0 million, or 4%, increase in foreign net sales, excluding the impact of changes in foreign currency exchange rates. The 9% increase in sales within the U.S. resulted primarily from increased sales of natural gas filtration vessels and aftermarket elements, higher sales of dust collector systems and air pollution control products, higher HVAC air filter sales and increased filter sales through our TFS distribution business. The 4% increase in foreign net sales primarily resulted from higher sales of dust collector systems and air pollution control products in Europe and China, as well as increased sales of natural gas filtration vessels and aftermarket elements in Europe and the Middle East.

Increased organic net sales of $18.4 million, or 5%, at our Engine/Mobile Filtration segment. This net sales growth resulted from a $12.6 million, or 5%, increase in sales within the U.S. and a $5.7 million, or 4%, increase in foreign net sales, excluding the impact of changes in foreign currency exchange rates. The 5% increase in sales within the U.S. resulted primarily from an 8% increase in sales of heavy-duty engine filters to the U.S. aftermarket. The 4% increase in foreign sales was driven by increased export sales of heavy-duty engine filters to Canada, Southeast Asia and South America, partly offset by a 5% decline in heavy-duty engine filter sales volume in Europe and a 7% decline in Australia, reflecting lower mining activity in that region.

Net sales at our Packaging segment decreased $0.4 million, or 1%, due primarily to lower sales of spice containers, battery jackets and film packaging products, partially offset by higher sales of decorated flat sheet metal products and selling price increases on certain products.

Cost of Sales

Cost of sales increased $180.8 million, or 32%, in the first nine months of 2014 from the first nine months of 2013. This 32% increase in cost of sales was less than one percent greater than the 32% increase in net sales. As a result, our gross margin decreased to 32.5% in the first nine months of 2014 from 32.6% in the first nine months of 2013. This 0.1 percentage point decrease in gross margin primarily reflects a 0.4 percentage point decrease due to growth-related investments within our heavy-duty engine filtration business, a 0.2 percentage point decrease due to unfavorable sales mix and overhead cost absorption within our Packaging business, a 0.1 percentage point decrease due to $1.2 million of costs related to the closure of one of our HVAC manufacturing facilities in the first quarter of 2014 and a 0.1 percentage point decrease due to higher compensation expense related to our company-wide profit sharing plan. These impacts were partially offset by a 0.4 percentage point increase in gross margin due to the impact of a $4.6 million loss on disposal of equipment at our air filtration operations in the third quarter of 2013 which did not recur in 2014. Gross margin was also favorably impacted by 0.5 percentage points due to increases in the selling prices of our products, which was partly offset by a 0.1 percentage point decrease in gross margin due to higher raw material costs in certain of our businesses, primarily reflecting higher media and steel pricing. The fiscal 2014 acquisitions of GE's air filtration business, the Bekaert Business and the Stanadyne Business did not significantly impact gross margin in the first nine months of 2014 compared to the first nine months of 2013, as a 0.5 percentage point gross margin decrease due to the impact of approximately $6.0 million of increased cost of sales related to the step-up of inventory values as of each acquisition's purchase date to reflect their estimated fair values was offset by a 0.5 percentage point increase in gross margin from the base operations of these acquired businesses.

Selling and Administrative Expenses

Selling and administrative expenses increased $66.2 million, or 45%, in the first nine months of 2014 from the first nine months of 2013. This increase was primarily the result of a $43.2 million increase due to the December 2013 acquisition of GE's air filtration business (including $5.9 million of intangible asset amortization and $4.0 million of legal, investment advisory, consulting and other professional services costs related to the acquisition execution and integration), a $10.3 million increase due to the May 2014 acquisition of the Stanadyne Business (including $3.0 million of legal, investment advisory and other professional services costs related to the acquisition as well as $3.8 million of intangible asset amortization), and a $3.1 million increase due to the December 2013 acquisition of the Bekaert Business. The remaining organic increase of $9.7 million in the first nine months of 2014 from the first nine months of 2013 primarily resulted from $7.5 million of increased employee and professional services

Page 32




costs (including costs related to strategic growth initiatives), $3.7 million of higher compensation expense related to our company-wide profit sharing program and $1.4 million of increased costs due to an expense reduction in the third quarter of 2013 related to a net change in the estimated contingent liability for a potential earn-out related to one of the former owners of our TransWeb subsidiary, which did not recur in 2014. These organic cost increases were partially offset by a $3.1 million pension settlement charge in the third quarter of 2013 which did not recur in 2014. Since selling and administrative expenses increased 45% while net sales increased 32%, our selling and administrative expenses as a percentage of net sales increased to 19.3% in the first nine months of 2014 from 17.6% in the first nine months of 2013. Of this 1.7 percentage point increase, approximately 0.7 percentage points was driven by the $7.2 million of deal and integration costs related to the three businesses acquired in fiscal 2014 and approximately 0.8 percentage points was driven by the $9.2 million increase in intangible asset amortization related to the three businesses acquired in fiscal 2014.

Other Items

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

Acquisitions

The acquisition of GE's air filtration business, now operated as CLARCOR Industrial Air, in December 2013 impacted our net sales and operating profit in the third quarter and first nine months of 2014 compared to the third quarter and first nine months of 2013 as follows:
(Dollars in thousands)
 
Third Quarter
 
First Nine Months
Net sales
 
$
59,842

 
$
172,205

Operating profit
 
5,038

 
8,810

  
The net sales and operating profit for CLARCOR Industrial Air reflect results from December 16, 2013, the date of acquisition, through August 30, 2014. Operating profit for the third quarter and first nine months of 2014 includes approximately $0.1 million and $4.3 million, respectively, of cost of sales related to the recording of inventory acquired in the transaction at estimated acquisition date fair values, which are included in Cost of sales in the Consolidated Condensed Statements of Earnings, as well as approximately $0.4 million and $4.0 million, respectively, of costs related to the acquisition and integration of the GE air filtration business, which are included in Selling and administrative expenses in the Consolidated Condensed Statements of Earnings.

The acquisition of the Bekaert Business in December 2013 impacted our net sales and operating profit in the third quarter and first nine months of 2014 compared to the third quarter and first nine months of 2013 as follows:
(Dollars in thousands)
 
Third Quarter
 
First Nine Months
Net sales
 
$
2,809

 
$
9,111

Operating profit (loss)
 
(125
)
 
(679
)
  
The net sales and operating loss for the Bekaert Business reflect results from December 3, 2013, the date of acquisition, through August 30, 2014.

The acquisition of Stanadyne Corporation's diesel fuel filtration business, now operated as CLARCOR Engine Mobile Solutions, in May 2014 impacted our net sales and operating profit in the third quarter and first nine months of 2014 compared to the third quarter and first nine months of 2013 as follows:
(Dollars in thousands)
 
Third Quarter
 
First Nine Months
Net sales
 
$
28,014

 
$
37,006

Operating profit
 
7,275

 
5,348

  

Page 33




The net sales and operating profit for CLARCOR Engine Mobile Solutions reflect results from May 1, 2014, the date of acquisition, through August 30, 2014. The operating profit of approximately $5.3 million from the date of acquisition through August 30, 2014 includes 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 legal, investment advisory and other professional services costs related to the acquisition and integration of the Stanadyne Business, which are included in Selling and administrative expenses in the Consolidated Condensed Statements of Earnings.

Foreign Exchange

The average exchange rates for foreign currencies versus the U.S. dollar favorably (unfavorably) impacted our 2014 translated U.S. dollar value of net sales and operating profit compared to the same periods in 2013 as follows:
(Dollars in thousands)
 
Third Quarter
 
First Nine Months
Net sales
 
$
626

 
$
(1,226
)
Operating profit (loss)
 
(98
)
 
(553
)

Other income (expense)

Interest income (expense)

We recognized net interest income (expense) in other income (expense) as follows:
(Dollars in thousands)
 
Third Quarter
 
First Nine Months
2014
 
$
(1,235
)
 
$
(2,102
)
2013
 
82

 
77


Net interest expense in the third quarter and first nine months of 2014 was driven by $1.2 million and $1.9 million, respectively, of interest expense 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. At the end of the third quarter of 2014, 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 $14.0 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)
 
Third Quarter
 
First Nine Months
2014
 
$
(587
)
 
$
511

2013
 
95

 
(137
)

Foreign currency gains (losses) in the third quarter and first nine months of 2014, and in the comparable periods in 2013, 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, as well as the translation of cash accounts at certain foreign subsidiaries denominated in currencies other than their functional currencies.

Other income (expense)

Other income of approximately $3.4 million in the first nine months of 2014 primarily reflects the $2.8 million bargain purchase gain that resulted from the Company's acquisition of the Bekaert Business in the first quarter of 2014, as described in more detail below, and the foreign currency gains of approximately $0.5 million as described above. There was no significant other income (expense) in the first nine months of 2013.


Page 34




The purchase price paid for the Bekaert Business was approximately $7.3 million net of cash acquired. Assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition date fair values, including property, plant and equipment of approximately $7.0 million, intangible assets of approximately $2.1 million, and net working capital of approximately $1.0 million, excluding cash acquired. The $2.8 million excess of the fair value of the net assets acquired 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. As the Company maintains a permanent reinvestment strategy for all foreign operations, this gain is not subject to tax.

Provisions for income taxes

Our effective tax rate decreased 0.6 percentage points to 31.2% in the third quarter of 2014 from 31.8% in the third quarter of 2013, reflecting various tax planning strategies.

Our effective tax rate decreased 0.5 percentage points to 31.3% in the first nine months of 2014 from 31.8% in the first nine months of 2013, primarily due to the $2.8 million bargain purchase gain recognized in the first nine months of 2014 which, as described above, was not subject to tax, and an increase in foreign earnings in the current year, which are generally subject to lower statutory tax rates. These impacts were partially offset by a $1.0 million tax benefit recognized in the first nine months of 2013 related to the extension of the research and development tax credit in December 2012, which did not recur in the first nine months of 2014.

Shares outstanding

Average diluted shares outstanding increased by approximately 0.3 million shares in the third quarter of 2014 and by 0.4 million shares in the first nine months of 2014 from the comparable prior year periods of 2013 as incremental dilutive shares related to stock option exercises and the issuance of stock options and restricted stock units were only partially offset by our repurchases of common stock.



Page 35




SEGMENT ANALYSIS 

 
 
Third Quarter
 
First Nine Months
(Dollars in thousands)
 
2014
 
%
Total
 
2013
 
%
Total
 
2014
 
%
Total
 
2013
 
%
Total
Net sales:
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Engine/Mobile Filtration
 
$
165,910

 
41
%
 
$
129,148

 
45
%
 
$
436,805

 
40
%
 
$
379,195

 
46
%
Industrial/Environmental Filtration
 
213,752

 
53
%
 
139,659

 
48
%
 
608,207

 
55
%
 
398,945

 
48
%
Packaging
 
20,490

 
6
%
 
20,319

 
7
%
 
54,467

 
5
%
 
54,840

 
6
%
 
 
$
400,152

 
100
%
 
$
289,126

 
100
%
 
$
1,099,479

 
100
%
 
$
832,980

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

Engine/Mobile Filtration
 
$
61,319

 
45
%
 
$
46,568

 
51
%
 
$
153,027

 
43
%
 
$
134,907

 
50
%
Industrial/Environmental Filtration
 
70,531

 
52
%
 
41,141

 
45
%
 
195,515

 
55
%
 
126,113

 
46
%
Packaging
 
3,475

 
3
%
 
4,191

 
4
%
 
8,740

 
2
%
 
10,580

 
4
%
 
 
$
135,325

 
100
%
 
$
91,900

 
100
%
 
$
357,282

 
100
%
 
$
271,600

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit:
 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

Engine/Mobile Filtration
 
$
36,741

 
59
%
 
$
28,611

 
68
%
 
$
86,587

 
60
%
 
$
81,156

 
65
%
Industrial/Environmental Filtration
 
23,873

 
38
%
 
11,315

 
27
%
 
55,024

 
38
%
 
39,404

 
31
%
Packaging
 
1,612

 
3
%
 
2,059

 
5
%
 
3,028

 
2
%
 
4,641

 
4
%
 
 
$
62,226

 
100
%
 
$
41,985

 
100
%
 
$
144,639

 
100
%
 
$
125,201

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Engine/Mobile Filtration
 
37.0
%
 
 

 
36.1
%
 
 
 
35.0
%
 
 

 
35.6
%
 
 
Industrial/Environmental Filtration
 
33.0
%
 
 

 
29.5
%
 
 
 
32.1
%
 
 

 
31.6
%
 
 
Packaging
 
17.0
%
 
 

 
20.6
%
 
 
 
16.0
%
 
 

 
19.3
%
 
 
 
 
33.8
%
 
 

 
31.8
%
 
 
 
32.5
%
 
 

 
32.6
%
 
 
 
 


 
 
 


 
 
 
 
 
 
 
 
 
 
Operating margin:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Engine/Mobile Filtration
 
22.1
%
 
 

 
22.2
%
 
 

 
19.8
%
 
 

 
21.4
%
 
 

Industrial/Environmental Filtration
 
11.2
%
 
 

 
8.1
%
 
 

 
9.0
%
 
 

 
9.9
%
 
 

Packaging
 
7.9
%
 
 

 
10.1
%
 
 

 
5.6
%
 
 

 
8.5
%
 
 

 
 
15.6
%
 
 

 
14.5
%
 
 

 
13.2
%
 
 

 
15.0
%
 
 




Page 36




Engine/Mobile Filtration Segment

 
 
Third Quarter
 
First Nine Months
 
 
 
 
 
 
Change
 
 
 
 
 
Change
 
(Dollars in thousands)
 
2014
 
2013
 
$
 
%
 
2014
 
2013
 
$
 
%
 
Net sales
 
$
165,910

 
$
129,148

 
$
36,762

 
28
%
 
$
436,805

 
$
379,195

 
$
57,610

 
15
%
 
Cost of sales
 
104,591

 
82,580

 
22,011

 
27
%
 
283,778

 
244,288

 
39,490

 
16
%
 
Gross profit
 
61,319

 
46,568

 
14,751

 
32
%
 
153,027

 
134,907

 
18,120

 
13
%
 
Selling and administrative expenses
 
24,578

 
17,957

 
6,621

 
37
%
 
66,440

 
53,751

 
12,689

 
24
%
 
Operating profit
 
36,741

 
28,611

 
8,130

 
28
%
 
86,587

 
81,156

 
5,431

 
7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
37.0%
 
36.1%
 
 
 
0.9
pt
35.0%
 
35.6%
 
 
 
(0.6)
pt
Selling and administrative percentage
 
14.8%
 
13.9%
 
 
 
0.9
pt
15.2%
 
14.2%
 
 
 
1.0
pt
Operating margin
 
22.1%
 
22.2%
 
 
 
(0.1)
pt
19.8%
 
21.4%
 
 

 
(1.6)
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 third quarter and first nine months of 2014 from the comparable periods of 2013 are detailed in the following tables:    
 
 
 
Third Quarter
 
First Nine Months
Organic volume
 
5
%
 
5
 %
Pricing
 
1
%
 
1
 %
Foreign exchange
 
%
 
(1
)%
Stanadyne Business acquisition
 
22
%
 
10
 %
 
 
28
%
 
15
 %

(Dollars in thousands)
 
Third Quarter
 
First Nine Months
2013
 
$
129,148

 
$
379,195

 
 
 
 
 
U.S. net sales
 
21,110

 
36,496

Foreign net sales (including export)
 
15,446

 
22,268

Foreign exchange
 
206

 
(1,154
)
Net increase
 
36,762

 
57,610

 
 
 
 
 
2014
 
$
165,910

 
$
436,805

  


Page 37




The net increase in U.S. net sales for our Engine/Mobile Filtration segment in the third quarter and first nine months of 2014 from the comparable periods of 2013 are detailed as follows:
(Dollars in thousands)
 
Third Quarter
 
First Nine Months
Stanadyne Business acquisition
 
$
15,851

 
$
20,942

Heavy-duty engine filters
 
3,965

 
11,090

Locomotive filters
 
903

 
2,522

Other
 
391

 
1,942

Increase in U.S. net sales
 
$
21,110

 
$
36,496

  
Our U.S. net sales increased 25% in the third quarter of 2014 compared with the same period in 2013. The acquisition of Stanadyne's diesel fuel filtration business (now operated as CLARCOR Engine Mobile Solutions) in May 2014 resulted in $15.9 million of increased U.S. net sales in the third quarter of 2014. The remaining increase in sales of $5.2 million was primarily the result of an 8% increase in heavy-duty engine filter aftermarket sales, which was driven by improved year-over-year demand from our U.S. national distribution and fleet services customers. We believe this growth reflects our initiatives to gain new customers and extend our product line, and was also positively impacted by the 4% year-over-year increase in heavy-duty truck tonnage for the preceding three months (March 2014 through May 2014) as measured by the American Trucking Associations, which we believe is usually a leading indicator of heavy-duty engine filter aftermarket demand in the U.S. We also experienced growth of approximately 10% in locomotive filter sales in the third quarter of 2014 compared with the same period in 2013, as well as growth in dust collection cartridge filter sales. This growth in locomotive filter sales reflects the impact of new products and increased railroad activity leading to increased replacement filter sales. These impacts were partially offset by lower filter aftermarket sales to automotive customers.

Our U.S. net sales increased 15% in the first nine months of 2014 compared with the same period in 2013. The acquisition of Stanadyne's diesel fuel filtration business in May 2014 resulted in $20.9 million of increased U.S. net sales in the first nine months of 2014. The remaining increase in sales of $15.6 million was primarily the result of an 8% increase in heavy-duty engine filter aftermarket sales and a 9% increase in locomotive filter sales in the first nine months of 2014 compared with the same period in 2013, as well as growth in dust collection cartridge filter sales.

The net change in foreign net sales (including export sales and adjusted for changes in foreign currencies) for our Engine/Mobile Filtration segment in the third quarter and first nine months of 2014 from the comparable periods in 2013 are detailed as follows:
(Dollars in thousands)
 
Third Quarter
 
First Nine Months
Stanadyne Business acquisition
 
$
12,163

 
$
16,064

Export sales primarily to the Middle East, Canada, Southeast Asia and Latin America
 
2,698

 
7,694

Heavy-duty engine filter sales in Europe
 
(375
)
 
(1,584
)
Other
 
960

 
94

Increase in foreign net sales
 
$
15,446

 
$
22,268


Our foreign net sales increased 34% in the third quarter of 2014 compared with the same period in 2013, 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 $12.2 million of increased foreign net sales in the third quarter of 2014. The remaining increase in foreign net sales of $3.3 million primarily reflects increased export sales of heavy-duty engine filters to the Middle East, Canada, Southeast Asia and Latin America, partly offset by sales declines in Europe and Australia primarily due to weak economic conditions in those markets and a resulting decline in trucking volume and filter replacement activity. Our foreign net sales increased 16% in the first nine months of 2014 compared with the same period in 2013, reflecting substantially the same business drivers as described above with respect to the third quarter.


Page 38




Cost of Sales

Cost of sales increased $22.0 million, or 27%, in the third quarter of 2014 from the third quarter of 2013. This increase was less than the 28% increase in net sales. As a result, our gross margin increased to 37.0% in the third quarter of 2014 from 36.1% in the third quarter of 2013. This 0.9 percentage point increase in gross margin primarily reflects a 1.7 percentage point increase due to the Stanadyne Business acquisition and a 1.1 percentage point increase in gross margin resulting from a customer price increase that we executed at the end of the first quarter of 2014. Those impacts were partly offset by a 0.6 percentage point decrease in gross margin resulting from higher material costs (including higher media and steel pricing), a 0.5 percentage point decrease resulting from increased growth-related costs (including costs related to new customers, new products and expanded capacity brought into service to support expected future growth), and a 0.3 percentage point decrease due to higher compensation expense related to our company-wide profit sharing program.

Cost of sales increased $39.5 million, or 16%, in the first nine months of 2014 from the first nine months of 2013. This increase was greater than the 15% increase in net sales. As a result, our gross margin declined to 35.0% in the first nine months of 2014 from 35.6% in the first nine months of 2013. This 0.6 percentage point decrease in gross margin primarily reflects a 1.3 percentage point decrease due to costs related to growth initiatives (including new customer and new product costs as well as additional capacity brought into service to support expected future growth), a 0.4 percentage point decrease resulting from higher material costs (including higher media and steel pricing ) and a 0.2 percentage point decrease due to higher compensation expense related to our company-wide profit sharing program. These impacts were partly offset by a 0.8 percentage point increase in gross margin resulting from a customer price increase that we executed at the end of the first quarter of 2014 and a 0.5 percentage point increase resulting from the Stanadyne Business acquisition (reflecting accretive ongoing results from this business, net of $1.4 million of increased cost of sales related to the step-up of inventory values as of the purchase date to reflect their estimated fair values).

Selling and Administrative Expenses

Selling and administrative expenses increased $6.6 million, or 37%, in the third quarter of 2014 from the third quarter of 2013. This increase was primarily the result of $5.6 million of selling and administrative expenses at the CLARCOR Engine Mobile Filtration business, including approximately $2.8 million of intangible asset amortization. The remaining increase of approximately $1.0 million was primarily the result of higher compensation expense related to our company-wide profit sharing program and higher allocated corporate costs, including growth-related costs. With selling and administrative expenses in this segment increasing 37% while segment net sales increased 28%, our selling and administrative expenses as a percentage of net sales increased to 14.8% in the third quarter of 2014 from 13.9% in the third quarter of 2013.

Selling and administrative expenses increased $12.7 million, or 24%, in the first nine months of 2014 from the first nine months of 2013. This increase was primarily the result of $10.3 million of selling and administrative expenses at the CLARCOR Engine Mobile Filtration business, including approximately $3.8 million of intangible asset amortization and $3.0 million of costs related to the acquisition transaction and subsequent integration of the acquired business. The remaining increase of approximately $2.4 million was primarily the result of higher compensation expense related to our company-wide profit sharing program and higher allocated corporate costs, including growth-related costs. With selling and administrative expenses in this segment increasing 24% while segment net sales increased 15%, our selling and administrative expenses as a percentage of net sales increased to 15.2% in the first nine months of 2014 from 14.2% in the first nine months of 2013.


Page 39




Industrial/Environmental Filtration Segment

 
 
Third Quarter
 
First Nine Months
 
 
 
 
 
 
Change
 
 
 
 
 
Change
 
(Dollars in thousands)
 
2014
 
2013
 
$
 
%
 
2014
 
2013
 
$
 
%
 
Net sales
 
$
213,752

 
$
139,659

 
$
74,093

 
53
%
 
$
608,207

 
$
398,945

 
$
209,262

 
52
%
 
Cost of sales
 
143,221

 
98,518

 
44,703

 
45
%
 
412,692

 
272,832

 
139,860

 
51
%
 
Gross profit
 
70,531

 
41,141

 
29,390

 
71
%
 
195,515

 
126,113

 
69,402

 
55
%
 
Selling and administrative expenses
 
46,658

 
29,826

 
16,832

 
56
%
 
140,491

 
86,709

 
53,782

 
62
%
 
Operating profit
 
23,873

 
11,315

 
12,558

 
111
%
 
55,024

 
39,404

 
15,620

 
40
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
33.0%
 
29.5%
 
 
 
3.5
pt
32.1%
 
31.6%
 
 
 
0.5
pt
Selling and administrative percentage
 
21.8%
 
21.4%
 
 
 
0.4
pt
23.1%
 
21.7%
 
 
 
1.4
pt
Operating margin
 
11.2%
 
8.1%
 
 

 
3.1
pt
9.0%
 
9.9%
 
 

 
(0.9)
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 third quarter and first nine months of 2014 from the comparable periods in 2013 are detailed in the following tables:    

 
 
Third Quarter
 
First Nine Months
Organic volume
 
7
%
 
7
%
Pricing
 
1
%
 
%
Foreign exchange
 
%
 
%
GE Air Filtration acquisition
 
43
%
 
43
%
Bekaert Advanced Filtration acquisition
 
2
%
 
2
%
 
 
53
%
 
52
%

(Dollars in thousands)
 
Third Quarter
 
First Nine Months
2013
 
$
139,659

 
$
398,945

 
 
 
 
 
U.S. net sales
 
46,125

 
108,593

Foreign net sales (including export)
 
27,544

 
100,736

Foreign exchange
 
424

 
(67
)
Net increase
 
74,093

 
209,262

 
 
 
 
 
2014
 
$
213,752

 
$
608,207



Page 40




The net increase in U.S. net sales for our Industrial/Environmental Filtration segment in the third quarter and first nine months of 2014 from the comparable periods of 2013 are detailed as follows:

(Dollars in thousands)
 
Third Quarter
 
First Nine Months
GE Air Filtration acquisition
 
$
32,337

 
$
85,580

Natural gas filtration vessels and aftermarket elements
 
7,753

 
10,535

Filter sales through Total Filtration Services ("TFS")
 
2,193

 
4,107

Dust collector systems
 
848

 
2,994

HVAC and other industrial air filtration products
 
1,223

 
3,831

All other, net
 
1,771

 
1,546

Increase in U.S. net sales
 
$
46,125

 
$
108,593


The acquisition of GE's Air Filtration business, now operated as CLARCOR Industrial Air, in December 2013 resulted in $32.3 million and $85.6 million of increased U.S. net sales in the third quarter and first nine months of 2014, respectively, reflecting sales of filtration systems and aftermarket filters for gas turbine air intake applications, sales of pleated filters, bag filters and other industrial air filters, and sales of membrane products.

Higher sales in the natural gas market in the third quarter and first nine months of 2014 from the comparable periods of 2013 were driven by an increase in natural gas vessel and aftermarket element sales arising from increased natural gas extraction and transportation activity throughout the U.S., including at various shale gas basins.

Higher sales through our TFS distribution subsidiary in the third quarter and first nine months of 2014 from the comparable periods in 2013 were primarily the result of higher liquid and air filter sales to a variety of customers, including those in the general industrial, food and beverage and chemical industries.

Higher dust collection system sales in the third quarter and first nine months of 2014 from the comparable periods in 2013 was primarily the result of higher sales of Smog Hog® and Dust Hog® air pollution control systems to OEM customers by our United Air Specialists subsidiary.

Higher sales of HVAC and other industrial air filtration products in the third quarter and first nine months of 2014 from the comparable periods in 2013 was primarily the result of increased sales of heating, ventilation and air conditioning filters to various wholesale customers.

The net 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 third quarter and first nine months of 2014 from the comparable periods of 2013 are detailed as follows:

(Dollars in thousands)
 
Third Quarter
 
First Nine Months
GE Air Filtration acquisition
 
$
27,505

 
$
86,625

Bekaert Business acquisition
 
2,809

 
9,111

Dust collector systems
 
1,467

 
4,677

Natural gas filtration vessels and aftermarket filters
 
(4,935
)
 
911

All other, net
 
698

 
(588
)
Increase in foreign net sales
 
$
27,544

 
$
100,736


The acquisition of GE's Air Filtration business, now operated as CLARCOR Industrial Air, in December 2013 resulted in $27.5 million and $86.6 million of increased foreign net sales in the third quarter and first nine months of 2014, respectively, reflecting sales of filtration systems and aftermarket filters for gas turbine air intake applications, sales of pleated filters, bag filters and other industrial air filters, and sales of membrane products, primarily in Europe, Asia, the Middle East and Latin America.


Page 41




The acquisition of the Bekaert Business in December 2013 resulted in $2.8 million and $9.1 million of foreign net sales in the third quarter and first nine months of 2014, respectively, reflecting sales of engineered metal filters and systems used primarily in the polymer fiber and plastics industry, sold primarily in Europe and Southeast Asia.

Sales of dust collector systems increased in the third quarter and first nine months of 2014 from the comparable prior year periods, driven by increased sales of industrial dust, fume and oil mist collectors in China and Europe.

Lower sales of natural gas vessels and aftermarket filters in the third quarter of 2014 from the comparable period of 2013 were driven by lower sales in Latin America and Europe due to several large filtration vessel shipments in the third quarter of 2013 that did not recur in 2014. Increased sales of natural gas vessels and aftermarket filters in the first nine months of 2014 from the comparable period in 2013 reflects global growth in natural gas extraction, processing and transportation activity.

Cost of Sales

Cost of sales increased $44.7 million, or 45%, in the third quarter of 2014 from the third quarter of 2013. This increase was less than the 53% increase in net sales. As a result, our gross margin increased to 33.0% in the third quarter of 2014 from 29.5% in the third quarter of 2013. This 3.5 percentage point increase in gross margin primarily reflects a 2.2 percentage point increase in gross margin due to the impact of a $4.6 million loss on disposal of equipment at our air filtration operations in the third quarter of 2013 which did not recur in 2014. Gross margin was also favorably impacted by 0.5 percentage points due to the December 2013 acquisition of GE's Air Filtration business (now operated as CLARCOR Industrial Air) and by 0.4 percentage points due to increases in the selling prices of our products.

Cost of sales increased $139.9 million, or 51%, in the first nine months of 2014 from the first nine months of 2013. This increase was less than the 52% increase in net sales. As a result, our gross margin increased to 32.1% in the first nine months of 2014 from 31.6% in the first nine months of 2013. This 0.5 percentage point increase in gross margin primarily reflects a 0.8 percentage point increase in gross margin due to the impact of a $4.6 million loss on disposal of equipment at our air filtration operations in the third quarter of 2013 which did not recur in 2014. Gross margin was also favorably impacted by 0.2 percentage points due to increases in the selling prices of our products. These benefits were partly offset by a 0.4 percentage point decrease in gross margin due to the December 2013 acquisition of GE's Air Filtration business (now operated as CLARCOR Industrial Air), including a $4.3 million impact from increased cost of sales related to the step-up of inventory values as of the purchase date to reflect their estimated fair values, and a 0.2 percentage point decrease resulting from $1.2 million of increased cost of sales in the first nine months of 2014 related to restructuring activities within our air filtration business.

Selling and Administrative Expenses

Selling and administrative expenses increased $16.8 million, or 56%, in the third quarter of 2014 from the third quarter of 2013. This increase was primarily the result of $13.6 million of selling and administrative expenses at the CLARCOR Industrial Air business, including approximately $1.8 million of intangible asset amortization. Other drivers behind the increase included $1.1 million of selling and administrative expenses at the Bekaert Business and $1.5 million of increased costs, including higher allocated corporate costs, related to growth initiatives. With selling and administrative expenses increasing 56% while our net sales increased 53%, our selling and administrative expenses as a percentage of net sales increased to 21.8% in the third quarter of 2014 from 21.4% in last year's third quarter.

Selling and administrative expenses increased $53.8 million, or 62%, in the first nine months of 2014 from the first nine months of 2013. This increase was primarily the result of $43.2 million of selling and administrative expenses at the CLARCOR Industrial Air business, including approximately $4.0 million of costs related to the acquisition transaction and subsequent integration of the acquired business and approximately $5.3 million of intangible asset amortization. Other drivers behind the increase included $3.1 million of selling and administrative expenses at the Bekaert Business, $2.4 million of increased employee costs related to growth initiatives, $0.7 million of higher compensation expense related to our company-wide profit sharing program and higher allocated corporate costs. With selling and administrative expenses increasing 62% while our net sales increased 52%, our selling and administrative expenses as a percentage of net sales increased to 23.1% in the first nine months of 2014 from 21.7% in the comparable prior year period.


Page 42




Packaging Segment
  
 
 
Third Quarter
 
First Nine Months
 
 
 
 
 
 
Change
 
 
 
 
 
Change
 
(Dollars in thousands)
 
2014
 
2013
 
$
 
%
 
2014
 
2013
 
$
 
%
 
Net sales
 
$
20,490

 
$
20,319

 
$
171

 
1
 %
 
$
54,467

 
$
54,840

 
$
(373
)
 
(1
)%
 
Cost of sales
 
17,015

 
16,128

 
887

 
5
 %
 
45,727

 
44,260

 
1,467

 
3
 %
 
Gross profit
 
3,475

 
4,191

 
(716
)
 
(17
)%
 
8,740

 
10,580

 
(1,840
)
 
(17
)%
 
Selling and administrative expenses
 
1,863

 
2,132

 
(269
)
 
(13
)%
 
5,712

 
5,939

 
(227
)
 
(4
)%
 
Operating profit
 
1,612

 
2,059

 
(447
)
 
(22
)%
 
3,028

 
4,641

 
(1,613
)
 
(35
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
17.0%
 
20.6%
 
 
 
(3.6)
pt
16.0%
 
19.3%
 
 
 
(3.3)
pt
Selling and administrative percentage
 
9.1%
 
10.5%
 
 
 
(1.4)
pt
10.5%
 
10.8%
 
 
 
(0.3)
pt
Operating margin
 
7.9%
 
10.1%
 
 
 
(2.2)
pt
5.6%
 
8.5%
 
 
 
(2.9)
pt

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

Net Sales

The changes in net sales in the third quarter and first nine months of 2014 at our Packaging segment from the comparable periods last year are detailed in the following table:
(Dollars in thousands)
 
Third Quarter
 
First Nine Months
Spice packaging
 
$
(667
)
 
$
(2,083
)
Battery jackets
 
(239
)
 
(1,006
)
Film packaging
 
(390
)
 
(787
)
Decorated flat sheet metal products
 
1,782

 
4,312

Other, net
 
(315
)
 
(809
)
Increase (decrease) in net sales
 
$
171

 
$
(373
)

Lower sales of spice packaging, battery jackets and film packaging products in the third quarter and first nine months of 2014 from the comparable periods of 2013 were driven by lower demand on various customer programs, some of which we believe reflect seasonality in the timing of order patterns within the year. The increase in sales of decorated flat sheet metal products in the third quarter and first nine months of 2014 compared to the prior year periods was driven by new business opportunities, including increased sales of coating and printing services for metal packaging used on various food and promotional products.

Cost of Sales

Cost of sales increased $0.9 million, or 6%, in the third quarter of 2014 from the third quarter of 2013. This increase was greater than the 1% increase in net sales. As a result, our gross margin declined to 17.0% in the third quarter of 2014 from 20.6% in the third quarter of 2013. This 3.6 percentage point decline in gross margin was primarily driven by increased variable manufacturing expenses, including higher utility costs due to increased natural gas prices, lower absorption of fixed manufacturing overhead due to lower production volumes, and unfavorable sales mix related to higher sales of decorated flat sheet metal products, which generally have lower margins than other packaging products with higher lithography and metal fabrication content.

Cost of sales increased $1.5 million, or 3%, in the first nine months of 2014 from the first nine months of 2013. This increase was greater than the 1% decrease in net sales. As a result, our gross margin declined to 16.0% in the first nine months of 2014 from 19.3% in the first nine months of 2013. This 3.3 percentage point decline in gross margin reflects the same factors experienced in the third quarter, as described above.


Page 43




Selling and Administrative Expenses

Selling and administrative expenses decreased $0.3 million, or 13%, in the third quarter of 2014 from the third quarter of 2013. This decrease was primarily driven by lower compensation expense related to our company-wide profit sharing program and lower administrative spending, partly offset by higher corporate expenses related to growth initiatives and our company-wide profit sharing program, which are allocated to each reporting segment. With selling and administrative expenses decreasing 13% while our net sales increased 1%, our selling and administrative expenses as a percentage of net sales decreased to 9.1% in the third quarter of 2014 from 10.5% in last year's third quarter.

Selling and administrative expenses decreased $0.2 million, or 4%, in the first nine months of 2014 from the first nine months of 2013. This decrease primarily reflects the same factors experienced in the third quarter, as described above. With selling and administrative expenses decreasing 4% while our net sales decreased 1%, selling and administrative expenses as a percentage of net sales decreased to 10.5% in the first nine months of 2014 from 10.8% in the first nine months of 2013.


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, and we acquired Stanadyne Corporation's diesel fuel filtration business in May 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 $77.6 million at the end of the third quarter of 2014.  Approximately $65.3 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 3.1 at the end of the third quarter of 2014 decreased from 4.3 at year-end 2013.  This decrease was primarily due to a $334.7 million decrease in cash, cash equivalents and restricted cash, due primarily to our acquisition of GE's air filtration business, now operated as CLARCOR Industrial Air, in December 2013 for approximately $260.3 million in cash (net of cash acquired), our purchase of the Bekaert Business in December 2013 for approximately $7.3 million in cash (net of cash acquired) and our purchase of Stanadyne Corporation's diesel fuel filtration business in May 2014 for approximately $327.7 million in cash (net of cash acquired). This was partially offset by an increase of $88.9 million in accounts receivable and an increase of $62.2 million in inventory at the end of the third quarter of 2014 compared to year-end 2013, both of which were primarily due to the acquisition of GE's air filtration business, now operated as CLARCOR Industrial Air, and the acquisition of Stanadyne Corporation's diesel fuel filtration business, now operated as CLARCOR Engine Mobile Solutions.

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 44




At the end of the third quarter of 2014, we had $395.0 million outstanding on the Term Loan Facility with a weighted average interest rate including margin of approximately 1.06% and we had $14.0 million outstanding on the Credit Facility with a weighted average interest rate including margin of approximately 0.85%. 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 third quarter of 2014. 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 third quarter of 2014. At August 30, 2014, we also had approximately $16.0 million outstanding on a $50.0 million letter of credit sub-facility.  Accordingly, we had $120.0 million available for further borrowing at the end of the third quarter of 2014. Our Term Loan Facility expires in April 2017.

Total long-term debt of $425.5 million at the end of the third quarter of 2014 included $395.0 million outstanding on the Term Loan Facility, $14.0 million outstanding on the Credit Facility, $15.8 million outstanding on industrial revenue bonds and $0.7 million of other long-term debt.  At the end of the third quarter of 2014, 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 28.0% at the end of the third quarter of 2014 compared to 13.9% at year-end 2013, with the increase attributable to the $315.0 million Term Loan entered into pursuant to the acquisition of Stanadyne Corporation's diesel fuel filtration business.

We had 50.1 million shares of common stock outstanding at the end of the third quarter of 2014 compared with 50.4 million shares outstanding at year-end 2013.  This 0.3 million decrease was due to the repurchase of 0.4 million shares during the three and nine month periods ended August 30, 2014, partly offset by 0.1 million shares issued pursuant to stock incentive plans in the first nine months of 2014.  Shareholders’ equity increased to $1,094.3 million at the end of the third quarter of 2014 from $1,032.9 million at year-end 2013.  This $61.4 million increase resulted mainly from additional net earnings of $100.7 million and items related to stock compensation and option activity pursuant to incentive plans of $9.0 million, partially offset by dividend payments of $25.8 million and our repurchase of common stock of $21.6 million.

Cash Flow

Net cash provided by operating activities increased $27.6 million to $98.8 million in the first nine months of 2014 from $71.2 million in the first nine months of 2013.  This increase was primarily due to a $15.2 million increase in net earnings and a $8.0 million decrease in cash used for changes in working capital, which was driven primarily by increased accounts payable.

Net cash used in investing activities increased $614.0 million in the first nine months of 2014 from the first nine months of 2013 primarily due to a $595.3 million increase in payments related to business acquisitions, including $327.7 million net cash paid for the acquisition of Stanadyne Corporation's diesel fuel filtration business (now operated as CLARCOR Engine Mobile Solutions), $260.3 million net cash paid for the acquisition of the GE Air Filtration business (now operated as CLARCOR Industrial Air) and $7.3 million net cash paid for the acquisition of the Bekaert Business, as well as a $27.0 million increase in capital expenditures and a $2.3 million decrease in proceeds from the disposition of plant assets.

Net cash provided by financing activities increased $230.8 million in the first nine months of 2014 from the first nine months of 2013 primarily as the result of a $315.0 million increase in borrowings under the Term Loan Facility 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, as well as a $2.2 million decrease in cash used to repurchase common stock, partially offset by $36.0 million of cash used to repay outstanding borrowings on the Credit Facility, $20.0 million of cash used to repay outstanding borrowings on the Term Loan, and a $19.9 million decrease in cash received from stock option exercises and the sale of capital stock pursuant to the Company's employee stock purchase plan.
 
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 nine months of 2014 we repurchased and retired 0.4 million shares of our common stock for $22.0 million at an approximate average price of $60.58.  At the end of the third quarter of 2014, there was approximately $219.3 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.

In January 2013 we announced that we intend to invest approximately $40.0 million in our Engine/Mobile Filtration segment to build a new warehouse and distribution center adjacent to our manufacturing facility in Kearney, Nebraska. The project is

Page 45




anticipated to take approximately two years to complete. Through the first nine months of 2014 we have incurred approximately $18.3 million in costs related to this project.

At the end of the third quarter of 2014, our gross liability for uncertain income tax provisions was $2.4 million including interest and penalties.  Due to the high degree of uncertainty regarding the timing of potential future cash outflows associated with 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 H to the Consolidated Financial Statements in our 2013 Form 10-K.  We had no variable interest entity or special purpose entity agreements during the first nine months of 2014 or 2013.


OTHER MATTERS

Critical Accounting Policies

Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in our 2013 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 2013 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.


Page 46




Forward-Looking Information is Subject to Risk and Uncertainty

This Third Quarter 2014 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 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 from our customers 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 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 growth initiatives, including the expansion of facilities;
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 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 anticipated outcome of the 3M lawsuit referenced in Note 11; 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) our ability to integrate the businesses we have acquired, (5) currency fluctuations, particularly increases or decreases in the U.S. dollar against other currencies, (6) commodity price increases and/or limited availability of raw materials and component products, including steel, (7) compliance costs associated with environmental laws and regulations, (8) political factors, (9) our international operations, (10) highly competitive markets, (11) governmental laws and regulations, (12) the implementation of new information systems, (13) 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, (14) changes in accounting standards or adoption of new accounting standards, (15) adverse effects of natural disasters, (16) legal challenges with respect to intellectual property, and (17) other factors described in more detail in the “Risk Factors” section of our 2013 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 Third Quarter 2014 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 Third Quarter 2014 Form 10-Q, or any other information in this Third Quarter 2014 Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Third Quarter 2014 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

Page 47




currencies.  Market risks are also discussed in our 2013 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 2013 Form 10-K.


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 August 30, 2014.  

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 August 30, 2014.  

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No change in our internal control over financial reporting occurred during our most recent fiscal quarter ended August 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Page 48





Part II. OTHER INFORMATION


Item 1. Legal Proceedings

The information required by this Item is incorporated by reference from Note 11 included in Part I, Item 1 of this Third Quarter 2014 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 2013 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 362,502 shares of our common stock during the fiscal quarter ended August 30, 2014.  The Company had remaining authorization of approximately $219.3 million to repurchase shares as of August 30, 2014 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
June 1, 2014 through July 5, 2014
 
80,525

 
$
62.12

 
80,525

 
236,279,550

July 6, 2014 through August 2, 2014
 
241,977

 
$
60.04

 
241,977

 
221,751,407

August 3, 2014 through August 30, 2014
 
40,000

 
$
60.73

 
40,000

 
219,322,331

Total
 
362,502

 
 

 
362,502

 
 



Item 6. Exhibits

a.
Exhibits:
 
* 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 49




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


Page 50





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)

September 19, 2014
 
By
/s/ Christopher L. Conway
(Date)
 
 
Christopher L. Conway
 
 
 
President and Chief Executive Officer
 
 
 
 
September 19, 2014
 
By
/s/ David J. Fallon
(Date)
 
 
David J. Fallon
 
 
 
Chief Financial Officer and Chief Accounting Officer


Page 51