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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 2, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 1-11024
 CLARCOR Inc.
 (Exact name of registrant as specified in its charter)
 DELAWARE
    
    
    
    36-0922490(State or other jurisdiction of
    
    
    
    (I.R.S. Employerincorporation or organization)
    
    
    
    Identification No.)
 840 Crescent Centre Drive, Suite 600, Franklin, Tennessee 37067
  Registrants telephone number, including area code
    
    
    
    615-771-3100
 (Former name, former address and former fiscal year, if changed since last report.)
 þ o
  þ o o
 o þ




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TABLE OF CONTENTS  Part IItem 1Part IItem 2Part IItem 3. Quantitative and Qualitative Disclosure About Market RiskPart IItem 4. Controls and ProceduresPart II  Other InformationItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6 ExhibitsSIGNATURESSection 302 CertificationSection 302 CertificationSection 906 Certification    Table of Contents  
  
  
 September 2,
    
    
    December 3,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,026
    
    
    $
    18,502Short-term investments
    
    
    19,500
    
    
    
    10,400Accounts receivable, less allowance for losses
of $12,849 for 2006 and $9,775 for 2005
    
    
    153,643
    
    
    
    152,755Inventories:Raw materials
    
    
    47,091
    
    
    
    42,205Work in process
    
    
    21,012
    
    
    
    17,057Finished products
    
    
    60,635
    
    
    
    58,246Total inventories
    
    
    128,738
    
    
    
    117,508Prepaid expenses and other current assets
    
    
    7,047
    
    
    
    7,253Deferred income taxes
    
    
    18,261
    
    
    
    18,515Total current assets
    
    
    352,215
    
    
    
    324,933Plant assets at cost,
    
    
    359,315
    
    
    
    355,216less accumulated depreciation
    
    
    (213,960
    )
    
    
    (205,711
    )145,355
    
    
    
    149,505Goodwill
    
    
    115,691
    
    
    
    114,278Acquired intangibles, less accumulated amortization
    
    
    53,553
    
    
    
    53,898Pension assets
    
    
    22,567
    
    
    
    22,069Deferred income taxes
    
    
    521
    
    
    
    521Other noncurrent assets
    
    
    10,769
    
    
    
    10,068$
    700,671
    
    
    $
    675,272LIABILITIESCurrent liabilities:Current portion of long-term debt
    
    $
    62
    
    
    $
    233Accounts payable
    
    
    49,353
    
    
    
    49,239Income taxes
    
    
    11,020
    
    
    
    12,544Accrued employee compensation
    
    
    22,496
    
    
    
    24,281Other accrued liabilities
    
    
    34,106
    
    
    
    35,173Total current liabilities
    
    
    117,037
    
    
    
    121,470Long-term debt, less current portion
    
    
    15,963
    
    
    
    16,009Postretirement health care benefits
    
    
    4,599
    
    
    
    4,239Long-term pension liabilities
    
    
    19,998
    
    
    
    16,287Deferred income taxes
    
    
    25,228
    
    
    
    26,184Other long-term liabilities
    
    
    4,601
    
    
    
    6,267Minority interests
    
    
    1,573
    
    
    
    1,983ContingenciesSHAREHOLDERS EQUITYCapital stock
    
    
    51,023
    
    
    
    51,595Capital in excess of par value
    
    
    1,891
    
    
    
    21,458Accumulated other comprehensive earnings
    
    
    (1,138
    )
    
    
    (4,637
    )Retained earnings
    
    
    459,896
    
    
    
    414,417511,672
    
    
    
    482,833$
    700,671
    
    
    $
    675,272
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Quarter Ended
    
    
    Nine Months EndedSeptember 2,
    
    
    August 27,
    
    
    September 2,
    
    
    August 27,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    231,510
    
    
    $
    216,403
    
    
    $
    671,769
    
    
    $
    632,450Cost of sales
    
    
    159,689
    
    
    
    149,003
    
    
    
    469,057
    
    
    
    441,945Gross profit
    
    
    71,821
    
    
    
    67,400
    
    
    
    202,712
    
    
    
    190,505Selling and administrative expenses
    
    
    36,742
    
    
    
    36,348
    
    
    
    115,539
    
    
    
    110,820Operating profit
    
    
    35,079
    
    
    
    31,052
    
    
    
    87,173
    
    
    
    79,685Other income (expense):Interest expense
    
    
    (174
    )
    
    
    (164
    )
    
    
    (564
    )
    
    
    (460
    )Interest income
    
    
    468
    
    
    
    267
    
    
    
    1,194
    
    
    
    556Other, net
    
    
    (198
    )
    
    
    175
    
    
    
    (510
    )
    
    
    (225
    )96
    
    
    
    278
    
    
    
    120
    
    
    
    (129
    )Earnings before income taxes and
minority interests
    
    
    35,175
    
    
    
    31,330
    
    
    
    87,293
    
    
    
    79,556Provision for income taxes
    
    
    12,087
    
    
    
    10,292
    
    
    
    30,939
    
    
    
    27,801Earnings before minority interests
    
    
    23,088
    
    
    
    21,038
    
    
    
    56,354
    
    
    
    51,755Minority interests in earnings of subsidiaries
    
    
    (125
    )
    
    
    (183
    )
    
    
    (385
    )
    
    
    (400
    )Net earnings
    
    $
    22,963
    
    
    $
    20,855
    
    
    $
    55,969
    
    
    $
    51,355Net earnings per common share:Basic
    
    $
    0.45
    
    
    $
    0.40
    
    
    $
    1.08
    
    
    $
    0.99Diluted
    
    $
    0.44
    
    
    $
    0.40
    
    
    $
    1.07
    
    
    $
    0.98Average number of common shares outstanding:Basic
    
    
    51,414,083
    
    
    
    51,866,491
    
    
    
    51,691,685
    
    
    
    51,650,585Diluted
    
    
    51,981,546
    
    
    
    52,678,124
    
    
    
    52,390,283
    
    
    
    52,328,384Dividends paid per share
    
    $
    0.0675
    
    
    $
    0.0638
    
    
    $
    0.2025
    
    
    $
    0.1913
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Nine Months EndedSeptember 2,
    
    
    August 27,2006
    
    
    2005Cash flows from operating activities:Net earnings
    
    $
    55,969
    
    
    $
    51,355Depreciation
    
    
    16,036
    
    
    
    15,038Amortization
    
    
    1,636
    
    
    
    944Stock-based compensation expense
    
    
    2,194
    
    
    
    662Tax benefits from stock-based compensation
    
    
    (3,312
    )
    
    
    Changes in assets and liabilities
    
    
    (21,133
    )
    
    
    (19,521
    )Other, net
    
    
    629
    
    
    
    279Net cash provided by operating activities
    
    
    52,019
    
    
    
    48,757Cash flows from investing activities:Business acquisitions, net of cash acquired
    
    
    (4,627
    )
    
    
    (3,512
    )Additions to plant assets
    
    
    (11,416
    )
    
    
    (16,847
    )Other, net
    
    
    1,130
    
    
    
    561Net cash used in investing activities
    
    
    (14,913
    )
    
    
    (19,798
    )Cash flows from financing activities:Net payments under line of credit
    
    
    
    
    
    
    (7,500
    )Payments on long-term debt
    
    
    (555
    )
    
    
    (860
    )Sale of capital stock under stock option and employee
purchase plans
    
    
    5,362
    
    
    
    5,655Tax benefits from stock-based compensation
    
    
    3,312
    
    
    
    Purchase of treasury stock
    
    
    (28,909
    )
    
    
    (1,986
    )Cash dividends paid
    
    
    (10,490
    )
    
    
    (9,893
    )Other, net
    
    
    
    
    
    
    (9,332
    )Net cash used in financing activities
    
    
    (31,280
    )
    
    
    (23,916
    )Net effect of exchange rate changes on cash
    
    
    698
    
    
    
    (623
    )Net change in cash and cash equivalents
    
    
    6,524
    
    
    
    4,420Cash and cash equivalents, beginning of period
    
    
    18,502
    
    
    
    17,420Cash and cash equivalents, end of period
    
    $
    25,026
    
    
    $
    21,840Cash paid during the period for:Interest
    
    $
    565
    
    
    $
    458Income taxes
    
    $
    30,043
    
    
    $
    14,796
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1.
    
    CONSOLIDATED FINANCIAL STATEMENTSThe consolidated condensed balance sheet as of September 2, 2006, the consolidated condensed
statements of earnings and the consolidated condensed statements of cash flows for the periods
ended September 2, 2006, and August 27, 2005, have been prepared by the Company without audit.
The financial statements have been prepared on the same basis as those in the Companys December
3, 2005 annual report on Form 10-K (2005 Form 10-K). The December 3, 2005 consolidated balance
sheet data was derived from CLARCORs year-end audited financial statements as presented in the
2005 Form 10-K but does not include all disclosures required by accounting principles generally
accepted in the United States of America. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows have been made. The results of operations for the period
ended September 2, 2006 are not necessarily indicative of the operating results for the full
year.As discussed in the 2005 Form 10-K, at fiscal year end 2005 the Company revised its presentation
of short-term investments on its Consolidated Balance Sheets and Consolidated Statements of Cash
Flows, which were presented as cash and cash equivalents in previous years, to present them in
accordance with their contractual maturities. The amount revised in the Consolidated Condensed
Statement of Cash Flows totaled $19,350 for the first nine months of fiscal 2005. The purchases
and sales related to the investments have been presented on the Consolidated Statements of Cash
Flows in the operating activities section. This revision had no impact on the Consolidated
Statements of Earnings.2.
    
    STOCK-BASED COMPENSATIONEffective December 4, 2005, the Company adopted Statement of Financial Accounting Standards No.
123R, Share-Based Payment (SFAS No. 123R), using the modified prospective transition method.
Under this method, stock-based compensation expense is recognized using the fair-value based
method for all awards granted on or after the date of adoption. Compensation expense for
unvested stock options and awards that were outstanding on December 4, 2005 will be recognized
over the requisite service period based on the grant-date fair value of those options and awards
as previously calculated under the pro forma disclosures under SFAS No. 123. The Company
determined the fair value of these awards using the Black-Scholes option pricing model. The
Company also adopted the non-substantive vesting period approach for attributing stock
compensation to individual periods for awards with retirement eligibility options, which
requires recognition of compensation expense immediately for grants to retirement eligible
employees or over the period from the grant date to the date retirement eligibility is achieved.
This change will not affect the overall amount of compensation expense recognized and had an
immaterial effect on the amount recorded in the quarter and nine months ended September 2, 2006.
Prior to adoption, the Company used the intrinsic value method under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations
and provided the disclosure-only provisions of SFAS No. 123 applying the nominal vesting period
approach. Therefore, the Company did not recognize compensation expense prior to fiscal 2006 in
association with options granted.As a result of adopting the standard, the Company recorded pretax compensation expense related
to stock options of $611 and $1,628 and related tax benefits of $217 and $578 for the
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2.
    
    STOCK-BASED COMPENSATION (Continued)quarter and nine months ended September 2, 2006, respectively. This reduced net earnings by
$394 and $1,050 and diluted earnings per share (EPS) by less than $0.01 and by approximately
$0.02 for the quarter and for the nine months ended September 2, 2006, respectively. The
Company also recorded $161 and $566 in pretax compensation expense related to its restricted
share units for the quarter and nine months ended September 2, 2006. The tax benefits
associated with tax deductions that exceed the amount of compensation expense recognized in the
financial statements related to stock option exercises was $320 and $3,312 for the quarter and
nine months ended September 2, 2006, respectively. This reduced cash flows from operating
activities and increased cash flows from financing activities compared to amounts that would
have been reported if the standard had not been adopted.On November 18, 2005, the Board of Directors approved a grant of 386,375 options that were fully
vested on the date of grant. Approximately $3,000 of pretax compensation expense was included
in the determination of pro forma earnings during 2005 that otherwise would have been recorded
as stock option expense in accordance with SFAS No. 123R over future years had the options been
granted with a four-year vesting period similar to prior grants. On March 22, 2005, the
Compensation Committee of the Board of Directors approved accelerating the vesting of
nonqualified stock options granted on December 12, 2004 to current employees, including
executive officers. All of these options had an exercise price greater than the then-market
price per share and provided for vesting at the rate of 25% per year beginning on the first
anniversary of the date of grant. Approximately $3,000 of pretax compensation expense was
included in the determination of pro forma earnings during 2005 that otherwise would have been
recorded as stock option expense in accordance with SFAS No. 123R over future years. Together
these events reduced the amount of pre-tax compensation that would have been recorded related to
these two grants in the quarter and nine months ended September 2, 2006 by approximately $375
and $1,125, respectively.If the Company had determined compensation expense for its stock-based compensation plans based
on the fair value at the grant dates for the prior fiscal year, the Companys pro forma net
earnings and basic and diluted EPS would have been as follows:
 Quarter Ended
    
    
    Nine Months EndedAugust 27, 2005
    
    
    August 27, 2005Net earnings, as reported
    
    $
    20,855
    
    
    $
    51,355Add stock-based
compensation expense,
net of tax, included in
net earnings
    
    
    137
    
    
    
    420Less total stock-based
compensation expense
under the fair
value-based method, net
of tax
    
    
    (2,308
    )
    
    
    (6,020
    )Pro forma net earnings
    
    $
    18,684
    
    
    $
    45,755Basic EPS, as reported
    
    $
    0.40
    
    
    $
    0.99Pro forma basic EPS
    
    $
    0.36
    
    
    $
    0.89Diluted EPS, as reported
    
    $
    0.40
    
    
    $
    0.98Pro forma diluted EPS
    
    $
    0.35
    
    
    $
    0.87
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2.
    
    STOCK-BASED COMPENSATION (Continued)On March 24, 2003, the shareholders of CLARCOR approved the 2004 Incentive Plan, which replaced
the 1994 Incentive Plan on its termination date of December 14, 2003. The 2004 Incentive Plan
allows the Company to grant stock options, restricted stock and performance awards to officers,
directors and key employees of up to 3,000,000 shares. Upon share option exercise or restricted
share unit conversion, the Company issues new shares unless treasury shares are available.Stock OptionsUnder the 2004 Incentive Plan, nonqualified stock options may only be granted at the fair market
value at the date of grant. All outstanding stock options have been granted at the fair market
value on the date of grant, which is the date the Board of Directors approves the grant and the
participants receive it. The Companys Board of Directors determines the vesting requirements
for stock options at the time of grant and may accelerate vesting as occurred during 2005.
Excluding the grants awarded in fiscal 2005, options granted to key employees vest 25% per year
beginning at the end of the first year; therefore, they become fully exercisable at the end of
four years. Vesting may be accelerated in the event of retirement, disability or death of a
participant or change in control of the Company. Options granted to non-employee directors vest
immediately. All options expire ten years from the date of grant unless otherwise terminated.
The options granted in fiscal 2005 are fully vested as discussed above.The following table summarizes the activity for the nine months ended September 2, 2006 under
the nonqualified stock option plans and includes options granted under both the 1994 Incentive
Plan and the 2004 Incentive Plan.
 SharesGranted
    
    Weightedunder
    
    AverageIncentive
    
    ExercisePlans
    
    PriceOutstanding at beginning of year
    
    
    3,885,915
    
    
    $
    20.63Granted
    
    
    61,550
    
    
    
    35.08Exercised
    
    
    (572,117
    )
    
    
    16.72Surrendered
    
    
    (41,875
    )
    
    
    20.60Outstanding at September 2, 2006
    
    
    3,333,473
    
    
    $
    21.56Options exercisable at September 2, 2006
    
    
    3,009,561
    
    
    $
    21.63
  Quarter Ended
    
    Nine Months EndedSeptember 2, 2006
    
    August 27, 2005
    
    September 2, 2006
    
    August 27, 2005Fair value of options exercised
    
    $
    339
    
    
    $
    2,381
    
    
    $
    2,377
    
    
    $
    3,392Total intrinsic value of options exercised
    
    
    1,035
    
    
    
    12,346
    
    
    
    9,923
    
    
    
    17,802Cash received upon exercise of options
    
    
    515
    
    
    
    948
    
    
    
    3,529
    
    
    
    3,493Tax benefit realized from exercise of options
    
    
    367
    
    
    
    4,658
    
    
    
    3,365
    
    
    
    6,727
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2.
    
    STOCK-BASED COMPENSATION (Continued)The following table summarizes information about the options at September 2, 2006.
 Options Outstanding
    
    Options ExercisableWeightedWeighted
    
    Average
    
    
    
    
    
    WeightedAverage
    
    Remaining
    
    
    
    
    
    AverageRange of
    
    
    
    
    
    Exercise
    
    Life in
    
    
    
    
    
    ExerciseExercise Prices
    
    Number
    
    Price
    
    Years
    
    Number
    
    Price$  7.21  $  9.79
    
    
    356,626
    
    
    $
    9.15
    
    
    
    3.26
    
    
    
    356,626
    
    
    $
    9.15$10.53  $15.15
    
    
    267,263
    
    
    $
    13.22
    
    
    
    4.97
    
    
    
    267,263
    
    
    $
    13.22$16.01  $22.80
    
    
    1,409,443
    
    
    $
    20.37
    
    
    
    5.53
    
    
    
    1,093,331
    
    
    $
    20.27$25.89  $35.66
    
    
    1,300,141
    
    
    $
    27.97
    
    
    
    7.77
    
    
    
    1,292,341
    
    
    $
    27.953,333,473
    
    
    $
    21.56
    
    
    
    6.11
    
    
    
    3,009,561
    
    
    $
    21.63
   Nine Months Ended
    
    Year EndedSeptember 2, 2006
    
    December 3, 2005Risk-free interest rate
    
    
    4.74
    %
    
    
    4.05
    %Expected dividend yield
    
    
    0.96
    %
    
    
    1.06
    %Expected volatility factor
    
    
    20.72
    %
    
    
    21.48
    %Expected option term (in years):Original grants without reloads
    
    
    6.9
    
    
    
    6.4Original grants with reloads
    
    
    n/a
    
    
    
    5.0
 Restricted Share Unit Awards
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2.
    
    STOCK-BASED COMPENSATION (Continued)grant date and is recorded equally over the vesting period of four years. During the vesting
period, officers and key employees receive compensation equal to dividends declared on common
shares. Upon vesting, the employee may elect to defer receipt of their shares. Compensation
expense related to vesting of restricted stock awards totaled $161 and $566 for the quarter and
nine months ended September 2, 2006, respectively, and $217 and $662 for the quarter and nine
months ended August 27, 2005, respectively. The following table summarizes the restricted share
unit awards.
 WeightedAverageGrant DateUnits
    
    Fair ValueNonvested at beginning of year
    
    
    110,441
    
    
    $
    23.32Granted
    
    
    
    
    
    
    Vested
    
    
    (37,158
    )
    
    
    19.56Surrendered
    
    
    (3,382
    )
    
    
    24.56Nonvested at September 2, 2006
    
    
    69,901
    
    
    $
    25.25
 The total fair value of shares vested during the nine months ended September 2, 2006 and August
27, 2005 was $566 and $689, respectively. As of September 2, 2006, there was $1,046 of total
unrecognized compensation cost related to nonvested share-based compensation arrangements. Of
this nonvested cost, $171 is expected to be recognized during the remainder of fiscal 2006 and
the remaining $875 during fiscal years 2007, 2008 and 2009.Employee Stock Purchase PlanThe Company sponsors an employee stock purchase plan which allows employees to purchase stock at
a discount. Effective January 1, 2006, the plan was amended to be in compliance with the safe
harbor rules of SFAS No. 123R so that the plan is not compensatory under the new standard and no
expense will be recognized. The Company issued stock under this plan for $364 and $1,833 during
third quarter and nine months of 2006, respectively, and $1,054 and $2,162, during third quarter
and nine months of 2005, respectively.3.
    
    EARNINGS PER SHARE AND TREASURY STOCK TRANSACTIONSDiluted earnings per share reflects the impact of outstanding stock options and restricted share
units as if exercised during the periods presented using the treasury stock method. The
following table provides a reconciliation of the numerators and denominators utilized in the
calculation of basic and diluted earnings per share:
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3.
    
    EARNINGS PER SHARE AND TREASURY STOCK TRANSACTIONS (Continued)
 Quarter Ended
    
    
    Nine Months EndedSeptember 2,
    
    
    August 27,
    
    
    September 2,
    
    
    August 27,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic weighted average number of
common shares outstanding
    
    
    51,414,083
    
    
    
    51,866,491
    
    
    
    51,691,685
    
    
    
    51,650,585Dilutive effect of stock options and
restricted stock
    
    
    567,463
    
    
    
    811,633
    
    
    
    698,598
    
    
    
    677,799Diluted weighted
average number of
common shares
outstanding
    
    
    51,981,546
    
    
    
    52,678,124
    
    
    
    52,390,283
    
    
    
    52,328,384Net earnings
    
    $
    22,963
    
    
    $
    20,855
    
    
    $
    55,969
    
    
    $
    51,355Basic earnings per share amount
    
    $
    0.45
    
    
    $
    0.40
    
    
    $
    1.08
    
    
    $
    0.99Diluted earnings per share amount
    
    $
    0.44
    
    
    $
    0.40
    
    
    $
    1.07
    
    
    $
    0.98
 Options with exercise prices greater than the average market price of the common shares
during the respective quarter were not included in the computation of diluted earnings per
share. For the quarter and nine months ended September 2, 2006, 57,550 options with a weighted
average exercise price of $35.53 were excluded from the computation. For the quarter and nine
months ended August 27, 2005, 321,038 and 358,490 options with a weighted average price of
$29.04 and $29.00, respectively, were excluded from the computation.For the nine months ended September 2, 2006, exercises of stock options added $4,609 to capital
in excess of par value.During the quarter and nine months ended September 2, 2006, the Company purchased and retired
1,000,000 shares of common stock for $28,909. During the quarter and nine months ended August
27, 2005, the Company purchased and retired 68,200 shares of common stock. The number of issued
shares was reduced as a result of the retirement of these shares.4.
    
    COMPREHENSIVE EARNINGSThe Companys total comprehensive earnings and its components are as follows:
 Quarter Ended
    
    
    
    Nine Months EndedSeptember 2,
    
    
    August 27,
    
    
    September 2,
    
    
    August 27,2006
    
    
    2005
    
    
    2006
    
    
    2005Net earnings
    
    $
    22,963
    
    
    $
    20,855
    
    
    $
    55,969
    
    
    $
    51,355Other comprehensive earnings, net of tax:Foreign currency translation adjustments
    
    
    (61
    )
    
    
    (1,620
    )
    
    
    3,499
    
    
    
    (2,624
    )Total comprehensive earnings
    
    $
    22,902
    
    
    $
    19,235
    
    
    $
    59,468
    
    
    $
    48,731
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##### Table of Contents



4.
    
    COMPREHENSIVE EARNINGS (Continued)The components of the ending balances of accumulated other comprehensive earnings are as
follows:
 September 2,
    
    
    December 3,2006
    
    
    2005Minimum pension liability, net of $2,373 tax
    
    $
    (3,944
    )
    
    $
    (3,944
    )Translation adjustments, net of $155 tax
    
    
    2,806
    
    
    
    (693
    )Accumulated other comprehensive loss
    
    $
    (1,138
    )
    
    $
    (4,637
    )
 5.
    
    ACQUISITIONS, PURCHASE OF MINORITY INTERESTSIn April 2006, the Company acquired two small businesses for approximately $2,843 in cash, net
of cash received. One was a filter distributorship based in Minnesota which became a
wholly-owned subsidiary of the Company and was included in the Industrial/ Environmental
Filtration segment beginning in the second quarter of 2006. In the other transaction, the
Company acquired certain assets of a manufacturer and distributor of heavy-duty air filters
based in Oklahoma. These assets were combined into an existing subsidiary of the Company within
the Engine/Mobile Filtration segment and the results were included in the Companys consolidated
results of operations from the date of acquisition.A preliminary allocation of the purchase prices for these two acquisitions has been made to
major categories of assets and liabilities. The $498 excess of the purchase price over the
preliminary estimated fair value of the net tangible and identifiable intangible assets acquired
was recorded as goodwill. Other acquired intangibles included noncompete agreements valued at
$91 and customer relationships valued at $1,195, which will be amortized on a straight-line
basis over three years and ten to twenty years, respectively. The acquisitions are not material
to the results of the Company. The Company expects to make additional adjustments for the
valuation of assets and deferred taxes during the fourth quarter of 2006.On June 1, 2006, the Company purchased the minority owners interest in a consolidated
affiliate in South Africa for approximately $2,200 of which $1,644 was paid and the remainder
will be paid in 2007 based on fiscal 2006 results. In addition, there will be a payment
estimated to be approximately $225 to be paid in 2008 based on fiscal 2007 results.As discussed in the 2005 Form 10-K, on November 1, 2005, the Company acquired Martin Kurz & Co.,
Inc. (MKI), a privately-owned Mineola, New York manufacturer of sintered porous metal laminates
used in screening and filtration products for a wide array of industries, including
pharmaceutical, petrochemical, aerospace, paper and chemical process industries, for
approximately $24,761 net of cash received, including acquisition expenses. During the nine
months of 2006, the Company paid an additional $140 related to a working capital adjustment and
final settlement with the sellers and acquisition expenses. This payment, along with a revised
estimate of liabilities assumed and finalization of the appraisal, increased goodwill by $117.
The purchase price was paid in cash with available funds. MKIs sales for the most recent
twelve months prior to acquisition were approximately $12,000. The
acquisition is expected to be accretive to earnings per share in fiscal year 2006. MKI was included in the
Industrial/Environmental Filtration segment from the date of acquisition.
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##### Table of Contents



5.
    
    ACQUISITIONS, PURCHASE OF MINORITY INTERESTS (Continued)The excess of the purchase price over the estimated fair value of the net
tangible and identifiable intangible assets acquired was recorded as goodwill. The initial
purchase price was based on the net assets of the business acquired as shown on an October 31,
2005, balance sheet which was subject to a final adjustment. The allocation of the purchase
price over the estimated fair value of the tangible and identifiable intangible assets acquired
for MKI resulted in $9,231 recorded as goodwill. In addition based on an independent
appraisal, the Company recognized $8,600 for customer relationships that will be amortized over
twelve years, $267 for trademarks that will be amortized over twenty years and $1,700 as other
acquired intangibles which will be amortized over five to ten years. Following is a condensed
balance sheet based on fair values of the assets acquired and liabilities assumed.
 Cash
    
    $
    244Accounts receivable, less allowance for losses
    
    
    1,312Inventory, net
    
    
    468Prepaid assets
    
    
    59Plant assets
    
    
    3,493Goodwill
    
    
    9,231Other acquired intangibles
    
    
    10,567Total assets acquired
    
    
    25,374Accounts payable and accrued liabilities
    
    
    (369
    )Net assets acquired
    
    $
    25,005
 6.
    
    RESTRUCTURING CHARGESAs announced in July 2006, the Company began a
restructuring program focused on the heating, ventilating and air conditioning (HVAC) filter
manufacturing operations within its Industrial/Environmental filtration segment. The goal of
the program is to pursue the Companys goal of an overall 10% segment operating margin from its
current margins of mid-single digits. As a part of this program, the Company will discontinue
production at an HVAC filter manufacturing plant in
Kenly, North Carolina effective November 6, 2006. Severance costs of $195 were accrued during
the third quarter and included in cost of sales in the Industrial/Environmental segment. No
amounts were paid. Minimal additional charges related to contract termination costs and
facilities consolidation costs will be recognized when the Company exits a lease related to
that facility.At the end of the second quarter 2006, the Company announced a plan to merge two of its
manufacturing facilities in order to realize cost savings and efficiency benefits. At the end
of August 2006, the Company terminated manufacturing at one of its European facilities. The
Company recorded a $416 severance charge which it expects to pay as one-time termination
benefits to employees who were involuntarily terminated in the third quarter of fiscal 2006.
The Company had paid $304 as of the end of the third quarter 2006. This charge is included in
cost of sales in the Industrial/Environmental filtration segment. Additional charges related
to contract termination costs and facilities consolidation costs, estimated to be less than
$500, will be recognized when the Company exits leases related to that facility, which it
expects will occur during fourth quarter 2006.
 Page 12




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##### Table of Contents



6.
    
    RESTRUCTURING CHARGES (Continued)Following is a summary of the related liability accounts:
 Employee
    
    Contract
    
    FacilitiesTermination
    
    Termination
    
    ConsolidationBenefits
    
    Costs
    
    Costs
    
    TotalBalance at December 3, 2005
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Additional expense incurred
    
    
    611
    
    
    
    
    
    
    
    
    
    
    
    611Amounts paid
    
    
    (304
    )
    
    
    
    
    
    
    
    
    
    
    (304
    )Balance at September 2, 2006
    
    $
    307
    
    
    $
    
    
    
    $
    
    
    
    $
    307
 7.
    
    GAIN ON INSURANCE SETTLEMENTIn April 2006, the Companys warehouse in Goodlettsville, Tennessee was damaged by a tornado.
In accordance with Financial Accounting Standards Board Interpretation No. 30, Accounting for
Involuntary Conversions of Non-Monetary Assets to Monetary Assets, (FIN No. 30) the Company has
recognized a $790 gain in management and selling expenses on the excess of insurance proceeds
over the net book value of the property offset by $250 of expenses subject to a deductible paid
by the Company. As of September 2, 2006, the Company has collected $500. The remaining
insurance receivable, estimated to approximate $500, is recorded in current assets and is
expected to be received during fourth quarter 2006 when repairs to the building are complete.8.
    
    ACQUIRED INTANGIBLESThe following table reconciles the activity for goodwill by reporting unit for the nine months
ended September 2, 2006.
 Engine/
    
    
    Industrial/Mobile
    
    
    Environmental
    
    
    
    
    
    
    TotalFiltration
    
    
    Filtration
    
    
    Packaging
    
    
    GoodwillBalance at December 3, 2005
    
    $
    15,678
    
    
    $
    98,600
    
    
    $
    
    
    
    $
    114,278Acquisitions
    
    
    190
    
    
    
    425
    
    
    
    
    
    
    
    615Currency translation adjustments
    
    
    639
    
    
    
    159
    
    
    
    
    
    
    
    798Balance at September 2, 2006
    
    $
    16,507
    
    
    $
    99,184
    
    
    $
    
    
    
    $
    115,691
  Engine/
    
    
    Industrial/Mobile
    
    
    EnvironmentalFiltration
    
    
    Filtration
    
    
    Packaging
    
    
    TotalBalance at September 2, 2006:Trademarks, gross
    
    $
    603
    
    
    $
    29,157
    
    
    $
    
    
    
    $
    29,760Less accumulated amortization
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Trademarks, net
    
    $
    603
    
    
    $
    29,149
    
    
    $
    
    
    
    $
    29,752Customer relationships, gross
    
    $
    1,970
    
    
    $
    16,672
    
    
    $
    
    
    
    $
    18,642Less accumulated amortization
    
    
    371
    
    
    
    2,060
    
    
    
    
    
    
    
    2,431Customer relationships, net
    
    $
    1,599
    
    
    $
    14,612
    
    
    $
    
    
    
    $
    16,211
 Page 13




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##### Table of Contents



8.
    
    ACQUIRED INTANGIBLES (Continued)
 Engine/
    
    
    Industrial/Mobile
    
    
    EnvironmentalFiltration
    
    
    Filtration
    
    
    Packaging
    
    
    TotalBalance at September 2, 2006:Other acquired intangibles
    
    $
    241
    
    
    $
    12,682
    
    
    $
    
    
    
    $
    12,923Less accumulated amortization
    
    
    212
    
    
    
    5,121
    
    
    
    
    
    
    
    5,333Other acquired intangibles, net
    
    $
    29
    
    
    $
    7,561
    
    
    $
    
    
    
    $
    7,590
 Amortization expense is estimated to be $2,192 in 2006, $2,117 in 2007, $1,944 in 2008,
$1,918 in 2009 and $1,909 in 2010.9.
    
    GUARANTEES AND WARRANTIESThe Company has provided letters of credit totaling approximately $29,463 to various government
agencies, primarily related to industrial revenue bonds, and to insurance companies and other
entities in support of its obligations. The Company believes that no payments will be required
resulting from these accommodation obligations.In the ordinary course of business, the Company also provides routine indemnifications and other
guarantees whose terms range in duration and often are not explicitly defined. The Company does
not believe these will have a material impact on the results of operations or financial
condition of the Company.Warranties are recorded as a liability on the balance sheet and as charges to current expense
for estimated normal warranty costs and, if applicable, for specific performance issues known to
exist on products already sold. The expenses estimated to be incurred are provided at the time
of sale and adjusted as needed, based primarily upon experience.Changes in the Companys warranty accrual during the nine months ended September 2, 2006 are as
follows:
 Balance at December 3, 2005
    
    $
    1,122Accruals for warranties issued during the period
    
    
    942Accruals related to pre-existing warranties
    
    
    (62
    )Settlements made during the period
    
    
    (606
    )Other adjustments, including currency translation
    
    
    151Balance at September 2, 2006, included in other current liabilities
    
    $
    1,547
 Page 14




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10.
    
    RETIREMENT BENEFITSThe Company provides various retirement benefits, including defined benefit plans and
postretirement health care plans covering certain current and retired employees in the U.S. and
abroad. Components of net periodic benefit cost and company contributions for these plans were
as follows:
 Quarter Ended
    
    
    Nine Months EndedSeptember 2,
    
    
    August 27,
    
    
    September 2,
    
    
    August 27,2006
    
    
    2005
    
    
    2006
    
    
    2005Pension BenefitsComponents of net periodic benefit cost:Service cost
    
    $
    848
    
    
    $
    944
    
    
    $
    2,541
    
    
    $
    2,837Interest cost
    
    
    1,689
    
    
    
    1,561
    
    
    
    5,057
    
    
    
    4,696Expected return on plan assets
    
    
    (1,964
    )
    
    
    (1,874
    )
    
    
    (5,874
    )
    
    
    (5,634
    )Amortization of unrecognized:Prior service cost
    
    
    42
    
    
    
    40
    
    
    
    129
    
    
    
    120Net actuarial loss
    
    
    502
    
    
    
    523
    
    
    
    1,505
    
    
    
    1,570Net periodic benefit cost
    
    $
    1,117
    
    
    $
    1,194
    
    
    $
    3,358
    
    
    $
    3,589Cash Contributions
    
    $
    127
    
    
    $
    160
    
    
    $
    376
    
    
    $
    401Postretirement Healthcare BenefitsComponents of net periodic benefit cost:Service cost
    
    $
    4
    
    
    $
    8
    
    
    $
    15
    
    
    $
    24Interest cost
    
    
    22
    
    
    
    26
    
    
    
    63
    
    
    
    78Amortization of unrecognized:Prior service cost
    
    
    (31
    )
    
    
    (31
    )
    
    
    (93
    )
    
    
    (93
    )Net actuarial gain
    
    
    (27
    )
    
    
    (19
    )
    
    
    (78
    )
    
    
    (57
    )Net periodic benefit income
    
    $
    (32
    )
    
    $
    (16
    )
    
    $
    (93
    )
    
    $
    (48
    )Cash Contributions
    
    $
    70
    
    
    $
    66
    
    
    $
    210
    
    
    $
    198
  Page 15




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11.
    
    CONTINGENCIESThe Company is involved in legal actions arising in the normal course of business.
Additionally, the Company is party to various proceedings relating to environmental issues. The
U.S. Environmental Protection Agency (EPA) 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. 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 at issue, the difficulty in
determining the nature and extent of contamination attributable to each PRP, the length of time
remediation may require, the complexity of the environmental regulation and the continuing
advancement of remediation technology. Applicable federal law may impose joint and several
liability on each PRP for the cleanup.It is the opinion of management, after consultation with legal counsel that additional
liabilities, if any, resulting from these legal or environmental issues, are not expected to
have a material adverse effect on the Companys financial condition or consolidated results of
operations.In the event of a change in control of the Company, termination benefits may be required for
certain executive officers and other key employees.12.
    
    SEGMENT DATAThe Company operates in three principal product segments: Engine/Mobile Filtration,
Industrial/Environmental Filtration and Packaging. The segment data for the third quarter and
nine months ended September 2, 2006 and August 27, 2005, respectively, are shown below. Net
sales represent sales to unaffiliated customers as reported in the consolidated condensed
statements of earnings. Intersegment sales were not material.
 Quarter Ended
    
    
    Nine Months EndedSeptember 2,
    
    
    August 27,
    
    
    September 2,
    
    
    August 27,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales:Engine/Mobile Filtration
    
    $
    103,358
    
    
    $
    90,686
    
    
    $
    295,819
    
    
    $
    267,537Industrial/Environmental Filtration
    
    
    106,263
    
    
    
    105,153
    
    
    
    312,785
    
    
    
    309,019Packaging
    
    
    21,889
    
    
    
    20,564
    
    
    
    63,165
    
    
    
    55,894$
    231,510
    
    
    $
    216,403
    
    
    $
    671,769
    
    
    $
    632,450
 Page 16




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##### Table of Contents



12.
    
    SEGMENT DATA (Continued)
 Quarter Ended
    
    
    Nine Months EndedSeptember 2,
    
    
    August 27,
    
    
    September 2,
    
    
    August 27,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating profit:Engine/Mobile Filtration
    
    $
    25,147
    
    
    $
    20,500
    
    
    $
    66,666
    
    
    $
    56,907Industrial/Environmental Filtration
    
    
    7,965
    
    
    
    8,544
    
    
    
    15,044
    
    
    
    18,747Packaging
    
    
    1,967
    
    
    
    2,008
    
    
    
    5,463
    
    
    
    4,03135,079
    
    
    
    31,052
    
    
    
    87,173
    
    
    
    79,685Other income (expense)
    
    
    96
    
    
    
    278
    
    
    
    120
    
    
    
    (129
    )Earnings before income taxes and
minority earnings
    
    $
    35,175
    
    
    $
    31,330
    
    
    $
    87,293
    
    
    $
    79,556Identifiable assets:Engine/Mobile Filtration
    
    
    
    
    
    
    
    
    
    $
    208,364
    
    
    $
    191,891Industrial/Environmental Filtration
    
    
    
    
    
    
    
    
    
    
    375,299
    
    
    
    349,089Packaging
    
    
    
    
    
    
    
    
    
    
    42,756
    
    
    
    43,054Corporate
    
    
    
    
    
    
    
    
    
    
    74,252
    
    
    
    81,427$
    700,671
    
    
    $
    665,461
 During the second quarter the Company recognized a pretax charge to earnings of
approximately $3,000 in the Industrial/Environmental segments operating profit arising from the
refusal of a customer to pay for products it had ordered and used. The charge represents unpaid
invoices and certain inventories and is included in selling and administrative expenses. The
Company has initiated legal proceedings against the customer to recover this amount. The
Industrial/Environmental operating profit for the nine months ended September 2, 2006 also
includes the $611 charge related to restructuring of a European manufacturing facility and
closing of a North Carolina operation and the $540 gain related to insurance proceeds.13.
    
    RECENT ACCOUNTING PRONOUNCEMENTIn June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, (FIN No. 48). The Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial statements in
accordance with Statement of Financial Accounting Standard No. 109, Accounting for Income
Taxes, and will be effective for the Companys fiscal year 2008 although earlier application is
encouraged. FIN No. 48 prescribes guidance for recognizing, measuring, reporting and disclosing
a tax position taken or expected to be taken in a tax return. The Company is currently
evaluating the effects FIN No. 48 will have on its financial statements.
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MANAGEMENTS DISCUSSION AND ANALYSIS
 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
        Page 18




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS
 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
         Page 19




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MANAGEMENTS DISCUSSION AND ANALYSIS
 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
         Page 20




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS
 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
        Page 21




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MANAGEMENTS DISCUSSION AND ANALYSIS
 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
       Page 22




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MANAGEMENTS DISCUSSION AND ANALYSIS
 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
     (Dollars in thousands)2006
    
    2007 & 2008
    
    2009 & 2010
    
    ThereafterLong-Term Debt
    
    $
    233
    
    
    $
    179
    
    
    $
    
    
    
    $
    15,830Credit Facility
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating Leases
    
    $
    9,165
    
    
    $
    15,624
    
    
    $
    8,079
    
    
    $
    7,730
      Page 23




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS
 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
    th
     Page 24




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MANAGEMENTS DISCUSSION AND ANALYSIS
 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
        
    
    statements and assumptions relating to future growth, earnings, earnings per share
and other financial performance measures, as well as managements short-term and
long-term performance goals;
    
    statements relating to the anticipated effects on results of operations or financial
condition from recent and expected developments or events;
    
    statements relating to the Companys business and growth strategies; and
    
    any other statements or assumptions that are not historical facts.
  Page 25




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MANAGEMENTS DISCUSSION AND ANALYSIS
 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
   Page 26




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COMPANY PURCHASES OF EQUITY SECURITIES (1)(c)Totalnumber of
    
    (d)shares
    
    Approximatepurchased
    
    dollar value ofas part of
    
    shares that may(a)
    
    (b)
    
    publicly
    
    yet beTotal number
    
    Average
    
    announced
    
    purchasedof shares
    
    price paid
    
    plans or
    
    under the plansPeriod
    
    purchased
    
    per share
    
    programs
    
    or programsJune 4, 2006 through June 30, 2006
    
    
    700,000
    
    
    $
    29.21
    
    
    
    700,000
    
    
    $
    119,088,960July 1, 2006 through July 31, 2006
    
    
    300,000
    
    
    $
    28.20
    
    
    
    300,000
    
    
    $
    110,630,097August 1, 2006 through September 2,
2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    110,630,097Total
    
    
    1,000,000
    
    
    
    
    
    
    
    1,000,000
 
 (1)
    
    Stock Repurchase Program announced June 20, 2005, for aggregate
purchases up to $150 million. Program expires June 16, 2007. Page 28




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##### Table of Contents



a.
    
    Exhibits:
 31(i)
    
    Certification of Norman E. Johnson pursuant to Section
302 of the Sarbanes-Oxley Act of 200231(ii)
    
    Certification of Bruce A. Klein pursuant to Section 302
of the Sarbanes-Oxley Act of 200232(i)
    
    Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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##### Table of Contents



SIGNATURES
  CLARCOR Inc.
 September 25, 2006
    
    
    
    By
    
    /s/ Norman E. Johnson(Date)
    
    
    
    
    
    Norman E. JohnsonChairman of the Board, President andChief Executive OfficerSeptember 25, 2006
    
    
    
    By
    
    /s/ Bruce A. Klein(Date)
    
    
    
    
    
    Bruce A. KleinVice President  Finance andChief Financial Officer