SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

 

Commission File Number 1-11024

 

CLARCOR Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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 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 þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

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

 

The aggregate market value of the Common Stock held by non-affiliates computed by reference to the price at which the Common Stock was last sold as of the last business day of registrant’s most recently completed second fiscal quarter was $2,203,486,540.

 

There were 50,868,644 shares of Common Stock outstanding as of January 16, 2009.

 

Certain portions of the registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders (“Proxy Statement”), currently anticipated to be held on March 23, 2009, are incorporated by reference in Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended November 29, 2008.

 

TABLE OF CONTENTS

 

 

 

 

CLARCOR Inc. (“CLARCOR”) was organized in 1904 as an Illinois corporation and in 1969 was reincorporated in the State of Delaware. As used herein, the “Company” and terms such as “we” or “our” refers to CLARCOR and its subsidiaries unless the context otherwise requires.

 

The Company’s fiscal year ends on the Saturday closest to November 30. For fiscal year 2008, the year ended on November 29, 2008 and included 52 weeks. For fiscal year 2007, the year ended December 1, 2007, and included 52 weeks. For fiscal year 2006, the year ended December 2, 2006 and included 52 weeks. In this 2008 Annual Report on Form 10-K (“2008 Form 10-K”), all references to fiscal years are shown to begin on December 1 and end on November 30 for clarity of presentation.

 

Certain Significant Developments

 

Acquisitions

 

As reported in our previous SEC filings, the Company completed the following three acquisitions during fiscal year 2008.

 

In December 2007 (which is part of fiscal year 2008), the Company acquired Perry Equipment Corporation (“Peco”), a privately-owned manufacturer of engineered filtration products and technologies used in a wide array of industries, including the oil and natural gas, refining, power generation, petrochemical, food and beverage, electronics, polymers and pulp and paper industries. Peco is based in Mineral Wells, Texas with operations in Mexico, Canada, the United Kingdom, Italy, Romania, Malaysia and China. Peco was merged with the Company’s Facet operations with the combined headquarters based in Mineral Wells. Peco was acquired to expand the Company’s product offerings, technology, filtration solutions and customer base in the oil and natural gas industries. The purchase price was approximately $145.8 million excluding cash acquired and including acquisition costs. The Company issued 2,137,797 shares of Company common stock with a value of approximately $72 million and paid the remaining purchase price with available cash of approximately $5.3 million and approximately $80 million of cash borrowed under the Company’s multicurrency revolving credit agreement. The business is included in the Industrial/Environmental Filtration Segment from the date of acquisition.

 

In December 2007 (which is part of fiscal year 2008), the Company purchased a distributor of engineered filtration products in Canada for approximately $1.4 million including acquisition costs. Of the purchase price, $811,000 was paid at closing and the remaining $591,000 is to be paid over the four years following closing. The business is included in the Industrial/Environmental Filtration segment from the date of acquisition.

 

In May 2008, the Company acquired a 30% share in BioProcess H2O LLC (“BPT”), a Rhode Island based manufacturer of industrial waste water and water reuse filtration systems, for $4 million, payable $2 million in cash at closing with the remaining $2 million to be paid by December 31, 2009. Under the terms of the agreement with BPT, the Company has the right, but not the obligation, to acquire additional ownership shares and eventually complete ownership of the company over several years at a price based on, among other factors, BPT’s operating income.

 

In addition, as announced in our press release dated December 29, 2008, the Company acquired 100% of the share capital of Keddeg Company (“Keddeg”) on December 29, 2008 (which is in fiscal year 2009), for approximately $6 million in cash, plus related transaction expenses. Keddeg is a manufacturer of filtration products and technologies used in the aviation industry, and is based in Lenexa, Kansas. Keddeg is being merged with CLARCOR’s Purolator Facet operations, and its results will be included in the Industrial/Environmental Filtration Segment from the date of acquisition. Keddeg’s results of operations are not included in this 2008 Form 10-K.

HVAC Production Restructuring (CLC Air)

 

In July 2006, the Company announced a major restructuring of its HVAC production at CLARCOR Air Filtration Products, Inc. (“CLC Air”) within its Industrial/Environmental Filtration Segment. This restructuring is anticipated to cost approximately $26 million in capital investment and expense over four years and result in a $14 million annual increase in operating profits of the Company’s Industrial/Environmental Filtration Segment by the end of fiscal year 2010. The Company hopes to achieve these profit increases by the end of 2010 by more fully automating its HVAC filter production processes and more rationally locating its production facilities throughout the United States. As part of this restructuring, the Company closed one CLC Air plant in North Carolina and one plant in Iowa during fiscal year 2008 and in December 2008 initiated the consolidation of four Louisville, Kentucky area facilities into one location in Jeffersonville, Indiana. The Company expects continued progress in executing the restructuring program as the CLC Air facilities receive and install new equipment, improve production processes and train their employees.

 

 

During fiscal 2008, the Company conducted business in three principal industry segments: (1) Engine/Mobile Filtration, (2) Industrial/Environmental Filtration and (3) Packaging. These segments are discussed in greater detail below. Financial information for each of the Company’s business segments for the fiscal years 2006 through 2008 is included in Note P to Notes to Consolidated Financial Statements. See pages F-30 through F-32 in this 2008 Form 10-K.

 

 

Engine/Mobile Filtration

 

The Company’s Engine/Mobile Filtration Segment sells filtration products used on engines and in mobile equipment applications, including trucks, automobiles, buses and locomotives, and marine, construction, industrial, mining and agricultural equipment. The segment’s filters are sold throughout the world, primarily in the replacement market. In addition, some “first-fit” filters are sold to original equipment manufacturers. At one of its Engine/Mobile filtration plants, the Company also manufactures dust collection cartridges, including cartridges incorporating the Company’s Protura^tm nanofiber filtration media. These cartridges are used in environmental filtration applications.

 

The products in the Engine/Mobile Filtration Segment include a full line of oil, air, fuel, coolant, transmission and hydraulic fluid filters which are used in a wide variety of applications and in processes where filter efficiency, reliability and durability are essential. Most of these applications involve a process where impure air or fluid flows through semi-porous paper, corrugated paper, cotton, synthetic, chemical or membrane filter media with varying filtration efficiency characteristics. The impurities contained on the media are disposed of when the filter is changed.

 

The Company’s sale of filtration products for use in automobiles occurs exclusively in the replacement market (i.e., the Company does not sell “first-fit” automotive filters to automobile manufacturers). The Company does provide filtration products and services directly to automobile manufacturers for use in their manufacturing facilities but not for use in the vehicles that are manufactured in these facilities. A decrease or complete loss of the Company’s sales directly to automobile manufacturers for use in their manufacturing facilities would not be expected to have a material effect on the Company’s financial performance.

 

Industrial/Environmental Filtration

 

The Company’s Industrial/Environmental Filtration Segment centers around the manufacturing and marketing of filtration products used in industrial and commercial processes, and in buildings and infrastructures of various types. The segment’s products are sold throughout the world, and include liquid process filtration products and air filtration products and systems used to maintain high interior air quality and to control exterior pollution.

 

The segment’s liquid process filtration products include specialty industrial process liquid filters; filters for pharmaceutical processes and beverages; filtration systems, filters and coalescers for the oil and natural gas industry; filtration systems for aircraft refueling, anti-pollution, sewage treatment and water recycling; bilge water

separators; sand control filters for oil and gas drilling; and woven wire and metallic products for filtration of plastics and polymer fibers. These filters use a variety of string wound, meltblown, and porous and sintered and non-sintered metal media, woven wire, and absorbent media.

 

The segment’s air filtration products represent a complete line of air filters and cleaners, including antimicrobial treated filters and high efficiency electronic air cleaners. These products are used in commercial buildings, hospitals, factories, residential buildings, paint spray booths, gas turbine systems, medical facilities, motor vehicle cabins, aircraft cabins, clean rooms, compressors and dust collector systems.

 

Packaging

 

The Company’s consumer and industrial packaging products business is conducted by a wholly-owned subsidiary, J.L. Clark, Inc. (“J.L. Clark”).

 

J.L. Clark manufactures a wide variety of different types and sizes of containers and packaging specialties. Metal, plastic and combination metal/plastic containers and closures manufactured by the Company are used in packaging a wide variety of dry and paste form products, such as food specialties (e.g., tea, coffee, spices, cookies, candy, mints and other confections); tobacco products; toiletries; playing cards; cosmetics and pharmaceuticals. Other packaging products include shells for dry batteries, canisters for film and candles, spools for insulated and fine wire, and custom decorated flat metal sheets.

 

Containers and packaging specialties are manufactured only upon orders received from customers, and individualized containers and packaging specialties are designed and manufactured, usually with distinctive decoration, to meet each customer’s marketing and packaging requirements and specifications.

 

Distribution

 

Products in both the Engine/Mobile Filtration and Industrial/Environmental Filtration Segments are sold primarily through a combination of independent distributors, dealers for original equipment manufacturers, retail stores and directly to end-use customers such as truck and equipment fleet users, manufacturing companies and contractors. In addition, both segments distribute products worldwide through their respective foreign subsidiaries and through export sales from the United States to end-use customers.

 

In the Packaging Segment, J.L. Clark uses an internal sales force and sells its products directly to customers for containers and packaging specialties. Each salesperson is trained in J.L. Clark’s manufacturing processes with respect to the products sold and to consult with customers and prospective customers concerning the details of their particular requirements. In addition, salespersons with expertise in specific areas, such as flat-sheet decorating, are focused on specific customers and markets.

 

Financial information related to the geographic areas in which the Company operates and sells its products is included in Note P to Notes to Consolidated Financial Statements. See pages F-30 through F-32 in this 2008 Form 10-K.

 

Class of Products

 

No class of similar products accounted for 10% or more of the total sales of the Company in any of the Company’s last three fiscal years.

 

Raw Materials

 

The primary raw materials the Company uses to manufacture its products include various types of steel, adhesives, plastic and paper products and filter medias made from materials such as wood pulps, metals, polyester and other synthetic fibers, fiberglass and cotton. All of these are purchased and are available from a variety of sources. The Company experienced significant price volatility during most of fiscal year 2008, with the price of many commodities increasing dramatically during the first three quarters, followed by a decrease for many of these commodities in the fourth quarter. The Company was able to procure adequate supplies of raw materials throughout fiscal year 2008 and does not anticipate procurement problems in 2009.

Patents, Trademarks and Trade names

 

Certain features of some of the Company’s products are covered by domestic and, in some cases, foreign patents or patent applications. While these patents are valuable and important for certain products, the Company does not believe that its competitive position is dependent upon patent protection, although as discussed under the heading of “Risk Factors”, the Company believes that patent-related litigation may become more commonplace across all of its business segments, particularly with respect to its engine aftermarket business.

 

With respect to trademarks and trade names, the Company believes that trademarks and trade names it uses in connection with certain products (such as “Baldwin”, “Purolator,” “Peco” and “Facet”) are valuable and significant to its business.

 

Seasonality

 

In general, the Company’s products and service offerings are not seasonal in nature, although certain of our operating companies in all our segments experience modest seasonal increases and decreases with respect to products and services supplied to particular end-use customers or industries. These shifts are normally not material to the Company on a consolidated basis.

 

Customers

 

The largest 10 customers of the Engine/Mobile Filtration Segment accounted for 24% of the approximately $439,033,000 of fiscal year 2008 sales of such segment.

 

The largest 10 customers of the Industrial/Environmental Filtration Segment accounted for 16% of the approximately $543,112,000 of fiscal year 2008 sales of such segment.

 

The largest 10 customers of the Packaging Segment accounted for 72% of the approximately $77,456,000 of fiscal year 2008 sales of such segment.

 

No single customer accounted for 10% or more of the Company’s consolidated fiscal year 2008 sales.

 

Backlog

 

At November 30, 2008, the Company had a backlog of firm orders for products of approximately $93,330,000. The backlog figure for November 30, 2007 was approximately $91,689,000. Substantially all of the orders on hand at November 30, 2008 are expected to be filled during fiscal year 2009. The Company does not view its backlog as being insufficient, excessive or problematic, or a significant indication of fiscal year 2009 sales.

 

Competition

 

The Company encounters strong competition in the sale of all of its products. The Company competes in a number of filtration markets against a variety of competitors. The Company is unable to state its relative competitive position in all of these markets due to a lack of reliable industry-wide data. However, in the replacement market for heavy-duty liquid and air filters used in internal combustion engines, the Company believes that it is among the top five companies worldwide measured by annual sales. In addition, the Company believes that it is a leading manufacturer of liquid and air filters for diesel locomotives. The Company believes that for industrial and environmental filtration products, it is among the top ten companies worldwide measured by annual sales, and is a market leader with respect to filtration products used in the oil and gas industries.

 

In the Packaging Segment, the Company’s principal competitors include several manufacturers that often compete on a regional basis only and whose specialty packaging segments are smaller than the Company’s. Strong competition is also presented by manufacturers of paper, plastic and glass containers. The Company’s competitors generally manufacture and sell a wide variety of products in addition to packaging products of the type produced by the Company and do not publish separate sales figures relative to these competitive products. Consequently, the Company is unable to state its relative competitive position in those markets.

The Company believes that it is able to maintain its competitive position because of the quality and breadth of its products and services and the broad geographic scope of its operations. The Company’s products primarily compete on the basis of price, performance, speed of delivery, quality and customer support.

 

Product Development

 

The Company develops products on its own and in consultation or partnership with its customers. In addition to product testing and development that occurs at the Company’s various subsidiaries, the Company maintains the CLARCOR Filtration Research Center, a standalone research and development center in Forrest Park, Ohio (“CFRC”). The Company’s laboratories, including the CFRC, test product components and completed products to insure high-quality manufacturing results, evaluate competitive products, aid suppliers in the development of product components, and conduct controlled tests of newly designed filters, filtration systems and packaging products for particular uses. Product development is concerned with the improvement and creation of new filters and filtration media, filtration systems, containers and packaging products in order to increase their performance characteristics, broaden their respective uses and counteract obsolescence.

 

In fiscal year 2008, the Company employed approximately 88 professional employees, including 4 at the CFRC, on either a full-time or part-time basis on research activities relating to the development of new products or the improvement or redesign of its existing products. During this period the Company spent approximately $14,029,000 on such activities as compared with $11,241,000 for fiscal year 2007 and $9,748,000 for fiscal year 2006.

 

Environmental Factors

 

The Company is not aware of any facts which would cause it to believe that it is in material violation of existing applicable standards with respect to emissions to the atmosphere, discharges to waters, or treatment, storage and disposal of solid or hazardous wastes.

 

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 (PRP), along with other companies, in remedial activities for the cleanup of waste sites under the federal Superfund statute.

 

Although it is not certain what future environmental claims, if any, may be asserted, the Company currently believes that its potential liability for known environmental matters does not exceed its present accrual of $50,000. 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 extent of the contamination, the length of time remediation may require, the complexity of environmental regulation and the continuing advancement of remediation technology. Applicable federal law may impose joint and several liability on each PRP for the cleanup of a contaminated site.

 

The Company does anticipate, however, that it may be required to install additional pollution control equipment to augment or replace existing equipment in the future in order to meet applicable environmental standards. The Company is presently unable to predict the timing or the cost of any project of this nature and cannot give any assurance that the cost of such projects may not have a material adverse effect on earnings. However, the Company is not aware, at this time, of any other additional significant current or pending requirements to install such equipment at any of its facilities.

 

Employees

 

As of November 30, 2008, the Company had approximately 5,500 employees.

 

 

Financial information relating to export sales and the Company’s operations in the United States and other countries is included in Note P to Notes to Consolidated Financial Statements. As noted therein, total international sales for the Company in fiscal year 2008 were $335,000. See page F-32 in this 2008 Form 10-K. In addition, see “Item 1A — Risk Factors” below for a discussion of certain risks of foreign operations.

 

The Company’s Internet address is www.clarcor.com. The Company makes available, free of charge, on this website, its annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such forms are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). In addition, the following corporate governance documents can be found on this website: (a) charters for the Audit Committee, the Director Affairs/Corporate Governance Committee and the Compensation Committee of the Board of Directors; (b) Corporate Conduct Guidelines; (c) Code of Ethics for Senior Financial Officers, which includes the Chief Executive Officer; (d) Corporate Governance Guidelines; (e) Disclosure Controls and Procedures; (f) Procedures Regarding Reports of Misconduct or Alleged Misconduct; (g) the Company’s By-laws; (h) Instructions for Communication with Directors, and (i) Insider Trading Policy. Copies of all of these documents can also be obtained, free of charge, upon written request to the Corporate Secretary, CLARCOR Inc., 840 Crescent Centre Drive, Suite 600, Franklin, TN 37067. The information contained on the Company’s website is not incorporated herein or otherwise considered to be a part of this 2008 Form 10-K.

 

Our business faces a variety of risks. These risks include those described below and may include additional risks and uncertainties not presently known to us or that we currently deem immaterial. If any of the events or circumstances described in the following risk factors occur, our business, financial condition or results of operations may suffer, and the trading price of our common stock could decline. These risk factors should be read in conjunction with the other information in this 2008 Form 10-K.

 

Our business is affected by the health of the markets we serve.

 

Our financial performance depends, in large part, on varying conditions in the markets that we serve, particularly the general industrial and trucking markets. Demand in these markets fluctuates in response to overall economic conditions and is particularly sensitive to changes in fuel costs, although the replacement nature of our products helps mitigate the effects of these changes. In addition, a continued general economic downturn may have an adverse effect on sales of more expensive filtration systems and products, such as capital equipment sold by Peco (which may be affected by a decrease in the cost of oil and natural gas), United Air Specialists and our Facet companies. A continued economic downturn in the markets we serve may result in reductions in sales and pricing of our products, which could reduce future earnings and cash flow.

 

Adverse macroeconomic and business conditions may significantly and negatively affect our revenues, profitability and results of operations.

 

Economic conditions in the United States and in foreign markets in which we operate could substantially affect our sales and profitability. Economic activity in the United States and throughout much of the world has undergone a sudden, sharp economic downturn following the recent housing downturn and subprime lending collapse. Global credit and capital markets have experienced unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Some of our suppliers and customers are facing credit issues and could experience cash flow problems and other financial hardships. Consumer confidence and spending are down significantly.

 

Changes in governmental banking, monetary and fiscal policies to restore liquidity and increase credit availability may not be effective. It is difficult to determine the breadth and duration of the economic and financial market problems and the many ways in which they may affect our suppliers, customers and our business in general. Nonetheless, continuation or further worsening of these difficult financial and macroeconomic conditions could have a significant adverse effect on our sales, profitability and results of operations.

 

Our access to borrowing capacity could be affected by the turmoil and uncertainty impacting credit markets generally.

 

As a result of current economic conditions, including turmoil and uncertainty in the capital markets, credit markets have tightened significantly such that the ability to obtain new capital has become more challenging and more expensive. In addition, several large financial institutions have either recently failed or been dependent on the assistance of the U.S. federal government to continue to operate as a going concern. Although we believe that the banks under our credit facility have adequate capital and resources, we can provide no assurance that all of these banks will continue to operate as a going concern in the future. If any of the banks in the lending group were to fail, it is possible that the borrowing capacity under our credit facility would be reduced. In the event that the availability under our credit facility were reduced significantly, we could be required to obtain capital from alternate sources in order to finance our capital needs. Our options for addressing such capital constraints would include, but not be limited to (i) obtaining commitments from the remaining banks in the lending group or from new banks to fund increased amounts under the terms of our credit facility, (ii) accessing the public capital markets, or (iii) delaying certain of our existing development projects. If it became necessary to access additional capital, it is likely that any such alternatives in the current market would be on terms less favorable than under our existing credit facility terms, which could have a material effect on our consolidated financial position, results of operations, or cash flows.

Our manufacturing operations are dependent upon third-party suppliers.

 

We obtain materials and manufactured components from third-party suppliers. Although the majority of these materials and components can be obtained from multiple sources, and while we historically have not suffered any significant limitations on our ability to procure them, any delay in our suppliers’ abilities to provide us with necessary materials and components may affect our capabilities at a number of our manufacturing locations. Delays in obtaining supplies may result from a number of factors affecting our suppliers, including capacity constraints, labor disputes, the impaired financial condition of a particular supplier, suppliers’ allocations to other purchasers, weather emergencies or acts of war or terrorism. Any delay in receiving supplies could impair our ability to deliver products to our customers and, accordingly, could have a material adverse effect on our business, results of operations and financial condition.

 

We could be adversely impacted by environmental laws and regulations.

 

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 environmental costs with respect to our former or existing operations are not material, but there is no assurance that we will not be adversely impacted by such costs, liabilities or claims in the future, either under present laws and regulations or those that may be adopted or imposed in the future.

 

Our operations outside of the United States are subject to political, investment and local business risks.

 

Approximately 32% of our sales result from exports to countries outside of the United States and from sales of our foreign business units. As part of our business strategy, we expect to expand our international operations through internal growth and acquisitions. Sales and operations outside of the United States, particularly in emerging markets, are subject to a variety of risks which are different from or additional to the risks the Company faces within the United States. Among others, these risks include:

 

 

The occurrence of one or more of the foregoing factors could have a material adverse effect on our international operations or on our financial condition and results of operations.

We face significant competition in the markets we serve.

 

The markets in which we operate are highly competitive and highly fragmented. We compete worldwide with a number of other manufacturers and distributors that produce and sell similar products. Our products primarily compete on the basis of price, performance, speed of delivery, quality and customer support. Some of our competitors are companies, or divisions or operating units of companies, that have greater financial and other resources than we do. Any failure by us to compete effectively in the markets we serve could have a material adverse effect on our business, results of operations and financial condition.

 

Increasing costs for manufactured components, raw materials, transportation, health care and energy prices may adversely affect our profitability.

 

We use a broad range of manufactured components and raw materials in our products, including raw steel, steel-related components, filtration media, resins, plastics, paper and packaging materials. Materials comprise the largest component of our costs, representing over 40% of the costs of our net sales in fiscal year 2008. Increases in the price of these items could further materially increase our operating costs and materially adversely affect our profit margins. Similarly, transportation, energy and health care costs have risen steadily over the past few years and represent an increasingly important burden for the Company. Although we try to contain these costs wherever possible, and although we try to pass along increased costs in the form of price increases to our customers, we may be unsuccessful in doing so for competitive reasons, and even when successful, the timing of such price increases may lag significantly behind our incurrence of higher costs.

 

We face heightened legal challenges with respect to intellectual property.

 

We have developed and actively pursue developing proprietary technology in the industries in which we operate, and rely on intellectual property laws and a number of patents to protect such technology. In doing so, we incur ongoing costs to enforce and defend our intellectual property. Despite our efforts in this regard, we may face situations where our own intellectual property rights are invalidated or circumvented, to our material detriment. We also face increasing exposure to claims by others for infringement of intellectual property rights, particularly with respect to our aftermarket products. These claims could result in significant costs or losses.

 

Our success depends in part on our development of improved products, and we may fail to meet the needs of customers on a timely or cost-effective basis.

 

Our continued success depends on our ability to maintain technological capabilities, machinery and knowledge necessary to adapt to changing market demands as well as to develop and commercialize innovative products, such as innovative filtration media and higher efficiency filtration systems. We may not be able to develop new products as successfully as in the past or be able to keep pace with technological developments by our competitors and the industry generally. In addition, we may develop specific technologies and capabilities in anticipation of customers’ demands for new innovations and technologies. If such demand does not materialize, we may be unable to recover the costs incurred in such programs. If we are unable to recover these costs or if any such programs do not progress as expected, our business, financial condition or results of operations could be materially adversely affected.

 

The introduction of new and improved products and services could reduce our future sales.

 

Substantial changes or technological developments in the industries in which our products are used could reduce sales if these changes negatively impact the need for our products. For example, improvements in engine technology may reduce the need to make periodic filter changes and thus negatively impact our aftermarket filter sales for such engines.

 

Our ability to operate effectively could be impaired if we fail to attract and retain key personnel.

 

Our ability to operate our business and implement our strategies depends, in part, on the efforts of our executive officers and other key employees. Our management philosophy of cost-control means that we operate what we consider to be a very lean company with respect to personnel, and our commitment to a less centralized organization (discussed further below) also places greater emphasis on the strength of local management. Our future success will

depend on, among other factors, our ability to attract and retain other qualified personnel, particularly management, research and development engineers and technical sales professionals. The loss of the services of any of our key employees or the failure to attract or retain other qualified personnel, domestically or abroad, could have a material adverse effect on our business or business prospects.

 

Our acquisition strategy may be unsuccessful.

 

As part of our growth strategy, we plan to pursue the acquisition of other companies, assets and product lines that either complement or expand our existing business. We may be unable to find or consummate future acquisitions at acceptable prices and terms. We continually evaluate potential acquisition opportunities in the ordinary course of business, including those that could be material in size and scope. Acquisitions involve a number of special risks and factors, including:

 

 

Although we conduct what we believe to be a prudent level of investigation regarding the operating and financial condition of the businesses we purchase, an unavoidable level of risk remains regarding the actual operating condition of these businesses. Until we actually assume operating control of these business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired entities and their operations. This is particularly true with respect to non-U.S. acquisitions.

 

We compete for potential acquisitions based on a number of factors, including price, terms and conditions, size and ability to offer cash, stock or other forms of consideration. In pursuing acquisitions, we compete against other strategic and financial buyers, some of which are larger than we are and have greater financial and other resources than we have. Increased competition for acquisition candidates could result in fewer acquisition opportunities for us and higher acquisition prices. In addition, the negotiation of potential acquisitions may require members of management to divert their time and resources away from our operations.

 

We are a decentralized company, which presents certain risks.

 

The Company is relatively decentralized in comparison with its peers. While we believe this practice has catalyzed our growth and enabled us to remain responsive to opportunities and to our customers’ needs, it necessarily places significant control and decision-making powers in the hands of local management. This presents various risks, including the risk that we may be slower or less able to identify or react to problems affecting a key business than we would in a more centralized environment. In addition, it means that “company-wide” business initiatives, such as the integration of disparate information technology systems, are often more challenging and costly to implement, and their risk of failure higher, than they would be in a more centralized environment. Depending on the nature of the initiative in question, such failure could materially adversely affect our business, financial condition or results of operations.

 

 

The Company has no unresolved SEC comments.

 

The various properties owned and leased by the Company and its operating units are considered by it to be in generally good repair and well maintained. Plant asset additions in fiscal year 2009 are estimated at $30-$40 million for land, buildings, furniture, production equipment and machinery, and computer and communications equipment.

 

The following is a description of the real property owned or leased by the Company or its affiliated entities, broken down by business segment. All acreage and square foot measurements are approximate.

 

Corporate Headquarters

 

The Company’s corporate headquarters are located in Franklin, Tennessee, and housed in 23,000 sq ft of office space under lease to the Company. The Company also owns a parcel of undeveloped land in Rockford, Illinois totaling 6 acres. The Company also leases approximately 14,400 square feet of space in Forrest Park, Ohio, which is occupied by the CFRC.

 

Engine/Mobile Filtration Segment

 

United States Facilities

 

 

International Facilities

 

 

In addition to the above properties, the Engine/Mobile Filtration Segment leases and operates smaller facilities in Australia, Belgium, South Africa and the United Kingdom in order to manufacture and/or distribute applicable filtration products.

Industrial/Environmental Filtration Segment

 

United States Facilities

 

International Facilities

 

 

In addition to the above properties, the Industrial/Environmental Filtration Segment leases and operates smaller facilities in the following locations in order to manufacture, distribute and/or service applicable filtration products: United States: Anaheim, CA; Atlanta, GA; Auburn, WA; Birmingham, AL; Casper, WY; Chantilly, VA; Cincinnati, OH; Clover, SC; Columbus, OH; Commerce City, CO; Dalton, GA; Dallas, TX; Davenport, IA*; Farmington, NM; Fresno, CA; Hayward, CA; Houston, TX; Indianapolis, IN; Jackson, MS; Jasper, IN; Kansas City, MO; Louisville, KY; Milwaukee, WI; Minneapolis, MN; Phoenix, AZ; Portland, OR; Sacramento, CA; Stillwell, OK; Tulsa, OK; Vernal, UT; Wichita, KS. International: Canada; China; France; Germany; Italy; Malaysia; Netherlands; Singapore; United Kingdom; Romania.

 

 

 

 

Packaging Segment.

 

 

 

The Company is involved in legal actions arising in the normal course of business. Management is of the opinion that the outcome of these actions will not have a material adverse effect on the Company’s consolidated results of operations or financial position.

 

 

None.

 

The following individuals are the executive officers of the Company as of January 23, 2009:

 

 

Each executive officer of the Company is elected by the Board of Directors for a term of one year which begins at the Board of Directors Meeting at which he or she is elected, typically held at the time of the Annual Meeting of Shareholders, and ends on the date of the next Annual Meeting of Shareholders or upon their earlier death, resignation or removal in accordance with the Company’s By-Laws.

 

 

The Company’s Common Stock is listed on the New York Stock Exchange; it is traded under the symbol CLC.

 

The following table sets forth the high and low market prices as quoted during the relevant periods on the New York Stock Exchange and dividends per share paid for each quarter of the last two fiscal years.

 

 

 

As set forth above, the quarterly dividend rate was increased in fiscal year 2008, and the Company currently expects to continue making dividend payments to shareholders. The Company’s right to make dividend payments is subject to restrictions contained in the credit agreement to which the Company is a party. The Company has never been prevented from making dividend payments under its past credit agreements or its current credit agreement and does not anticipate being so restricted in the foreseeable future.

 

The approximate number of holders of record of the Company’s Common Stock at January 16, 2009 was 2,635.

 

On June 25, 2007, the Company’s Board of Directors approved a three-year, $250 million stock repurchase program. Pursuant to the authorization, CLARCOR may purchase shares from time to time in the open market or through privately negotiated transactions over the next three years. CLARCOR has no obligation to repurchase shares under the authorization, and the timing, actual number and value of shares to be purchased will depend on CLARCOR’s stock price and market conditions. This authorization replaces CLARCOR’s previous share repurchase authorization which expired on June 16, 2007.

 

During fiscal year 2008, the Company repurchased 1,000,000 shares of its Common Stock, at a median price of $37.26 per share, and an aggregate cost of approximately $37 million. As set forth in the table below, the Company did not repurchase any shares during the fourth quarter of fiscal year 2008. The Company had a balance of $187,210,241 available to repurchase shares as of November 29, 2008.

COMPANY PURCHASES OF EQUITY SECURITIES(1)

 

 

 

5-Year Performance of the Company

 

PERFORMANCE GRAPH

 

The following Performance Graph compares the Company’s cumulative total return on its Common Stock for a five-year period (November 29, 2003 to November 29, 2008) with the cumulative total return of the S&P SmallCap 600 Index and the S&P Industrial Machinery Index.

 

TOTAL RETURN TO SHAREHOLDERS

 

Comparison of Five-Year Cumulative Total Return
Among the Company, S&P SmallCap 600 Index and
S&P Industrial Machinery Index

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
ASSUMES INITIAL INVESTMENT OF $100 AND REINVESTMENT OF ALL DIVIDENDS

 

 

 

The information required hereunder is included as Exhibit 13 to this 2008 Form 10-K.

 

 

The information presented in this discussion should be read in conjunction with other financial information provided in the Consolidated Financial Statements and Notes thereto. The analysis of operating results focuses on the Company’s three reportable business segments: Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging. Except as otherwise set forth herein, references to particular years refer to the applicable fiscal year of the Company.

 

EXECUTIVE SUMMARY

 

Management Discussion Snapshot
(Dollars in millions except per share data)

 

 

Fiscal 2008 was the 16th consecutive year of annual sales and earnings growth for CLARCOR. Fiscal 2008 sales, operating profit and net earnings increased from fiscal 2007 by 15.0%, 17.0% and 5.5%, respectively. Operating margins improved slightly to 14.3% in 2008. The Company’s diversity of filtration businesses and the breadth of its product lines and customer base offset fluctuations during 2008 in product demand and material costs in many of its markets primarily caused by domestic and global economic factors. For most of 2008, demand was strong for filters used in oil and natural gas exploration and transmission, for filters used on aircraft, agricultural, mining and construction machinery, for aviation fuel filtration systems and filters and for dust collector systems and replacement cartridges. Demand for filters sold to the over-the-road truck market, railroad market and automobile manufacturers and automotive parts suppliers was lower in 2008 compared to 2007. Overseas, and mostly in Asia, growth was solid in 2008 overall; however, the pace began to slow towards the end of the year compared to 2007 and earlier in 2008. Although the Company experienced significant cost increases in metals, petroleum-based products, energy, natural gas, resins, adhesives, packaging materials and filter media during the first three quarters of fiscal 2008, it was able to implement price increases and cost reduction initiatives to offset most cost increases and slightly improve its operating margin over 2007. During the fourth quarter of fiscal 2008, prices declined for these commodities but the impact to the Company input costs was not significant due to outstanding purchase orders. The Company expects to realize cost reductions for purchases of these raw materials beginning in early 2009.

 

On December 3, 2007, the Company acquired Perry Equipment Corporation (“Peco”), a privately-owned manufacturer of engineered filtration products and technologies used in a wide array of industries, including oil and natural gas, refining, power generation, petrochemical, food and beverage, electronics, polymers, pulp and paper. Peco is based in Mineral Wells, Texas with operations in Mexico, Canada, the United Kingdom, Italy, Romania, Malaysia and China. Peco was merged with the Company’s Facet operations with the combined headquarters based in Mineral Wells. Peco was acquired to expand the Company’s product offerings, technology, filtration solutions

and customer base in the oil and natural gas industry. Its results are included as part of the Company’s Industrial/Environmental Filtration Segment since the date of its acquisition. The purchase price was approximately $145.8 million including acquisition costs and excluding $11.4 million of cash acquired. The Company issued 2,137,797 shares of CLARCOR common stock with a value of approximately $72 million and paid the remaining purchase price with cash on hand of $5.3 million and approximately $80 million of cash borrowed under the Company’s multi-currency revolving credit agreement. The Peco acquisition added approximately $116 million of sales and $15 million of operating profit in 2008.

 

Effective May 1, 2008, the Company acquired a 30% share in BioProcess H2O LLC (“BPT”), a Rhode Island based manufacturer of industrial waste water and water reuse filtration systems, for $4 million, payable $2 million in cash with the remaining $2 million to be paid by December 31, 2009. Under the terms of the agreement with BPT, the Company has the right, but not the obligation, to acquire additional ownership shares and eventually complete ownership of the company over several years at a price based on, among other factors, BPT’s operating income. The investment, with a carrying value of approximately $4 million, is being accounted for under the equity method. The Company’s share of BPT’s earnings since the acquisition date is immaterial.

 

The following are other significant items that occurred during the periods presented:

 

 

OPERATING RESULTS

 

SALES

 

Net sales in fiscal 2008 were $1,059.6 million, a 15.0% increase from $921.2 million in fiscal 2007. The 2008 sales increase was the 22nd consecutive year of sales growth for the Company. Acquisitions during 2008 and 2007 contributed an incremental $118 million to sales in 2008. Fluctuations in foreign currencies increased sales in 2008 by less than 1%, or $9.6 million. In 2007, fluctuations in foreign currencies increased sales by approximately 1.5%, or $13.8 million.

Comparative net sales information related to CLARCOR’s operating segments is shown in the following tables.

 

 

 

The Engine/Mobile Filtration Segment’s sales increased 2.1% in 2008 from 2007 and 7.8% in 2007 from 2006. Fluctuations in foreign currencies added approximately $3 million to sales for this segment in 2008 compared to 2007. Approximately $3 million of the 2008 increase and $6 million of the 2007 increase was due to the 2007 acquisition of an 80% ownership share in Sinfa SA (Sinfa), a manufacturer of automotive and heavy-duty engine filters based in Casablanca, Morocco. Heavy-duty engine filter sales through independent distributors, in both domestic and international aftermarkets, original equipment manufacturer dealers, truck fleets and national accounts were about even with 2007’s sales. Sales to domestic trucking companies were slow in North America during 2008 and began softening in the rest of the world towards the end of fiscal 2008. Filter markets for off-road applications for construction, mining and agricultural equipment were stronger in 2007 and 2006 than in 2008 as economic conditions in these markets slowed during the latter part of 2008. Heavy-duty engine filter sales grew in Mexico, South Africa and China by double digits in 2008 although growth slowed towards the end of 2008 compared to earlier in the year. Heavy-duty engine filter sales in Europe were relatively unchanged for fiscal year 2008 overall compared to fiscal 2007. Railroad filter sales declined slightly in 2008 from 2007 levels. The Company expects the commercial rail industry to remain soft through most of 2009 as economic pressures continue in the coal, housing and automotive sectors, which are important to the railroad industry. Construction activity is also expected to remain slow in 2009. The Company anticipates over-the-road trucking will rebound slightly towards the end of 2009 as lower fuel prices reduce the costs to ship products. However, the Company expects that 2009 will be an exceptionally difficult year for the U.S. and world economies and that in the first fiscal quarter of 2009, the Company will report lower sales and operating profit than in the first quarter of 2008 in this segment.

 

The segment implemented price increases in 2008 for its products in response to high energy costs and rising raw material costs, particularly with respect to various grades and types of steel, filter media and oil-based raw materials. The segment will continue to evaluate further price changes in response to changing commodity costs.

 

Over-the-road truck mileage and railroad traffic began softening in the United States in 2007; however, international Engine/Mobile Filtration operations, led by sales increases of over 15% in China, Australia and Europe, recorded higher sales in 2007 than 2006. New product introductions and the breadth of the segment’s filter product line also contributed to sales growth in 2007 from 2006. Approximately $4.4 million of the sales increase was due to the weakening of the U.S. dollar during 2007 compared to 2006. There was no material impact from currency fluctuations in 2006. Price increases averaged 1% to 2% in 2006. There were no significant price increases in 2007.

 

The Company’s Industrial/Environmental Filtration Segment reported increased sales of $128.6 million or 31.0% in 2008 from 2007 and decreased sales of $5.9 million or 1.4% in 2007 from 2006. The segment implemented several price increases during 2008 to offset rising commodity costs. Approximately $116 million

of the 2008 increase in sales was due to the Peco acquisition. Peco’s sales were higher in 2008 than its previous fiscal year’s sales. The Company experienced strong global demand throughout 2008 for Peco’s filtration products and systems, which are used primarily in the natural gas industry. However, demand in 2009 remains uncertain. The significant reduction in the cost of oil and natural gas will affect drilling programs and the building of transmission facilities and pipelines over the long-term although the impact is expected to be very uneven across geographies. The Company expects less money will be spent on building new facilities if oil and natural gas prices stay at current levels. The Company believes the decline in oil and natural gas prices will eventually result, however, in an increase in usage which would benefit sales of aftermarket filters. The Company’s strategy is to focus heavily on the sale of aftermarket products.

 

Demand for the segment’s dust collector cartridges, which incorporate Protura^tm nanofiber technology, continues to grow. Environmental filtration systems and filter sales for aerospace, polymer and fiber, aviation fuel and specialty filter applications also grew by double digits in 2008 compared with 2007 although the Company experienced slower growth in its fourth quarter than earlier in 2008. If capital spending due to economic conditions throughout the world continues to be slow, the Company expects sales of dust collector systems and other environmental filtration systems to decline in 2009. The Company also expects sales of resin and fiber filters to be slow for 2009.

 

HVAC filter sales, especially those used in the automotive manufacturing and residential home-building industries, continued to be slow during 2008 compared with 2007. Lower HVAC filter sales partially offset the growth in other product lines within the segment. The Company does not expect to see any improvement in HVAC filter sales until the economy begins to recover. Sales to automobile manufacturers and automotive parts suppliers were less than 4% of the Company’s total sales in 2008. Therefore, the impact of continued weak sales to this industry is not significant to CLARCOR’s total sales. The weakening of the U.S. dollar during 2008 compared to 2007 added approximately $6 million to sales in 2008.

 

Most of the segment’s sales decrease in 2007 was due to lower sales volume at the Company’s environmental air filter manufacturing operations. Sales at the Company’s HVAC filter manufacturing operations were 13% lower in 2007 than in 2006. This was caused by a number of factors including the elimination of certain low margin customers and delays in deliveries to customers due to transitional issues at the Company’s HVAC plants arising from its HVAC filter restructuring program. As part of the HVAC filter restructuring program, the Company is regionalizing its manufacturing facilities to serve designated areas of the United States with a more complete product line at each facility. This requires moving equipment between facilities and adding new manufacturing plants, such as the plant in Pittston, Pennsylvania which began production late in the second quarter of 2007. As a result of this activity, the HVAC filter plants were sometimes unable to ship customer orders and sales suffered during 2007. The Company believes it has resolved these delivery problems resulting in improved service levels during the fourth quarter of fiscal 2007 and throughout fiscal 2008.

 

Excluding the results of the HVAC filter manufacturing operations, the Company’s other Industrial/Environmental filtration operations improved sales by approximately 6% in 2007 compared to 2006. Sales growth occurred, both domestically and internationally, in most product lines including process liquid filters, systems and filter cartridges for the aviation fuel and defense sectors, filters for aerospace applications, specialty filtration, pollution control systems, sand control filters used in off-shore oil and gas drilling, filters for plastic and polymer fiber and resin applications and sales to the Company’s Total Filtration Program customers. Sales of environmental filtration equipment were also stronger in 2007 than in 2006. In 2007, the Company introduced dust collector cartridges containing Protura^tm nanofiber media, which helped grow sales for this product line in 2007 compared to 2006. A first quarter 2007 acquisition contributed approximately $1 million of sales to 2007. The weakening of the U.S. dollar during 2007 compared to 2006 added approximately $9.4 million to sales for 2007. Changes in currency translation rates did not significantly impact sales growth in 2006.

 

In addition to the lower HVAC filter sales volumes in 2007 discussed above, this segment was impacted by the 2006 loss of a $10 million annual sales contract with a customer who had refused to pay amounts owed to the Company. The Company terminated this contract during the second quarter of 2006. Approximately $4.8 million of sales were reported in 2006 related to this contract. In the fourth quarter of 2007, the Company settled its litigation against this customer.

The Packaging Segment’s 2008 sales of $77.5 million were slightly higher than 2007’s sales of $76.7 million. Sales did not significantly increase due to continued slow growth in customers’ sales of their products and delayed new product introductions by the segment’s customers, particularly in the confectionary market. In addition, sales of decorated flat sheet metal, particularly for the film industry, were slow. Sales in 2007 decreased $8.1 million or 9.6% from 2006. The segment’s 2006 sales were unusually strong at $84.8 million due to the introduction of a wide array of new packaging designs, primarily in partnership with major consumer product companies, and price increases. Customer demand for fabricated metal packages, combination metal/plastic packages and plastic packaging was also stronger in 2006.

 

Operating Profit

 

Operating profit for 2008 increased 17.0% to $151.9 million from the 2007 level of $129.8 million. Although each of the Company’s segments experienced rising raw materials costs during the year, particularly in steel, resins, adhesives, filter media and packaging materials, they were able to offset most of the cost increases through price adjustments and production improvements. In addition, the acquisition of Peco contributed $15 million to operating profit in 2008. In the second quarter of fiscal 2008, four of the Company’s facilities in three states were damaged in weather-related events. The Company recognized a net gain, resulting from the excess of insurance proceeds received over the net book value of the property, of approximately $1.8 million (net of the $0.7 million deductible paid by the Company) as a reduction of cost of sales. The Company incurred approximately $1.2 million in costs, including a pension plan curtailment cost, related to closing HVAC filter manufacturing plants in Iowa and North Carolina during 2008. The Company also incurred $0.6 million of additional pension expense related to remeasurement of its pension plan assets and obligations at the time of curtailment. Despite these charges, additional bad debt expense and rising raw materials costs, the Company achieved higher operating profit and operating margin for 2008. Operating margin increased slightly to 14.3% in 2008 compared to 14.1% in 2007 and 14.0% in 2006. Although costs for freight and purchased materials, including metal products, filter media and petroleum-based products, have increased significantly over the past two years, price increases to customers have been implemented to help offset the cost increases. During the latter part of 2008, commodity costs related to oil and gas started to decline. This is expected to have an impact on the Company’s cost structure for 2009.

 

The 2.8% increase in operating profit for 2007 to $129.8 million was primarily due to higher Engine/Mobile Filtration Segment sales, increased specialty and process liquid filtration sales and Company-wide cost reduction efforts that offset losses in the environmental air filter operations. The cost savings during 2007 related to the HVAC restructuring were not significant, although the Company did realize anticipated savings in fiscal 2007 related to a European manufacturing restructuring.

 

A weakened U.S. dollar in 2008 and 2007 added approximately $1.4 million and $1.5 million, respectively, to operating profit. Foreign currency fluctuations did not have a material impact on consolidated operating profit in 2006. Comparative operating profit information related to the Company’s business segments is as follows.

 

 

 

 

The Engine/Mobile Filtration Segment reported operating profit of $99.4 million, which was relatively unchanged from 2007 profit of $98.8 million. Operating profit for 2008 was impacted by a charge for an insurance deductible recorded in the second quarter of 2008 due to a weather-related incident, increased legal costs and expense from the expiration of certain sales tax credits offset by lower employee health care, incentive compensation and benefits. The segment’s operating margin of 22.6% remains strong, although it declined slightly from 23.0% for 2007 due to a decline in domestic sales growth overall and higher international sales growth where margins are somewhat lower than in the United States. For fiscal 2009, the Company expects overall operating margin for this segment to decline slightly. The weakening of the U.S. dollar for 2008 compared to 2007 added less than $1 million to operating profit for 2008. Operating profit for 2007 improved 6.7% from 2006 primarily from sales growth and continued cost reduction efforts partially offset by a litigation settlement. The impact of foreign currency fluctuations to this segment’s operating profit for 2008 and 2007 was not material.

 

The Industrial/Environmental Filtration Segment reported operating profit of $45.8 million in 2008, an 80.1% increase over 2007 profit of $25.5 million. Operating margins improved from 6.1% in 2007 to 8.4% in 2008, a 2.3 percentage point increase. The Peco acquisition accounted for approximately $15 million of the increase in operating profit. This segment recognized a gain, resulting from the excess of insurance proceeds received over the net book value of the property, of approximately $2.0 million (net of the $0.5 million deductible paid by the Company) as a reduction of cost of sales related to a tornado and hail storm that damaged three of the Company’s facilities in two states. The Company has completed most of the repairs associated with the hail damage. The remaining increase in operating profit was due to higher sales of plastic and polymer fiber and resin filters, environmental equipment and replacement cartridge sales and filters used in aviation fuel, aerospace and oil and gas applications. Operating profit in 2008 also included the $1.2 million of costs associated with closing two HVAC filter manufacturing plants.

 

The HVAC restructuring program, which began in 2006, is continuing with improved labor and production efficiencies at its HVAC operating facilities. The program’s goal is based on achieving significantly improved manufacturing productivity and a lower product cost structure driven by the new equipment which will be installed at every one of the Company’s HVAC filter manufacturing locations. The restructuring plan includes relocating several HVAC filter manufacturing facilities to more closely align their shipments to their customers’ locations. This will reduce its inter-plant freight costs and transform its HVAC filter manufacturing plants into multi-product manufacturing facilities to improve product availability and on-time shipments to customers. The Company closed two plants during 2008 and one plant in 2007. It also opened a new plant in Pittston, Pennsylvania in 2007. In early fiscal 2009, the Company began consolidating four Louisville, Kentucky area HVAC related facilities into one location in Jeffersonville, Indiana. This is expected to be the last major plant consolidation effort in the restructuring plan.

 

Although the Company initially anticipated the HVAC restructuring program would result in an improvement in operating profit of $14 million annually by the end of 2009, it now believes that this improvement will be delayed until 2010. Specifically, the Company had expected an operating profit at the HVAC manufacturing facilities in

2008, which did not occur, although fourth quarter 2008 results were significantly better than 2007’s fourth quarter results and also better than any other quarter in 2008. Equipment delivery and installation delays in 2007 and 2008 and additional time needed to train new employees and improve production processes resulted in slower progress toward the profit improvement goal in 2007 and 2008 than expected. The Company’s goal for 2009 is an operating margin for this business of 3% to 5%, and in 2010 an operating margin of 7% to 9%. In addition, the Company believes it will reach its goal of an overall 10% operating margin for the Industrial/Environmental Filtration Segment in 2010. Most of the equipment that had been ordered for the HVAC manufacturing plants throughout the U.S. will be in place and in production by the middle of 2009.

 

The Industrial/Environmental Filtration Segment’s 2007 operating profit of $25.5 million and operating margin of 6.1% were unchanged from 2006. The segment’s operating results were impacted by lower sales volumes, continued costs to restructure and integrate manufacturing facilities in its HVAC filter manufacturing operations, including the start-up costs at its new production facility in Pennsylvania, and costs related to the relocation of acquired inventory and machinery from the acquisition of the synthetic fiber filtration business of Newton Tool in February 2007. As the Company reorganized its HVAC filter manufacturing and distribution facilities, integrated plant purchasing, consolidated customer service, moved manufacturing lines and trained new employees, it incurred higher costs than anticipated in 2007. The Company’s HVAC filter manufacturing operation increased prices to offset rising material and freight costs during 2007. Better utilization of the segment’s production facilities at non-HVAC filter manufacturing operations, higher sales in most other non-HVAC filter operations and a monetary settlement from a lawsuit also contributed to higher margins. In addition, 2006 included the $2.7 million charge related to a customer’s refusal to pay amounts owed to the Company and the European restructuring charges of $0.4 million. Foreign currency translation added approximately $1.2 million to the 2007 operating profit for this segment when compared to 2006.

 

The Packaging Segment’s operating profit of $6.7 million in 2008 was higher than the $5.5 million reported in 2007. The increase was primarily due to the implementation of price increases and cost reduction initiatives to offset most of the raw material cost increases. Operating margin of 8.6% for 2008 improved from 7.2% in 2007. The Company expects this segment’s operating profit and margins in fiscal 2009 to be slightly lower than that of 2008 based on the economic slowdown continuing. Operating margin was 9.7% in 2006. The strong sales volume in 2006, along with an ongoing focus on improving manufacturing efficiency through closely monitoring productivity measures and implementing cost reduction initiatives, contributed to higher operating profits and margins for fiscal 2006.

 

OTHER INCOME (EXPENSE)

 

Net other expense totaled $6.6 million in 2008 compared to net other income of $0.7 million in 2007 and $0.6 million in 2006. The most significant change from 2007 relates to interest expense of $6.5 million recorded in 2008 related primarily to debt incurred at the beginning of the fiscal year to acquire Peco and to repurchase company stock. Interest expense in 2008 also included a $2.0 million charge related to a mark-to market adjustment on a two-year interest rate swap. The $2.0 million charge will reverse over the next thirteen months and reduce interest expense over that period.

 

PROVISION FOR INCOME TAXES

 

The effective income tax rate for 2008 was 33.9% compared to 30.4% in 2007 and 34.5% in 2006. During the fourth quarter of 2008, the Company recorded a $0.5 million credit related to Congress passing the Research and Experimentation Tax Credit extension. During the first quarter of 2008, the Company recorded a $0.4 million tax benefit related to a refund it received from one of its overseas subsidiaries arising from changes in certain tax regulations. The unusually low 2007 effective tax rate was due to a tax benefit of approximately $4 million related to the completion of various income tax audits and the finalization of certain income tax liabilities in the third quarter 2007 and a cumulative tax benefit of $0.5 million during the first quarter 2007 from the Research and Experimentation Tax Credit extension that Congress passed in December 2006. These one-time benefits reduced the effective rate in 2007 by approximately 3.2%. Faster profit growth in international operations with lower tax rates than in the United States, increased tax-exempt interest income and a decline in the Extraterritorial Income

Exclusion deduction also contributed to a lower tax rate for 2007 compared to that of 2006. The effective tax rate for 2006 was higher due to changes in the deductibility of certain expenses.

 

The effective tax rate in 2009 is expected to be approximately 33.0% to 34.0%, which is comparable to that of 2008.

 

NET EARNINGS AND EARNINGS PER SHARE

 

Net earnings grew 5.5% to $95.7 million in 2008, or $1.86 per share on a diluted basis, compared to $90.7 million in 2007, or $1.78 per share on a diluted basis. Net earnings were $82.7 million in 2006, or diluted earnings per share of $1.59. The 1.0% increase in diluted average shares outstanding for fiscal 2008 compared to 2007 was due to the issuance of 2,137,797 shares in the Peco acquisition and grants of 437,803 shares of stock-based incentives offset by the repurchase of 1,000,000 shares and the full year impact of share repurchases in 2007. The 2.5% decrease in diluted average shares outstanding for fiscal 2007 compared to 2006 was due to the repurchase of 2,272,477 shares in 2007 offset by grants of 409,216 shares of stock-based incentives. The Company repurchased 1,000,000 shares in 2006 under the Company’s share repurchase authorization.

 

FINANCIAL CONDITION

 

LIQUIDITY AND CAPITAL RESOURCES

 

CLARCOR’s financial position remains strong, with adequate cash resources and sufficient borrowing capacity under its current line of credit. The global credit market experienced a significant tightening of credit availability and interest rate volatility during fiscal 2008. This resulted in reduced funding available for commercial banks and corporate debt issuers. As a result, capital became more expensive and less available; however, the Company does not foresee any difficulties meeting its cash requirements or accessing credit as needed in the next twelve months. On December 18, 2007, the Company entered into a five-year multicurrency revolving credit agreement (“2008 Credit Facility”) with a group of financial institutions under which it may borrow up to $250 million under a selection of currencies and rate formulas. This replaced the $165 million credit agreement that was to expire in April 2008. Management believes the financial institutions that are party to this arrangement have adequate capital and resources and will be able to fund future borrowings under the Company’s credit agreement. The interest rate is based upon either, at the Company’s election, a defined Base Rate or the London Interbank Offered Rate (LIBOR) plus or minus applicable margins. At November 30, 2008, the interest rate plus margin was 1.74%. Commitment fees, letter of credit fees and other fees are payable as provided in the credit agreement. As of year-end 2008, there was $75 million outstanding on the $250 million facility. The 2008 Credit Facility includes a $75 million letter of credit subline against which $8.5 million in letters of credit had been issued as of year-end 2008. The Company had approximately $166.5 million available for further borrowing at November 30, 2008.

 

On January 2, 2008, the Company entered into an interest rate agreement with a bank to manage its interest rate exposure on certain amounts outstanding under its $250 million revolving credit agreement. The interest rate agreement provides for the Company to pay a 3.93% fixed interest rate plus applicable margins and receive interest based on a three-month LIBOR on a notional amount of $100 million and expires January 1, 2010. This will mitigate the Company’s economic interest rate risk until January 2010. The swap agreement has not been designated as a hedge pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Unrealized gains and losses and periodic settlement payments are recorded in interest expense in the statement of earnings and as a component of cash flows from operations in the statement of cash flows. The fair value of the interest rate agreement at November 30, 2008 was $2.0 million. This was recorded as part of other long-term liabilities. The Company did not have any derivative instruments at November 30, 2007.

 

By using derivative instruments, the Company exposes itself, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. The Company minimizes this credit risk by entering into transactions with counterparties which it believes have the financial resources to meet their obligations. The Company minimizes market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. The Company’s swap agreement incorporates by reference the non-financial and financial debt covenants included in the

Company’s 2008 Credit Facility. The swap agreement also includes other events which would qualify as a default or termination event, whereby the counterparty could request payment on the derivative instrument.

 

Cash and short-term investments at year-end 2008 were $48.0 million compared to $40.9 million at year-end 2007. Short-term investments include tax-exempt municipal money market funds. Cash and cash equivalents are held by financial institutions throughout the world. Management regularly reviews the credit worthiness of these institutions and maintains access to the Company’s funds. The current ratio of 3.0 at year-end 2008 was lower than the current ratio of 3.3 at year-end 2007 primarily due to the Peco acquisition. Long-term debt of $83.8 million at year-end 2008 included a net $75 million of borrowings during 2008 under the Company’s revolving credit agreement to fund a portion of the Peco acquisition and stock repurchases and industrial revenue bonds of $7.4 million. Required principal payments on long-term debt will be approximately $0.1 million in 2009 based on scheduled payments in current debt agreements. The Company was in compliance with all covenants related to its borrowings throughout 2007 and 2008, as described in Note G to the Consolidated Financial Statements. The ratio of total debt to total capitalization, defined as long-term debt plus total shareholders’ equity, was 11.4% at the end of 2008 compared to 3.0% at fiscal year-end 2007. The long-term debt of $17.3 million at year-end 2007 related primarily to industrial revenue bonds.

 

The Company had 50,794,422 shares of common stock outstanding as of fiscal year-end 2008 compared to 49,218,822 shares outstanding at fiscal year-end 2007. The main reason for the increase was the Company’s issuance of 2,137,797 shares of its common stock in partial consideration of the purchase of Peco as discussed in Note B in the Consolidated Financial Statements partially offset by share repurchases. Shareholders’ equity increased to $651.8 million from $555.7 million at year-end 2007 primarily as a result of net earnings, stock issuances related to the Peco acquisition and stock option activity, and offset by stock repurchases of $37.3 million, dividend payments of $16.8 million, other comprehensive loss of $21.2 million due to currency translation adjustments and an after-tax adjustment of $11.2 million to accumulated other comprehensive income related to the remeasurement of pension plan assets and obligations.

 

Cash generated from operating activities decreased $30.2 million to $107.1 million for 2008 primarily due to higher investments in working capital compared to fiscal year 2007. The working capital fluctuations mainly resulted from the timing of payments made to vendors, the receipt of payments from customers, changes in inventory requirements and the timing of income tax payments. However, the Company did not experience a significant change in the number of days sales outstanding or inventory turns. The working capital change also included $2.4 million of cash used to purchase short-term investments, whereas in 2007, over $27.3 million of cash was provided by the sale of short-term investments. Cash flow from operating activities was $137.3 million in 2007 and $63.6 million in 2006. The $73.7 million increase in 2007 from 2006 was primarily due to the sale of short-term investments of $49.1 million and decreases in inventories of $8.5 million and income taxes of $6.0 million.

 

For 2008, cash flows used in investing activities of $108.9 million were higher than the $47.9 million recorded in 2007 primarily due to the acquisition of Peco. The Company spent $74.9 million on business acquisitions in 2008 compared to $12.3 million in 2007 and $4.6 million in 2006. Additions to plant assets of $34.9 million were primarily for the HVAC filter manufacturing restructuring program, new product development programs, facility additions and improvements and cost reduction programs. Capital expenditures for normal facility maintenance and improvements, productivity improvements, safety initiatives, the HVAC restructuring program, new products and filter media development are expected to be $30 to $40 million in 2009. Capital spending included in this amount and related to the HVAC restructuring program is estimated to be approximately $4 million in 2009. The Company has postponed several plant expansions and information technology projects until the U.S. and world economies recover. The Company does expect to continue to invest aggressively in new product and media development, cost reduction projects and safety initiatives. Plant asset additions totaled $37.0 million in 2007 and $17.6 million in 2006. Although a substantial amount of new equipment related to the HVAC restructuring plan had been ordered in 2006, it was not delivered as quickly as expected, causing 2006 capital spending to be lower than was anticipated.

 

Net cash provided by financing activities totaled $16.2 million in 2008, compared to cash used of $85.5 million in 2007 and $33.6 million in 2006. During 2008, cash provided by net borrowings of $75 million under the Company’s credit facility was partially offset by $37.3 million used to repurchase 1,000,000 shares of the Company’s common stock and $8.4 million used to redeem industrial revenue bonds. The Company spent

$74.9 million of cash to repurchase 2,272,477 shares of its common stock in 2007 and $28.9 million to repurchase shares in 2006. Dividend payments of $16.8 million in 2008 increased 12% from payments of $15.0 million during 2007. The current annual dividend rate per share is $0.36 compared to the previous annual rate of $0.32 per share. The Company paid dividends of $14.2 million in 2006.

 

On June 25, 2007, the Company’s Board of Directors authorized a $250 million stock repurchase program of the Company’s common stock in the open market and through private transactions over a three-year period. This authorization replaced the Company’s previous $150 million share repurchase authorization that expired on June 16, 2007. During 2008, the Company repurchased and retired 1,000,000 shares of common stock for $37.3 million. In 2007 and 2006, respectively, the Company repurchased 2,272,477 shares of common stock for $74.9 million and 1,000,000 shares of common stock for $28.9 million. The number of issued shares was reduced as a result of the retirement of these shares. At November 30, 2008, there was approximately $187.2 million available for repurchase under the current authorization. Future repurchases of Company stock may be made after considering cash flow requirements for internal growth (including working capital requirements), capital expenditures, acquisitions, interest rates and the current market price of the Company’s stock.

 

CLARCOR believes that its current operations will continue to generate cash and that sufficient lines of credit remain available to fund current operating needs, pay dividends, invest in the development of new products and filter media, fund planned capital expenditures and expansion of current facilities, complete the HVAC filter restructuring plans, provide for interest payments and required principal payments related to its debt agreements, fund pension plan contributions and repurchase Company stock. The Company’s strategy includes actively reviewing possible acquisitions. Any such acquisitions may affect operating cash flows and may require changes in the Company’s debt and capitalization. In addition, capital market disruptions may affect the cost or availability of future borrowings.

 

The Company has no material long-term purchase commitments. It is committed to restructure its HVAC filter manufacturing operations. Although no significant purchase commitments were signed as of year-end 2008, approximately $4 million of equipment related to the restructuring was on order. The Company enters into purchase obligations with suppliers on a short-term basis in the normal course of business.

 

The following table summarizes the Company’s current fixed cash obligations as of November 30, 2008 for the fiscal years indicated:

 

 

Interest payments on the Company’s variable rate debt are determined based on current interest rates as of year-end 2008. The $75 million outstanding as of November 30, 2008 under the Company’s five-year revolving line of credit will be due by the end of the five-year term. Annual interest payments related to the $75 million will be approximately $3.2 million for fiscal year 2009 based on the swap agreement entered into at the beginning of 2008 that expires in January 2010. After that, interest will be paid at a variable rate based on LIBOR plus or minus applicable margins. The amounts in the table above related to the line of credit assume a similar annual interest rate for the remaining term as that of the first two years and that no additional borrowings or payments will be made on the line of credit during the periods presented.

The minimum required contribution under the Pension Benefit Guarantee Corporation requirements for one of its U.S. qualified pension plans for fiscal 2009 is expected to be approximately $1 million. The Company, from time to time, makes contributions in excess of the minimum amount required as economic conditions warrant. It has not determined whether it will make a voluntary contribution to its U.S. qualified plans in 2009; however, it does expect to contribute $0.4 million to its non-U.S. qualified plan and $0.2 million to its postretirement health care benefit plan to pay benefits during 2009. Future estimates of the Company’s pension plan contributions may change significantly depending on the actual rate of return on plan assets, discount rates and regulatory requirements. The Company also has a nonqualified pension plan covering certain employees in the Company’s management. The expected payments to be made under this plan are shown in the table above and are largely not funded.

 

As of November 30, 2008, the Company’s liability for uncertain income tax provisions reported in accordance with the Company’s adoption of the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” was $2.0 million including interest. Due to the high degree of uncertainty regarding the timing of potential future cash outflows associated with these liabilities, the Company was unable to make a reasonably reliable estimate of the amount and period in which these remaining liabilities might be paid.

 

Off-Balance Sheet Arrangements

 

The Company’s off-balance sheet arrangements relate to various operating leases as discussed in Note H to the Consolidated Financial Statements. The Company had no variable interest entity or special purpose entity agreements during 2008 or 2007.

 

OTHER MATTERS

 

CRITICAL ACCOUNTING ESTIMATES

 

The Company’s critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the Notes to the Consolidated Financial Statements. These policies have been consistently applied in all material respects and address such matters as revenue recognition, depreciation methods, inventory valuation, asset impairment recognition, business combination accounting and pension and postretirement benefits. These critical accounting policies may be affected by recent relevant accounting pronouncements discussed in the following section.

 

While the estimates and judgments associated with the application of these critical accounting policies may be affected by different assumptions or conditions, the Company believes the estimates and judgments associated with the reported amounts are appropriate in the circumstances. The following lists the most critical accounting estimates used in preparing the consolidated financial statements which require the Company’s management to use significant judgment and estimates of amounts that are inherently uncertain:

 

 

 

In 2009, a reduction in the expected return on plan assets of 0.25% would result in additional expense in fiscal 2009 of approximately $0.2 million, while a reduction in the discount rate of 0.25% would result in additional expense of approximately $0.3 million for the Company’s qualified defined benefit pension plans for U.S. covered employees. Interest rates and pension plan valuations may vary significantly based on worldwide economic conditions and asset investment decisions. The unrecognized net actuarial loss of $31.3 million at year-end 2008 is due primarily to prior changes in assumptions related to discount rates and expected compared to actual asset returns. This actuarial loss will be recognized as pension expense in the future over the average remaining service period of the employees in the plans in accordance with SFAS No. 158. See Note I to the Consolidated Financial Statements.

 

 

RECENT RELEVANT ACCOUNTING PRONOUNCEMENTS

 

Effective December 2, 2007, the Company adopted the required provisions of SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value. These provisions relate to the Company’s financial assets and liabilities. See Note E for further discussion. On February 12, 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. 157-2 (FSP No. 157-2), which deferred the effective date for certain provisions of SFAS No. 157 related to nonrecurring measurements of nonfinancial assets and liabilities. The provisions of SFAS No. 157, which were deferred by FSP No. 157-2, will be effective for the Company’s fiscal year 2009.

 

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” The standards will affect the Company’s accounting for businesses acquired after November 30, 2009 and presentation of noncontrolling interests, previously called minority interests, in its consolidated financial statements in fiscal year 2010.

 

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This statement requires recognition of the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability in the statement of financial position and to recognize changes in the funded status in other comprehensive earnings in the year in which the changes occur. SFAS No. 158 also requires measurement of the funded status of a plan as of the date of the statement of financial position. SFAS No. 158 was effective for recognition of the funded status of the benefit plans for the Company’s fiscal year 2007 and resulted in an after-tax decrease to shareholders’ equity of $4,895. See Note I for further discussion of the impact of this change on the Company’s consolidated financial statements. SFAS No. 158’s provisions regarding the change in the measurement date are effective for the Company’s fiscal year 2009.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities.” This standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. These requirements include the disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS No. 161 will affect the Company’s presentation of derivatives in its consolidated financial statements in fiscal year 2009.

 

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) be considered participating securities and be included in the computation of earnings per share pursuant to the two-class method discussed in SFAS No. 128, “Earnings per Share.” FSP EITF 03-6-1 is effective for the Company’s fiscal year 2010 and requires the restatement of all previously reported earnings per share data. The Company does not believe FSP EITF 03-6-1 will have a material impact on the Company, as only its nonvested restricted share units are eligible to receive dividends and these are limited in number.

 

Recent Market Events

 

Current market conditions and economic events have significantly impacted the financial condition, liquidity and outlook for a wide range of companies, including many companies outside the financial services sectors. The Company has considered the potential impact of such conditions and events as it relates to currently reported financial results of operations and liquidity, including consideration of the possible impact of other than temporary impairment, counterparty credit risk and hedge accounting. The Company does not believe that current market conditions and economic events have significantly impacted its results of operations or current liquidity, nor does the Company believe that, based on its current investment policies and contractual relationships, it is subject to greater risk from such factors than other companies of similar size and market breadth.

OUTLOOK

 

The Company anticipates a slow first quarter of 2009 with sales and operating profit lower than that of the first quarter of fiscal 2008 in each of its segments. Assuming that the U.S. and world economies do not suffer a severe recession through the entire year, it does expect sales growth, margin improvement and higher diluted earnings per share in fiscal 2009. Diluted earnings per share are estimated to be in the range of $1.78 to $2.08 in 2009. The Company began manufacturing Protura^tm nanofiber embedded media late in the third quarter of 2007. The development of this technology is expected to provide additional sales and cost reduction opportunities for the Company’s filter product lines overall as it has done initially for dust collector cartridge production. New product introductions should also contribute to future growth. The Company’s diversification into many different, though complementary, filtration lines has resulted in an operation with increasingly stable sales and profits on a company-wide basis. The Company is focused on the filtration aftermarket which provides a strong base of recurring revenues. The Company believes it has a strong balance sheet, strong and consistent cash flows and available access to cash resources and credit as needed. Nevertheless, a continuation of the current domestic and international economic conditions will certainly impact the Company’s outlook.

 

Fiscal 2008 was a very unusual year for raw material costs. There were significant increases in various types and grades of steel and metals, oil and natural gas, resins, adhesives, gaskets, packaging material and filter media prices during the first three quarters of the year. In the fourth quarter of fiscal 2008, hydrocarbon and most metals prices declined significantly. Though these declines did not materially impact the Company’s input costs in the fourth quarter, the Company expects to see these declines reflected in its cost structure throughout 2009. In addition, the Company has implemented a very aggressive cost reduction program to further contain manufacturing overhead and administrative costs.

 

FORWARD-LOOKING STATEMENTS

 

This 2008 Form 10-K 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 2008 Form 10-K, other than statements of historical fact, are forward-looking statements. You can identify these statements from use of the words “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:

 

 

The Company believes that its expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the Company’s actual results, performance or achievements, or industry results, to differ materially from the Company’s expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, the Company’s past results of operations do not necessarily indicate its future results. These and other uncertainties are discussed in the “Risk Factors” section of this 2008 Form 10-K. The future results of the Company may fluctuate as a result of these and other risk factors detailed from time to time in the Company’s 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 2008 Form 10-K. Except as otherwise required by applicable laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements or the risk factors described in this 2008

Form 10-K, whether as a result of new information, future events, changed circumstances or any other reason after the date of this 2008 Form 10-K.

 

 

The Company’s market risk is primarily related to the potential loss arising from adverse changes in interest rates and foreign currency fluctuations. In the normal course of business, the Company may also be exposed to various market risks that arise from transactions entered into in the normal course of business related to items such as the cost of raw materials and changes in inflation. Certain contractual relationships with customers and vendors mitigate risks from changes in raw material costs and currency exchange rate changes that arise from normal purchasing and normal sales activities.

 

Interest Rates

 

The Company is exposed to changes in interest rates, primarily due to its financing and cash management activities, which include long and short-term debt as well as cash and certain short-term, highly liquid investments considered to be cash equivalents. Interest rate fluctuations could affect earnings, cash flows or the fair value of the Company’s financial liabilities. The Company’s debt obligations are primarily at variable rates and are denominated in U.S. dollars. In order to minimize the long-term costs of borrowing, the Company manages its interest rate risk by monitoring trends in rates as a basis for determining whether to enter into fixed rate or variable rate agreements and the duration of such agreements. The Company mitigated its interest rate risk on its $75 million of borrowing under its revolving line of credit by entering into a fixed interest rate swap agreement at the beginning of 2008 which fixed its interest until January 2010. Therefore, of its total debt outstanding at year end 2008, less than $10 million is subject to variable interest rates. Interest rate risk is not expected to be significant to the Company in fiscal 2009, and as a result, it is anticipated that a 1% change in rates would not have a material impact on the Company’s net earnings, cash flows or fair value of its debt in fiscal 2009.

 

Foreign Currency

 

Since the Company operates through subsidiaries in several countries around the world, its reported financial results of operations, including the reported value of assets and liabilities, are exposed to translation risk when the financial statements of the subsidiaries, as stated in their functional currencies, are translated into the U.S. Dollar. The assets and liabilities of subsidiaries outside the U.S. are translated at period end rates of exchange for each reporting period. Earnings and cash flow statements are translated at weighted-average rates of exchange. Although these translation changes have no immediate cash impact, the translation changes may impact the overall value of net assets.

 

The Company is also exposed to transaction risk from changes in foreign currency rates through sales and purchasing transactions when it sells product in functional currencies different from the currency in which product and manufacturing costs were incurred. The functional currencies of its worldwide facilities primarily include the U.S. Dollar, the Euro, the British Pound Sterling, the Canadian Dollar, the Chinese Yuan Renminbi and the Mexican Peso. As these currencies fluctuate against each other, and other currencies, the Company is exposed to foreign currency transaction risk on sales and purchasing transactions.

 

Currency exchange rates vary daily and often one currency strengthens against the U.S. Dollar while another currency weakens. Because of the complex interrelationship of the worldwide supply chains and distribution channels, it is difficult to quantify the impact of a particular change in exchange rates. However, the Company estimates that if the U.S. dollar strengthened or weakened 10% relative to the currencies where the Company’s foreign income and cash flows are derived, the effect on the consolidated results of operations could be $0.02 to $0.06 per diluted share. The effect of changes in foreign currency translation rates was not material to the Company’s financial condition and results of operations in fiscal 2008.

 

As a result of continued foreign sales and business activities, the Company continues to evaluate derivative financial instruments, including forwards, swaps and purchased options, to manage foreign currency exchange rate changes in the future. The Company did not hold any such derivatives during 2008, 2007 or 2006 related to foreign currency exchange.

 

The Consolidated Financial Statements, the Notes thereto and the report thereon of PricewaterhouseCoopers LLP, an independent registered public accounting firm, required hereunder with respect to the Company and its consolidated subsidiaries are included in this 2008 Form 10-K on pages F-1 through F-33.

 

 

None.

 

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of November 29, 2008, the end of the period covered by this annual report.

 

Management’s Report on Internal Control Over Financial Reporting

 

The management of CLARCOR is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), for the Company. Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Company’s internal control over financial reporting was conducted based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of November 29, 2008.

 

The Company has excluded Peco from management’s assessment of internal control over financial reporting as of November 29, 2008 because it was acquired by the Company in a material business combination during fiscal year 2008. Peco is a wholly-owned subsidiary whose total assets and total revenues represent 20.6% and 10.9%, respectively, of the related consolidated financial statement amounts as of and for the fiscal year ended November 29, 2008.

 

See Note B to the Consolidated Financial Statements under Part IV, Item 15(a)(1) of this Annual Report on Form 10-K for disclosure of full year adjusted pro forma revenue of Peco and the Company on a consolidated basis.

 

The effectiveness of the Company’s internal control over financial reporting as of November 29, 2008, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page F-1 of this Form 10-K.

 

 

None.

 

 

Certain information required hereunder is set forth in the Proxy Statement under the caption “Election of Directors — Nominees for Election to the Board of Directors,” “— Information Concerning Nominees and Directors”, and “Corporate Governance — Committees of the Board of Directors”, and “Corporate Governance — Code of Ethics” and is incorporated herein by reference. Additional information required hereunder is set forth in the Proxy Statement under the caption “Beneficial Ownership of the Company’s Common Stock — Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.

On April 2, 2008, the Company filed with the New York Stock Exchange (“NYSE”) the Annual Chief Executive Officer Certification regarding the Company’s compliance with the NYSE’s Corporate Governance listing standards, as required by Section 303A-12(a) of the NYSE Listed Company Manual. In addition, the Company has filed as exhibits to this 2008 Form 10-K and to the Annual Report on Form 10-K for the year ended December 1, 2007, the applicable certifications of its Chief Executive Officer and its Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002, regarding the quality of the Company’s public disclosures.

 

 

The information required hereunder is set forth in the Proxy Statement under the captions “Compensation of Executive Officers and Other Information”, and “Compensation Committee Interlocks and Insider Participation”, and “Report of the Compensation Committee”, and “Corporate Governance — Meetings and Fees” and is incorporated herein by reference.

 

 

The information required hereunder is set forth in the Proxy Statement under the caption “Equity Compensation Plan Information” and under the caption “Beneficial Ownership of the Company’s Common Stock” and is incorporated herein by reference.

 

 

The information required hereunder is set forth in the Proxy Statement under the caption “Corporate Governance — Certain Transactions” “Corporate Governance — Independence” and under the caption “Corporate Governance — Committees of the Board of Directors” and is incorporated herein by reference.

 

 

The information required herein is set forth in the Proxy Statement under the caption “Report of the Audit Committee — Amounts Paid to PricewaterhouseCoopers LLP.”

 

 

(a)(1) Financial Statements

 

 

(a)(2) Financial Statement Schedule

 

Financial statements and schedules other than those listed above are omitted for the reason that they are not applicable, are not required, or the information is included in the financial statements or the footnotes therein.

 

(a)(3) Exhibits

 

 

 

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

Date: January 23, 2009

 

CLARCOR Inc.
(Registrant)

 

Norman E. Johnson

Chairman of the Board, President &

Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

CLARCOR Inc.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

For the years ended November 30,
2008, 2007 and 2006

 

TABLE OF CONTENTS

 

 

 

To The Board of Directors and Shareholders
CLARCOR Inc.

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of CLARCOR Inc. and its subsidiaries (the “Company”) at November 29, 2008 and December 1, 2007, and the results of their operations and their cash flows for each of the three years in the period ended November 29, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of November 29, 2008 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, appearing on page 33 of the 2008 Form 10-K under item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

As discussed in Note A to the consolidated financial statements, the Company changed the manner in which it accounts for defined benefit arrangements effective in fiscal year 2007 due to the adoption of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, and changed the manner in which it accounts for unrecognized income tax positions effective in fiscal year 2008 due to the adoption of FIN 48, Accounting for Uncertainty in Income Taxes.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Perry Equipment Corporation from its assessment of internal control over financial reporting as of November 29, 2008 because it was acquired by the Company in a purchase business combination during 2008. We have also excluded Perry Equipment Corporation from our audit of internal control over financial reporting. Perry Equipment Corporation is a wholly-owned subsidiary whose total assets and total revenues represent 20.6% and 10.9%, respectively, of the related consolidated financial statement amounts as of and for the year ended November 29, 2008.

 

 

Atlanta, Georgia

January 23, 2009

CLARCOR Inc.

CONSOLIDATED BALANCE SHEETS
November 30, 2008 and 2007
(Dollars in thousands except per share data)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

CLARCOR Inc.

CONSOLIDATED STATEMENTS OF EARNINGS
for the years ended November 30, 2008, 2007 and 2006
(Dollars in thousands except per share data)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

CLARCOR Inc.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the years ended November 30, 2008, 2007 and 2006
(Dollars in thousands except per share data)