UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D. C. 20549





FORM
10-Q





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the quarterly period ended August 29, 2009ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the transition period from _______ to
________





Commission
File Number 1-11024





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





DELAWARE
            
            36-0922490(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer Identification No.)




840
      Crescent Centre Drive, Suite 600, Franklin, Tennessee
  37067(Address
      of principal executive offices)Registrant’s
      telephone number, including area code
            
            615-771-3100No
      Change(Former
      name, former address and former fiscal year, if changed since last
      report.)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x  No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o  No o





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





Large
      accelerated filer x
            Accelerated
      filero
            Non-accelerated
      filero
            Smaller
      reporting companyo





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





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





As of August 29, 2009,
50,337,043 common shares with a par value of $1 per share were
outstanding.









TABLE OF
      CONTENTS
              PAGEPart
      I – Financial InformationItem
              1
              .
              Financial
      Statements
              3Item
              2
              .
              Management’s
      Discussion and Analysis of Financial Condition and Results
      of Operations
              24Item
              3
              .
              Quantitative
      and Qualitative Disclosures About Market Risk
              38Item
              4
              .
              Controls
      and Procedures
              38Part II – Other
      InformationItem
              1
              .
              Legal
      Proceedings
              39Item
              1
              A.
              Risk
      Factors
              39Item
              2
              .
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              39Item
              3
              .
              Defaults
      Upon Senior Securities
              *Item
              4
              .
              Submission
      of Matters to a Vote of Security Holders
              *Item
              5
              .
              Other
      Information
              *Item
              6
              .
              Exhibits
              39*
      Item omitted because no answer is called for or item is not
      applicable.


Page
2
  Part I -Item 1.
Financial Statements
 CLARCOR
Inc.
 CONSOLIDATED
CONDENSED BALANCE SHEETS
 (Dollars
in thousands)




August
      29,
              
              
              November
      29,2009
              
              
              2008ASSETS
              
              (Unaudited)Current
      assets:Cash
      and cash equivalents
              
              $
              56,854
              
              
              $
              40,715Restricted
      cash
              
              
              486
              
              
              
              473Short-term
      investments
              
              
              24,103
              
              
              
              7,269Accounts
      receivable, less allowance for lossesof
      $ 16,615 for 2009 and $ 13,267 for 2008
              
              
              174,307
              
              
              
              194,864Inventories:Raw
      materials
              
              
              64,620
              
              
              
              60,575Work
      in process
              
              
              26,379
              
              
              
              27,318Finished
      products
              
              
              76,715
              
              
              
              70,308Total
      inventories
              
              
              167,714
              
              
              
              158,201Deferred
      income taxes
              
              
              22,999
              
              
              
              23,121Prepaid
      expenses and other current assets
              
              
              7,136
              
              
              
              7,928Total
      current assets
              
              
              453,599
              
              
              
              432,571Plant
      assets at cost,
              
              
              445,167
              
              
              
              439,423less
      accumulated depreciation
              
              
              (257,224
              )
              
              
              (246,824
              )187,943
              
              
              
              192,599Goodwill
              
              
              229,821
              
              
              
              223,964Acquired
      intangibles, less accumulated amortization
              
              
              95,133
              
              
              
              95,089Deferred
      income taxes
              
              
              224
              
              
              
              224Other
      noncurrent assets
              
              
              11,885
              
              
              
              13,435Total
      assets
              
              $
              978,605
              
              
              $
              957,882LIABILITIESCurrent
      liabilities:Current
      portion of long-term debt
              
              $
              108
              
              
              $
              128Accounts
      payable
              
              
              58,885
              
              
              
              65,398Accrued
      salaries, wages and commissions
              
              
              10,644
              
              
              
              14,292Compensated
      absences
              
              
              7,537
              
              
              
              8,004Accrued
      insurance liabilities
              
              
              9,959
              
              
              
              9,668Customer
      deposits
              
              
              12,299
              
              
              
              11,777Income
      taxes
              
              
              10,639
              
              
              
              5,083Other
      accrued liabilities
              
              
              31,831
              
              
              
              29,153Total
      current liabilities
              
              
              141,902
              
              
              
              143,503Long-term
      debt, less current portion
              
              
              77,084
              
              
              
              83,822Postretirement
      healthcare benefits
              
              
              678
              
              
              
              642Long-term
      pension liabilities
              
              
              29,989
              
              
              
              27,307Deferred
      income taxes
              
              
              37,517
              
              
              
              39,317Other
      long-term liabilities
              
              
              4,412
              
              
              
              7,360Minority
      interests
              
              
              3,303
              
              
              
              4,172Total
      liabilities
              
              
              294,885
              
              
              
              306,123ContingenciesSHAREHOLDERS'
      EQUITYCapital
      stock
              
              
              50,337
              
              
              
              50,794Capital
      in excess of par value
              
              
              35,460
              
              
              
              48,025Accumulated
      other comprehensive loss
              
              
              (14,770
              )
              
              
              (26,562
              )Retained
      earnings
              
              
              612,693
              
              
              
              579,502Total
      shareholders' equity
              
              
              683,720
              
              
              
              651,759Total
      liabilities and shareholders' equity
              
              $
              978,605
              
              
              $
              957,882




See Notes
to Consolidated Condensed Financial Statements


Page
3




CLARCOR
Inc.
 CONSOLIDATED
CONDENSED STATEMENTS OF EARNINGS
 (Dollars
in thousands, except per share data)
 (Unaudited)
  Quarter
      Ended
                
                
                Nine
      Months EndedAugust
      29,
                
                
                August
      30,
                
                
                August
      29,
                
                
                August
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      sales
                
                $
                230,271
                
                
                $
                276,300
                
                
                $
                673,356
                
                
                $
                793,618Cost
      of sales
                
                
                156,328
                
                
                
                188,152
                
                
                
                468,832
                
                
                
                543,304Gross
      profit
                
                
                73,943
                
                
                
                88,148
                
                
                
                204,524
                
                
                
                250,314Selling
      and administrative expenses
                
                
                41,863
                
                
                
                47,328
                
                
                
                133,527
                
                
                
                144,297Operating
      profit
                
                
                32,080
                
                
                
                40,820
                
                
                
                70,997
                
                
                
                106,017Other
      income (expense):Interest
      expense
                
                
                (316
                )
                
                
                (1,313
                )
                
                
                (1,848
                )
                
                
                (4,951
                )Interest
      income
                
                
                40
                
                
                
                311
                
                
                
                270
                
                
                
                1,012Other,
      net
                
                
                189
                
                
                
                (347
                )
                
                
                634
                
                
                
                (736
                )(87
                )
                
                
                (1,349
                )
                
                
                (944
                )
                
                
                (4,675
                )Earnings
      before income taxes andminority
      interests
                
                
                31,993
                
                
                
                39,471
                
                
                
                70,053
                
                
                
                101,342Provision
      for income taxes
                
                
                10,669
                
                
                
                13,578
                
                
                
                22,886
                
                
                
                34,422Earnings
      before minority interests
                
                
                21,324
                
                
                
                25,893
                
                
                
                47,167
                
                
                
                66,920Minority
      interests in earningsof
      subsidiaries
                
                
                (42
                )
                
                
                (82
                )
                
                
                (302
                )
                
                
                (326
                )Net
      earnings
                
                $
                21,282
                
                
                $
                25,811
                
                
                $
                46,865
                
                
                $
                66,594Net
      earnings per share:Basic
                
                $
                0.42
                
                
                $
                0.51
                
                
                $
                0.92
                
                
                $
                1.31Diluted
                
                $
                0.42
                
                
                $
                0.50
                
                
                $
                0.92
                
                
                $
                1.30Average
      number ofshares
      outstanding:Basic
                
                
                50,659,679
                
                
                
                50,885,417
                
                
                
                50,868,774
                
                
                
                50,745,240Diluted
                
                
                50,942,825
                
                
                
                51,455,710
                
                
                
                51,132,860
                
                
                
                51,252,593Dividends
      paid per share
                
                $
                0.09
                
                
                $
                0.08
                
                
                $
                0.27
                
                
                $
                0.24




See Notes
to Consolidated Condensed Financial Statements


Page
4




CLARCOR
Inc.
 CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
 (Dollars
in thousands)
 (Unaudited)
  Nine
      Months EndedAugust
      29,
                
                
                August
      30,2009
                
                
                2008Cash
      flows from operating activities:Net
      earnings
                
                $
                46,865
                
                
                $
                66,594Depreciation
                
                
                20,434
                
                
                
                19,130Amortization
                
                
                3,662
                
                
                
                3,975Stock-based
      compensation expense
                
                
                3,664
                
                
                
                4,162Excess
      tax benefit from stock-based compensation
                
                
                (1,513
                )
                
                
                (2,396
                )Changes
      in short-term investments
                
                
                (16,834
                )
                
                
                (2,547
                )Changes
      in assets and liabilities, excluding short-terminvestments
                
                
                19,806
                
                
                
                (14,100
                )Other,
      net
                
                
                266
                
                
                
                396Net
      cash provided by operating activities
                
                
                76,350
                
                
                
                75,214Cash
      flows from investing activities:Business
      acquisitions, net of cash acquired
                
                
                (11,777
                )
                
                
                (75,329
                )Additions
      to plant assets
                
                
                (15,019
                )
                
                
                (24,851
                )Investment
      in affiliate
                
                
                (1,794
                )
                
                
                (2,000
                )Other,
      net
                
                
                462
                
                
                
                139Net
      cash used in investing activities
                
                
                (28,128
                )
                
                
                (102,041
                )Cash
      flows from financing activities:Net
      (payments) proceeds under line of credit
                
                
                (15,000
                )
                
                
                80,000Borrowings
      under long-term debt
                
                
                8,410
                
                
                
                -Payments
      on long-term debt
                
                
                (809
                )
                
                
                (7,366
                )Sale
      of capital stock under stock optionand
      employee purchase plans
                
                
                2,944
                
                
                
                8,467Purchase
      of treasury stock
                
                
                (19,767
                )
                
                
                (37,260
                )Excess
      tax benefits from stock-based compensation
                
                
                1,513
                
                
                
                2,396Cash
      dividends paid
                
                
                (13,754
                )
                
                
                (12,259
                )Net
      cash (used in) provided by financing activities
                
                
                (36,463
                )
                
                
                33,978Net
      effect of exchange rate changes on cash
                
                
                4,380
                
                
                
                1,358Net
      change in cash and cash equivalents
                
                
                16,139
                
                
                
                8,509Cash
      and cash equivalents, beginning of period
                
                
                40,715
                
                
                
                36,059Cash
      and cash equivalents, end of period
                
                $
                56,854
                
                
                $
                44,568Cash
      paid during the period for:Interest
                
                $
                1,930
                
                
                $
                2,892Income
      taxes
                
                $
                17,301
                
                
                $
                29,249




See Notes
to Consolidated Condensed Financial Statements


Page
5




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


1.
            CONSOLIDATED FINANCIAL
      STATEMENTS





The
consolidated condensed balance sheet as of August 29, 2009, the consolidated
condensed statements of earnings and the consolidated condensed statements of
cash flows for the periods ended August 29, 2009 and August 30, 2008, have been
prepared by the Company without audit. The financial statements have been
prepared on the same basis as those in the Company’s Annual Report on Form 10-K
for the fiscal year ended November 29, 2008 (“2008 Form 10-K”). The November 29,
2008 consolidated balance sheet data was derived from the Company’s year-end
audited financial statements as presented in the 2008 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
Company performed a review of subsequent events through September 18, 2009, the
date the Consolidated Condensed Financial Statements were issued, and concluded
no events or transactions occurred during that period requiring recognition or
disclosure. The results of operations for the period ended August 29, 2009, are
not necessarily indicative of the operating results for the full
year.








2.
            BUSINESS
      ACQUISITIONS





During
the quarter ended August 29, 2009, the Company paid an additional $160 related
to its 2006 Industrial/Environmental Filtration segment acquisition, pursuant to
the terms of the purchase agreement. The payment was recorded as goodwill.
Additional payments, not to exceed approximately $923, may be required in future
years based on the operating performance of this entity.





During
the quarter ended August 29, 2009, the Company was refunded a portion of its
purchase price which had been held in escrow related to its 2007 acquisition of
80% of Sinfa SA, included in the Engine/Mobile Filtration
segment.  This refund reduced goodwill by $234.





On April
20, 2009, the Company purchased the remaining 20% minority interest in its
consolidated subsidiary based in Weifang, China for $4,593, including
acquisition costs. This subsidiary is part of the Company’s Engine/Mobile
Filtration segment and manufactures heavy-duty engine filters, certain lines of
environmental filters and filter systems and filters used in off-shore oil
drilling. A preliminary allocation of the purchase price for the acquisition has
been made to major categories of assets and liabilities, based on available
information, and is currently subject to change. The $2,205 excess of the
initial purchase price over the preliminary estimated fair value of the assets
acquired and liabilities assumed was recorded as goodwill.





On April
6, 2009, the Company purchased Weifang Yuhua Filters Ltd. (“Yuhua”), based in
Weifang, China for approximately $567, excluding cash acquired and including
acquisition costs. Yuhua manufactures heavy-duty engine filters. The business is
included in the Company’s Engine/Mobile Filtration segment. The acquisition is
not material to the results of the Company. A preliminary allocation of the
purchase price for the acquisition has been made to major categories of assets
and liabilities, based on available information, and is currently subject to
change. The Company did not recognize any goodwill in connection with this
acquisition.




Page
6


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


On
February 1, 2009, the Company purchased 85% ownership interests in Pujiang
Novaeastern International Mesh Co., Ltd. (“Pujiang”) and Quzhou Chinagrace
Filter Co., Ltd. (“Quzhou”). Both companies are based in China and were under
common ownership. Pujiang and Quzhou are manufacturers of wire mesh filtration
products sold primarily to the fibers, resin and aerospace industries. The
combined purchase price for the ownership interests in both companies was
approximately $618, excluding cash acquired and including acquisition costs. The
Company has the right, but not the obligation, to purchase the remaining 15%
ownership interests using a formula based on the combined companies’ future
operating results. The businesses are included in the Company’s
Industrial/Environmental Filtration segment. The acquisition is not material to
the results of the Company. A preliminary allocation of the purchase price for
the acquisition has been made to major categories of assets and liabilities,
based on available information, and is currently subject to change. The $519
excess of the initial purchase price over the preliminary estimated fair value
of the assets acquired and the liabilities assumed was recorded as
goodwill.





On
January 16, 2009, the Company purchased certain assets of Meggitt (UK) Limited
(“Meggitt”), for $578. This business was acquired to expand the Company’s
product range of aerospace filters sold primarily to European aircraft
manufacturers and aerospace parts distributors. The purchased assets were
combined into an existing Company subsidiary which is part of the Company’s
Industrial/Environmental Filtration segment. The Company expects to make an
additional payment in 2010 of approximately $146 to the former owner of the
Meggitt assets contingent upon the renewal of a contract with a customer. The
acquisition is not material to the results of the Company. A preliminary
allocation of the purchase price for the acquisition has been made to major
categories of assets based on available information, and is currently subject to
change. Other acquired intangibles included customer relationships valued at
$201 which will be amortized over their estimated useful life of 13 years. The
$231 excess of the initial purchase price over the preliminary estimated fair
value of the net assets acquired was recorded as goodwill.





On
December 29, 2008, the Company purchased the Keddeg Company (“Keddeg”), a
manufacturer of aerospace filtration products based in Lenexa, Kansas. The
purchase price was $5,495, excluding cash acquired and including acquisition
costs. Keddeg’s results are included as part of the Company’s
Industrial/Environmental Filtration segment from the date of acquisition. The
acquisition is not material to the results of the Company. A preliminary
allocation of the purchase price has been made to major categories of assets and
liabilities assumed, based on available information, and is subject to change.
The $1,753 excess of the purchase price over the preliminary estimated fair
value of the net tangible and intangible assets acquired was recorded as
goodwill. Acquired intangible assets, other than trade names and goodwill, are
amortized on a straight-line basis according to the useful lives of the acquired
assets. The fair value of the identifiable intangible assets and their
respective lives are shown in the following table:





EstimatedIdentifiable
      Intangible Asset
              
              Value
              
              Useful
      LifeTrade
      names
              
              $
              553
              
              IndefiniteNon-compete
      agreements
              
              
              86
              
              5
      yearsCustomer
      relationships
              
              
              875
              
              12
      yearsDeveloped
      technology
              
              
              1,256
              
              10
      yearsTotal fair
      value
              
              $
              2,770




Page
7




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




Effective
May 1, 2008, the Company acquired a 30% share in BioProcessH2O LLC
(“BPH”), a Rhode Island based manufacturer of industrial waste water and water
reuse filtration systems, for $4,000, payable $2,000 in cash at the acquisition
date with the remaining $2,000 to be paid by December 31, 2009. The Company paid
$206 during fiscal year 2008, $1,000 on February 6, 2009 and $794 on August 27,
2009. Under the terms of the agreement with BPH, the Company has the right, but
not the obligation, to acquire additional ownership shares and eventually
complete ownership of the company over several years at a price based on, among
other factors, BPH’s operating income. The investment, with a carrying amount of
$3,680 and $4,011 at August 29, 2009 and November 29, 2008, respectively, is
being accounted for under the equity method of accounting in accordance with
Accounting Principles Board Opinion No. 18, “The Equity Method of
Accounting for Investments in Common Stock.” The investment was initially
recorded at cost. The carrying amount is adjusted each period to recognize the
Company’s share of the earnings or losses of the investee based on the
percentage of ownership, as well as the receipt of any dividend income. The
equity investment is periodically reviewed for indicators of impairment. The
Company’s share of undistributed earnings was not material at August 29,
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 and
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
industries. Its results are included as part of the Company’s
Industrial/Environmental Filtration segment since the date of acquisition. The
purchase price was $145,807 excluding cash acquired and including acquisition
costs. The Company issued 2,137,797 shares of CLARCOR common stock with a value
of approximately $71,954 and paid the remaining purchase price with available
cash of $5,301 and $80,000 of cash borrowed under the Company’s multicurrency
revolving credit agreement. An allocation of the purchase price for the
acquisition has been made to major categories of assets and liabilities based on
available information. The $101,987 excess of the purchase price over the fair
value of the net tangible and identifiable intangible assets acquired was
recorded as goodwill. Other acquired intangibles are amortized over a
straight-line basis according to their useful lives. During the second and third
quarters of fiscal 2009, the Company resolved various tax accrual issues
resulting in a decrease to goodwill of $310.





Also in
December 2007, the Company purchased a distributor of engineered filtration
products in Canada for approximately $1,402 including acquisition costs. Of the
purchase price, $811 was paid during fiscal year 2008, $198 was paid during
fiscal year 2009 and the remaining amount will be paid over the next three
years. An allocation of the purchase price for the acquisition has been made to
major categories of assets and liabilities. The $698 excess of the purchase
price over the fair value of the net tangible and identifiable intangible assets
acquired was recorded as goodwill. The business was included in the
Industrial/Environmental Filtration segment from the date of acquisition and was
not material to the results of the Company.




Page
8


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




3.
            STOCK-BASED
      COMPENSATION





The
Company applies the provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 123R, “Share-Based Payment,” which establishes the accounting for
stock-based awards. Under this method, stock-based employee compensation cost is
recognized using the fair-value based method for all awards granted on or after
the date of adoption. The Company issues stock option awards and restricted
share unit awards to employees and issues stock option awards and restricted
stock to non-employee directors under its stock-based incentive plans. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. Compensation cost related to restricted
share units is recorded based on the market price of the Company’s common stock
on the grant date. Options granted 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. For those who are already
retirement eligible on the date of grant, compensation expense is recognized
immediately. The key provisions of the Company’s stock-based incentive plans are
described in Note N of the Company’s consolidated financial statements included
in the 2008 Form 10-K.





The
Company recorded pretax compensation expense related to stock options of $411
and $2,688, respectively, and related tax benefits of $131 and $855,
respectively, for the quarter and nine months ended August 29, 2009. For the
quarter and nine months ended August 30, 2008, the Company recorded pretax
compensation expense related to stock options of $365 and $3,140, respectively,
and related tax benefits of $126 and $1,081, respectively.





Pretax
compensation expense related to restricted share unit awards totaled $111 and
$976, respectively, for the quarter and nine months ended August 29, 2009, and
$84 and $1,022, respectively, for the quarter and nine months ended August 30,
2008.





The tax
benefits associated with tax deductions that exceed the amount of compensation
expense recognized in the financial statements related to stock-based
compensation were $1,081 and $1,513, respectively, for the quarter and nine
months ended August 29, 2009, and $107 and $2,396, respectively, for the quarter
and nine months ended August 30, 2008.





Stock
Options





The
following table summarizes the activity for the nine months ended August 29,
2009, with respect to non-qualified stock options granted under the Company’s
incentive plans.





SharesGranted
              
              
              Weightedunder
              
              
              AverageIncentive
              
              
              ExercisePlans
              
              
              PriceOutstanding
      at beginning of year
              
              
              3,132,111
              
              
              $
              25.75Granted
              
              
              466,025
              
              
              $
              31.94Exercised
              
              
              (287,822
              )
              
              $
              16.69Surrendered
              
              
              (44,700
              )
              
              $
              35.49Outstanding
      at August 29, 2009
              
              
              3,265,614
              
              
              $
              27.30Options
      exercisable at August 29, 2009
              
              
              2,408,384
              
              
              $
              24.87




Page
9




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




The fair
value of stock options granted during the nine months ended August 29, 2009 and
August 30, 2008 were based on the following weighted-average
assumptions:





Nine
      Months EndedAugust
      29,
              
              
              August
      30,2009
              
              
              2008Risk-free
      interest rate
              
              
              1.91
              %
              
              
              3.76
              %Expected
      dividend yield
              
              
              0.96
              %
              
              
              0.85
              %Expected
      volatility factor
              
              
              24.16
              %
              
              
              20.24
              %Expected
      option term in years
              
              
              6.1
              
              
              
              6.1





The
weighted average fair value per option at the date of grant for options granted
during the nine months ended August 29, 2009 and August 30, 2008, was
$7.62 and $9.37, respectively. The total intrinsic value of options
exercised during the nine months ended August 29, 2009 and August 30, 2008, was
$4,381 and $7,379, respectively.





The
following table summarizes information about the Company’s outstanding and
exercisable options at August 29, 2009.





Options
      Outstanding
              
              
              Options
      ExercisableWeighted
              
              
              
              
              
              Weighted
              
              
              
              
              
              Weighted
              
              
              
              
              
              WeightedAverage
              
              
              
              
              
              Average
              
              
              
              
              
              Average
              
              
              
              
              
              AverageRange
      of
              
              
              
              
              
              Exercise
              
              
              Intrinsic
              
              
              Remaining
              
              
              
              
              
              Exercise
              
              
              Intrinsic
              
              
              RemainingExercise
      Prices
              
              
              Number
              
              
              Price
              
              
              Value
              
              
              Life
      in Years
              
              
              Number
              
              
              Price
              
              
              Value
              
              
              Life
      in Years$
              8.97
              
              -
              
              $
              9.75
              
              
              
              73,698
              
              
              $
              9.23
              
              
              $
              1,707
              
              
              
              0.95
              
              
              
              73,698
              
              
              $
              9.23
              
              
              $
              1,707
              
              
              
              0.95$
              11.50
              
              -
              
              $
              13.75
              
              
              
              160,500
              
              
              $
              13.12
              
              
              
              3,092
              
              
              
              2.08
              
              
              
              160,500
              
              
              $
              13.12
              
              
              
              3,092
              
              
              
              2.08$
              16.01
              
              -
              
              $
              22.80
              
              
              
              802,345
              
              
              $
              20.34
              
              
              
              9,668
              
              
              
              3.35
              
              
              
              802,345
              
              
              $
              20.34
              
              
              
              9,668
              
              
              
              3.35$
              25.31
              
              -
              
              $
              31.96
              
              
              
              981,883
              
              
              $
              27.66
              
              
              
              4,644
              
              
              
              5.52
              
              
              
              981,383
              
              
              $
              27.66
              
              
              
              4,642
              
              
              
              5.51$
              32.78
              
              -
              
              $
              38.23
              
              
              
              1,247,188
              
              
              $
              34.38
              
              
              
              -
              
              
              
              7.89
              
              
              
              390,458
              
              
              $
              34.93
              
              
              
              -
              
              
              
              6.553,265,614
              
              
              $
              27.30
              
              
              $
              19,111
              
              
              
              5.62
              
              
              
              2,408,384
              
              
              $
              24.87
              
              
              $
              19,109
              
              
              
              4.59




At August
29, 2009, total unrecognized compensation cost of $3,043 related to non-vested
stock option awards is expected to be recognized over a weighted-average period
of 2.6 years.




Page
10




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


Restricted Share Unit
Awards




During
the nine months ended August 29, 2009 and August 30, 2008, the Company granted
36,368 and 25,989 restricted share units of Company common stock with a
weighted-average fair value of $32.78 and $36.48, respectively, per unit. During
the nine months ended August 29, 2009, 1,481 restricted share units of Company
common stock with a weighted average grant date fair value of $34.19 were
forfeited.








4.
            COMPREHENSIVE
      EARNINGS





The
Company’s total comprehensive earnings and its components are as
follows:





Quarter
      Ended
              
              
              Nine
      Months EndedAugust
      29,
              
              
              August
      30,
              
              
              August
      29,
              
              
              August
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      earnings
              
              $
              21,282
              
              
              $
              25,811
              
              
              $
              46,865
              
              
              $
              66,594Other
      comprehensive earnings, net of tax:Foreign
      currency translation adjustments
              
              
              3,011
              
              
              
              (4,157
              )
              
              
              11,143
              
              
              
              (305
              )Pension liability
      adjustments
              
              
              216
              
              
              
              (6,478
              )
              
              
              649
              
              
              
              (6,478
              )Total
      comprehensive earnings
              
              $
              24,509
              
              
              $
              15,176
              
              
              $
              58,657
              
              
              $
              59,811




The
components of the ending balances of accumulated other comprehensive loss are as
follows:




August
      29,
              
              
              November
      29,2009
              
              
              2008Pension
      liability, net of tax of $10,403 and $10,790
              
              $
              (17,529
              )
              
              $
              (18,178
              )Translation
      adjustments, net of tax of $155 and $155
              
              
              2,759
              
              
              
              (8,384
              )Accumulated
      other comprehensive loss
              
              $
              (14,770
              )
              
              $
              (26,562
              )






5.
            GOODWILL AND ACQUIRED
      INTANGIBLES





The
following table reconciles the activity for goodwill by reporting unit for the
nine months ended August 29, 2009.




Industrial/Engine/Mobile
              
              
              EnvironmentalFiltration
              
              
              Filtration
              
              
              Packaging
              
              
              TotalBalance
      at November 29, 2008
              
              $
              21,143
              
              
              $
              202,821
              
              
              $
              -
              
              
              $
              223,964Acquisitions
              
              
              1,971
              
              
              
              2,353
              
              
              
              -
              
              
              
              4,324Currency
      translation adjustments
              
              
              1,093
              
              
              
              440
              
              
              
              -
              
              
              
              1,533Balance
      at August 29, 2009
              
              $
              24,207
              
              
              $
              205,614
              
              
              $
              -
              
              
              $
              229,821




Page
11




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


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





Industrial/Engine/Mobile
              
              
              EnvironmentalFiltration
              
              
              Filtration
              
              
              Packaging
              
              
              TotalBalance
      at August 29, 2009:Trademarks,
      gross
              
              $
              923
              
              
              $
              41,510
              
              
              $
              -
              
              
              $
              42,433Less
      accumulated amortization
              
              
              40
              
              
              
              272
              
              
              
              -
              
              
              
              312Trademarks,
      net
              
              $
              883
              
              
              $
              41,238
              
              
              $
              -
              
              
              $
              42,121Customer
      relationships, gross
              
              $
              2,171
              
              
              $
              34,048
              
              
              $
              -
              
              
              $
              36,219Less
      accumulated amortization
              
              
              1,139
              
              
              
              7,600
              
              
              
              -
              
              
              
              8,739Customer
      relationships, net
              
              $
              1,032
              
              
              $
              26,448
              
              
              $
              -
              
              
              $
              27,480Other
      acquired intangibles, gross
              
              $
              243
              
              
              $
              35,913
              
              
              $
              -
              
              
              $
              36,156Less
      accumulated amortization
              
              
              243
              
              
              
              10,381
              
              
              
              -
              
              
              
              10,624Other
      acquired intangibles, net
              
              $
              -
              
              
              $
              25,532
              
              
              $
              -
              
              
              $
              25,532




Amortization
expense is estimated to be $4,883 in 2009, $4,535 in 2010, $4,474 in 2011,
$4,458 in 2012 and $4,389 in 2013.






6.
            FAIR VALUE
      MEASUREMENTS





The
Company measures assets and liabilities at fair value as discussed throughout
the notes to its quarterly and annual financial statements. Assets or
liabilities that have recurring measurements are shown below:





Fair
      Value Measurements at Reporting Date UsingQuoted
      Prices
              
              Significantin
      Active Markets
              
              Other
              
              Significantfor
      Identical
              
              Observable
              
              UnobservableAssets
              
              Inputs
              
              InputsTotal
              
              (Level
      1)
              
              (Level
      2)
              
              (Level
      3)August 29,
      2009Short-term
      investments
              
              $
              24,103
              
              
              $
              24,103
              
              
              $
              -
              
              
              $
              -Restricted
      trust (part of noncurrent
      assets)
              
              
              1,384
              
              
              
              1,384
              
              
              
              -
              
              
              
              -Interest
      rate agreement (part of
      current liabilities)
              
              
              (1,799
              )
              
              
              -
              
              
              
              (1,799
              )
              
              
              -November 29,
      2008Short-term
      investments
              
              $
              7,269
              
              
              $
              7,269
              
              
              $
              -
              
              
              $
              -Restricted
      trust (part of noncurrent
      assets)
              
              
              1,428
              
              
              
              1,428
              
              
              
              -
              
              
              
              -Interest
      rate agreement (part of
      long-term liabilities)
              
              
              (2,007
              )
              
              
              -
              
              
              
              (2,007
              )
              
              
              -




The
Company’s short-term investments consist of tax-exempt municipal money market
funds, which are actively traded. The restricted trust, which is used to fund
certain payments for the Company’s nonqualified U.S. pension plan, consists of
actively traded equity and bond funds. The fair value of the interest rate
agreement and the Company’s long-term debt is determined based on the present
value of expected future cash flows using discount rates appropriate to the
risks involved. There were no changes in fair value determination methods or
significant assumptions used in those methods during the nine months ended
August 29, 2009.




Page
12




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




The fair
values of the Company’s financial instruments, which are cash, accounts
receivable, short-term investments, the restricted trust and the interest rate
agreement, approximated the carrying values of those financial instruments at
both August 29, 2009 and November 29, 2008.  The fair value of the
Company’s long-term debt was $77,104 and $82,858 at August 29, 2009 and November
29, 2008, respectively.








7.
            GUARANTEES AND
      WARRANTIES





The
Company has provided letters of credit totaling approximately $23,359 and
$24,003 as of August 29, 2009 and November 29, 2008, respectively, 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
obligations.





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





Warranties
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 August 29, 2009,
are as follows:




Balance
      at November 29, 2008
              
              $
              2,494Accruals for warranties issued
      during the period
              
              
              1,910Accruals related to pre-existing
      warranties
              
              
              91Settlements made during the
      period
              
              
              (788
              )Other adjustments, including
      currency translation
              
              
              78Balance
      at August 29, 2009, included in other accrued liabilities
              
              $
              3,785







8.
            LONG-TERM DEBT AND
      INTEREST RATE AGREEMENT





On
December 18, 2007, the Company entered into a five-year multicurrency revolving
credit agreement (“Credit Facility”) with a group of financial institutions
under which it may borrow up to $250,000 under a selection of currencies and
rate formulas. The Credit Facility interest rate is based upon, at the Company’s
election, either a defined Base Rate or the London Interbank Offered Rate
(“LIBOR”) plus or minus applicable margins. Commitment fees, letter of credit
fees and other fees are also payable as provided in the credit agreement. At
August 29, 2009, long-term debt included $60,000 outstanding on the Credit
Facility.




Page
13




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


During
the second fiscal quarter of 2009, the Company re-issued an $8,410 industrial
revenue bond issued in cooperation with the South Dakota Economic Development
Finance Authority which is due February 1, 2016. The interest rate on this bond
was 0.56% at August 29, 2009 and is reset weekly.





The
Company’s significant accounting policies for derivative instruments are
described in Note A of the 2008 Form 10-K. On January 2, 2008, the Company
entered into a fixed rate interest swap agreement to manage its interest rate
exposure on certain amounts outstanding under the Credit Facility. The interest
rate agreement provides for the Company to receive interest at floating rates
based on LIBOR and pay a 3.93% fixed interest rate plus an applicable margin on
a notional amount of $100,000. Payments pursuant to the interest rate agreement
are settled on a net basis quarterly. The agreement expires January 1, 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 or losses are recorded in interest expense in the Consolidated Condensed
Statements of Earnings, and periodic settlement payments are a component of cash
flows from operating activities in the Consolidated Condensed Statements of Cash
Flows.





The
Company’s swap agreement incorporates by reference the non-financial and
financial debt covenants included in the 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.
Should the counterparty to the Company’s derivative contract fail to meet its
obligations, the Company would be exposed to greater interest rate fluctuations
along with the cost, if any, to extinguish the contract. The Company manages
exposure to counterparty credit risk by entering into derivative financial
instruments with institutions that can be expected to perform fully under the
terms of the agreements.





At August
29, 2009 and November 29, 2008, the Company had the following derivative in a
liability position. The Company did not have any derivatives in an asset
position at either reporting date.





Derivatives
      In Liability PositionDerivatives
      Not Designated
              
              Consolidated
      Balance
              
              Fairas
      Hedging Instruments
              
              Sheet
      Location
              
              ValueAugust 29,
      2009Fixed
      rate interest swap agreement
              
              Current
      liabilities
              
              $
              1,799Total
              
              
              
              $
              1,799November 29,
      2008Fixed
      rate interest swap agreement
              
              Other
      long-term liabilities
              
              $
              2,007Total
              
              
              
              $
              2,007




Page
14




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





The
following table reflects the loss on the interest rate agreement for the quarter
and nine months ended August 29, 2009 and August 30, 2008,
respectively.





Location
      of (Loss)Derivatives
      Not Designated
              
              on
      Interest Rate
              
              Amount
      of (Loss) onas
      Hedging Instruments
              
              Agreement
              
              Interest
      Rate AgreementQuarter
      EndedAugust
      29,
              
              August
      30,2009
              
              2008Fixed
      rate interest swap agreement
              
              Interest
      expense
              
              $
              (132
              )
              $
              (395
              )Nine
      Months EndedAugust
      29,
              
              August
      30,2009
              
              2008Fixed
      rate interest swap agreement
              
              Interest
      expense
              
              $
              (1,110
              )
              $
              (1,530
              )




The
Company made net settlement payments on the fixed interest rate swap agreement
of $688 and $1,318 for the quarter and nine months ended August 29, 2009,
respectively, and $312 and $110 for the quarter and nine months ended August 30,
2008, respectively.






9.
            PENSION AND OTHER
      POSTRETIREMENT PLANS





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




Quarter
      Ended
              
              
              Nine
      Months EndedAugust
      29,
              
              
              August
      30,
              
              
              August
      29,
              
              
              August
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Pension
      Benefits:Components
      of net periodic benefit cost:Service
      cost
              
              $
              451
              
              
              $
              561
              
              
              $
              1,352
              
              
              $
              1,861Interest
      cost
              
              
              2,309
              
              
              
              2,158
              
              
              
              6,904
              
              
              
              6,416Expected
      return on plan assets
              
              
              (1,726
              )
              
              
              (2,398
              )
              
              
              (5,154
              )
              
              
              (7,605
              )Amortization
      of unrecognized:Prior
      service cost
              
              
              32
              
              
              
              38
              
              
              
              97
              
              
              
              120Net
      actuarial loss
              
              
              389
              
              
              
              184
              
              
              
              1,168
              
              
              
              268Pension
      curtailment
              
              
              -
              
              
              
              516
              
              
              
              -
              
              
              
              516Net
      periodic benefit cost
              
              $
              1,455
              
              
              $
              1,059
              
              
              $
              4,367
              
              
              $
              1,576Cash
      contributions
              
              $
              212
              
              
              $
              522
              
              
              $
              1,019
              
              
              $
              1,167


Page
15




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




Quarter
      Ended
              
              
              Nine
      Months EndedAugust
      29,
              
              
              August
      30,
              
              
              August
      29,
              
              
              August
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Postretirement
      Healthcare Benefits:Components
      of net periodic benefit income:Interest
      cost
              
              $
              15
              
              
              $
              15
              
              
              $
              45
              
              
              $
              45Amortization
      of unrecognized:Prior
      service cost
              
              
              (31
              )
              
              
              (31
              )
              
              
              (93
              )
              
              
              (93
              )Net
      actuarial gain
              
              
              (46
              )
              
              
              (33
              )
              
              
              (138
              )
              
              
              (99
              )Net
      periodic benefit income
              
              $
              (62
              )
              
              $
              (49
              )
              
              $
              (186
              )
              
              $
              (147
              )Cash
      contributions
              
              $
              50
              
              
              $
              53
              
              
              $
              150
              
              
              $
              159





The
Company’s policy is to contribute to its qualified U.S. and non-U.S. pension
plans at least the minimum amount required by applicable laws and regulations,
to contribute to the nonqualified plan when required for benefit payments and to
contribute to the postretirement healthcare benefit plan an amount equal to the
benefit payments. The minimum required contribution to one of the Company’s
qualified U.S. pension plans for fiscal 2009 is approximately $400. The Company,
from time to time, makes contributions in excess of the minimum amount required
as economic conditions warrant. The Company has determined it will make a
voluntary contribution to its U.S. qualified plans of $360 in 2009. The Company
has not determined if it will make further contributions to its U.S. qualified
plans in 2009. The Company also expects to contribute $295 to its U.S.
nonqualified plan, $363 to its non-U.S. plan and $198 to its postretirement
healthcare benefit plan to pay benefits during 2009.





In
addition to the plan assets related to its qualified plans, the Company has also
funded $1,384 and $1,428 at August 29, 2009 and November 29, 2008, respectively,
in a restricted trust for its nonqualified plan. This trust is included in other
noncurrent assets in the Consolidated Condensed Balance Sheets.





Recent
declines in the fair value of plan assets may result in significant charges to
other comprehensive loss and a potential increase in the fiscal year 2010
pension expense to the extent the effects are not offset by a change in the
discount rate at the time of the Company’s annual pension measurement on
November 30, 2009. The Company’s required contributions to its plans may also be
affected.






10.
            INCOME
      TAXES





The
liability for gross unrecognized tax benefits was $2,491 at August 29, 2009 and
$1,970 at November 29, 2008. The $521 net increase in the liability was driven
by additions for current period uncertain tax positions of $329 and changes in
interest and penalties of $192.





At August
29, 2009, the amount of unrecognized tax benefit for permanent tax adjustments
that, if recognized, would impact the effective tax rate was $1,880. The Company
recognizes interest and penalties related to unrecognized tax benefits in income
tax expense. As of August 29, 2009, the Company had $578 accrued for the payment
of interest and penalties. Due to the various jurisdictions in which the Company
files tax returns and the uncertainty regarding the timing of settlements, it is
possible that there could be other significant changes in the amount of
unrecognized tax benefits in fiscal 2009 and in future years; however, the
amount cannot be estimated.




Page
16




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


The
Company is regularly audited by federal, state and foreign tax authorities. The
Internal Revenue Service has completed its audits of the Company’s U.S. income
tax returns through fiscal 2003 and has started audits of the Company’s U.S.
income tax returns for fiscal years 2004 through 2007. With few exceptions, the
Company is no longer subject to income tax examinations by state or foreign tax
jurisdictions for years prior to fiscal 2003.






11.
            RESTRUCTURING
      CHARGES





As
discussed more fully in the 2008 Form 10-K, 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 Company anticipates that the HVAC restructuring program
will be completed in fiscal year 2009, and that realization of the full benefits
of the program will be achieved in fiscal year 2010. The majority of these
expenses have been paid as of August 29, 2009.





As an
ongoing part of this program, during the first and second quarters of fiscal
2009, the Company consolidated four Louisville, Kentucky area facilities into
one location in Jeffersonville, Indiana to realize cost savings and efficiency
benefits. Restructuring severance costs of $0 and $133, respectively, were
expensed during the quarter and nine months ended August 29, 2009 and were
included in cost of sales in the Consolidated Condensed Statements of Earnings.
At August 29, 2009, severance costs of $16 were accrued in other accrued
liabilities in the accompanying Consolidated Condensed Balance Sheet. The
Company has classified land of $398 and building and building fixtures of
$1,602, which are included in plant assets, as assets held for sale related to
one Kentucky plant.





During
May 2009, the Company also closed a small facility in Clover, South Carolina.
The Company did not incur any material expenses related to this
closure.





During
the third quarter of fiscal year 2008, the Company discontinued production at an
HVAC filter manufacturing plant in Henderson, North Carolina. The Company
recorded restructuring expenses of $1,081 in fiscal year 2008, which were
included in cost of sales in the Consolidated Condensed Statements of Earnings,
mainly for employee termination costs and a pension curtailment expense of $516.
The Company recorded restructuring expenses of $0 and $47, respectively, related
to the Henderson, North Carolina location during the quarter and nine months
ended August 29, 2009, mainly for facility consolidation and employee
termination costs.Minimal additional
restructuring charges related to facility consolidation costs will be recognized
when the Company exits that facility. In addition to costs classified as
restructuring expenses, the Company has incurred and will continue to incur
other non-restructuring costs related to this facility until it is sold. The
Company has classified land of $230 and building and building fixtures of
$2,929, which are included in plant assets, as assets held for sale related to
the North Carolina plant.




Page
17




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




During
the second quarter of fiscal year 2008, the Company discontinued production at
an HVAC filter manufacturing plant in Davenport, Iowa. The Company expensed and
paid $154 in fiscal year 2008, which was included in cost of sales in the
Consolidated Condensed Statements of Earnings, mainly for employee termination
costs. The Company did not incur any restructuring expenses related to the
Davenport, Iowa location during the quarter and nine months ended August 29,
2009. Minimal additional restructuring charges related to contract termination
costs and facility consolidation costs will be recognized when the Company exits
a lease related to that facility in 2012.  In addition to costs
classified as restructuring expenses, the Company has incurred and will continue
to incur other non-restructuring costs related to this facility until the
expiration of the lease.





The
Company discontinued production at an HVAC filter manufacturing plant in Kenly,
North Carolina in November 2006. Restructuring severance costs of $164 were
accrued and paid during fiscal 2006 and were included in cost of sales in the
Consolidated Condensed Statements of Earnings.








12.
            INSURANCE
      CLAIMS





During
June 2009, an Industrial/Environmental Filtration segment warehouse that the
Company leases was damaged by fire. In accordance with Financial Accounting
Standards Board (“FASB”) Interpretation No. 30 (“FIN 30”), “Accounting for
Involuntary Conversions of Non-Monetary Assets to Monetary Assets”, a loss of
$250, representing the Company’s deductible, was recorded in cost of sales for
the quarter ended August 29, 2009.  Additional losses, which could be
as high as $1,284, resulting from the loss of inventory and physical assets
above the $250 are expected to be covered by insurance.





In the
second quarter of fiscal 2008, four of the Company’s facilities in three states
were damaged in weather-related events. In accordance with FIN 30, the Company’s
Industrial/Environmental Filtration segment recognized a gain for fiscal year
2008, resulting from the excess of insurance proceeds received over the net book
value of the property, of $1,963 (net of the $500 deductible paid by the
Company) as a reduction of cost of sales. The Company’s Engine/Mobile Filtration
segment recognized a loss for fiscal year 2008, resulting from costs incurred
below the Company’s deductible limit, of $178 in cost of sales. For the quarter
ended May 31, 2008, expenses of $750 were recorded in cost of sales and all
repairs to the buildings were complete.








13.
            CONTINGENCIES





Legal
Proceedings





On May
15, 2009, Donaldson Company, Inc. (“Donaldson”) filed a lawsuit in the U.S.
Federal District Court for the District of Minnesota alleging that certain
“ChannelFlow” engine/mobile filters manufactured and sold by a subsidiary of the
Company infringe one or more patents held by Donaldson.  Donaldson served
this lawsuit on August 26, 2009, and through the suit seeks various remedies,
including injunctive relief and monetary damages of an unspecified amount.
Management believes that the products in question do not infringe the asserted
patents and that such patents are invalid, and the Company is vigorously
defending the action.




Page
18




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




On August
14, 2009, 3M Company (“3M”) filed a lawsuit in the U.S. Federal District
Court for the Eastern District of Virginia, alleging that various statements and
imagery on the packaging of certain retail residential filters being sold by a
subsidiary of the Company are untrue or misleading to consumers, and thus
violate various aspects of the Lanham Act and Virginia consumer protection
law.  Through this lawsuit 3M seeks various remedies, including injunctive
relief and monetary damages of an unspecified amount.  3M is a former
customer of the Company, and the products in question compete with those offered
by 3M in the retail marketplace.  The Company is vigorously defending
the action and has filed counterclaims against 3M in respect of its own
packaging.





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





In
addition to the matters cited above, the Company is involved in legal actions
arising in the normal course of business.   In accordance with
SFAS No. 5, “Accounting for Contingencies,” the Company records provisions with
respect to identified claims or lawsuits when it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. Claims
and lawsuits are reviewed quarterly and provisions are taken or adjusted to
reflect the status of a particular matter.   No such provisions
have been taken in respect of the Donaldson or 3M legal proceedings referred to
above.





The
Company believes any recorded reserves in its Consolidated Condensed Financial
Statements are adequate in light of the probable and estimable outcomes. Any
recorded liabilities were not material to the Company’s financial position,
results of operation or liquidity and the Company does not believe that any
pending claims or litigation, including those identified above, will materially
affect its financial position, results of operation or liquidity.





Other
Contingencies





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




Page
19




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


14.
            EARNINGS PER SHARE AND
      TREASURY STOCK TRANSACTIONS





Diluted
earnings per share reflect 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.




Quarter
      Ended
              
              
              Nine
      Months EndedAugust
      29,
              
              
              August
      30,
              
              
              August
      29,
              
              
              August
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Weighted
      average number ofshares
      outstanding
              
              
              50,659,679
              
              
              
              50,885,417
              
              
              
              50,868,774
              
              
              
              50,745,240Dilutive
      effect of stock-basedarrangements
              
              
              283,146
              
              
              
              570,293
              
              
              
              264,086
              
              
              
              507,353Weighted
      average number ofdiluted
      shares outstanding
              
              
              50,942,825
              
              
              
              51,455,710
              
              
              
              51,132,860
              
              
              
              51,252,593Net
      earnings
              
              $
              21,282
              
              
              $
              25,811
              
              
              $
              46,865
              
              
              $
              66,594Basic
      earnings per share
              
              $
              0.42
              
              
              $
              0.51
              
              
              $
              0.92
              
              
              $
              1.31Diluted
      earnings per share
              
              $
              0.42
              
              
              $
              0.50
              
              
              $
              0.92
              
              
              $
              1.30


Options
with exercise prices greater than the average market price of the shares during
the respective periods are not included in the computation of diluted earnings
per share. For the quarter and nine months ended August 29, 2009, 1,299,688
options with a weighted average exercise price of $34.28 were excluded from the
computation. For the quarter ended August 30, 2008, no options were excluded
from the computation. For the nine months ended August 30, 2008, 5,325 options
with a weighted average exercise price of $38.23 were excluded from the
computation.





For the
nine months ended August 29, 2009, exercises of stock options added $2,582 to
capital in excess of par value. For the nine months ended August 30, 2008,
exercises of stock options added $9,357 to capital in excess of par
value.





During
the quarter and nine months ended August 29, 2009, the Company repurchased and
retired 688,200 shares of its common stock for $19,768 under its $250,000 stock
repurchase program. As of August 29, 2009, there was approximately $167,443
available for future purchases under this program. During the quarter ended
August 30, 2008, the Company did not repurchase any shares of its common stock.
For the nine months ended August 30, 2008, the Company repurchased and retired
1,000,000 shares of common stock for $37,260.




Page
20




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




15.
            SEGMENT
      DATA





The
Company operates in three principal product segments: Engine/Mobile Filtration,
Industrial/Environmental Filtration and Packaging. The segment data for the
quarter and nine months ended August 29, 2009 and August 30, 2008, 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 EndedAugust
      29,
              
              
              August
      30,
              
              
              August
      29,
              
              
              August
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      sales:Engine/Mobile
      Filtration
              
              $
              96,445
              
              
              $
              117,753
              
              
              $
              274,102
              
              
              $
              331,520Industrial/Environmental
      Filtration
              
              
              114,630
              
              
              
              138,708
              
              
              
              347,977
              
              
              
              404,456Packaging
              
              
              19,196
              
              
              
              19,839
              
              
              
              51,277
              
              
              
              57,642$
              230,271
              
              
              $
              276,300
              
              
              $
              673,356
              
              
              $
              793,618Operating
      profit:Engine/Mobile
      Filtration
              
              $
              21,904
              
              
              $
              28,669
              
              
              $
              53,662
              
              
              $
              75,461Industrial/Environmental
      Filtration
              
              
              7,944
              
              
              
              10,404
              
              
              
              14,471
              
              
              
              26,133Packaging
              
              
              2,232
              
              
              
              1,747
              
              
              
              2,864
              
              
              
              4,42332,080
              
              
              
              40,820
              
              
              
              70,997
              
              
              
              106,017Other
      (expense) income
              
              
              (87
              )
              
              
              (1,349
              )
              
              
              (944
              )
              
              
              (4,675
              )Earnings
      before income taxes andminority
      earnings
              
              $
              31,993
              
              
              $
              39,471
              
              
              $
              70,053
              
              
              $
              101,342




August
      29,
              
              
              November
      29,2009
              
              
              2008Identifiable
      assets:Engine/Mobile
      Filtration
              
              $
              249,491
              
              
              $
              252,380Industrial/Environmental
      Filtration
              
              
              644,420
              
              
              
              638,915Packaging
              
              
              38,368
              
              
              
              37,949Corporate
              
              
              46,326
              
              
              
              28,638$
              978,605
              
              
              $
              957,882






16.
            RECENT ACCOUNTING
      PRONOUNCEMENTS





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. See Note
I of the 2008 Form 10-K 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 ending November 28, 2009. As permitted by SFAS No. 158, the Company
will use the measurements performed in fiscal year 2008 to estimate the effects
of the changes to the 2009 fiscal year-end measurement dates. The impact of the
transition to fiscal year-end measurement dates, which will be recorded as an
adjustment to retained earnings in the fourth quarter of fiscal year 2009, is
not expected to be material.




Page
21




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




In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” and SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” These
standards will affect the Company’s accounting for businesses acquired after
November 28, 2009 and presentation of noncontrolling interests, previously
called minority interests, in its consolidated financial statements in fiscal
year 2010. In April 2009, the FASB issued FASB Staff Position (“FSP”) SFAS
141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies.” This FSP requires that assets
acquired or liabilities assumed in a business combination and arising from a
contingency be recognized at fair value at the acquisition date if the
acquisition date fair value can be determined during the measurement period. The
Company will adopt this FSP in connection with its adoption of SFAS No. 141R in
fiscal year 2010. These accounting pronouncements will impact the way the
Company accounts for future business acquisitions.





In March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments
and Hedging Activities.” This standard requires 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. The Company adopted SFAS No. 161 effective as of the beginning
of the first quarter of fiscal year 2009. The impact of adopting SFAS No. 161
was not material.





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 impact of adopting FSP EITF
03-6-1 is not expected to be material.





In
December 2008, the FASB issued FSP SFAS 132R-1, "Employers’ Disclosures about
Postretirement Benefit Plan Assets." FSP SFAS 132R-1 expands the disclosure set
forth in SFAS No. 132R by adding required disclosures about how investment
allocation decisions are made by management, major categories of plan assets and
significant concentration of risk. Additionally, FSP SFAS 132R-1 requires an
employer to disclose information about the valuation of plan assets similar to
that required under SFAS No. 157, “Fair Value Measurements”. This FSP is
effective for the Company’s fiscal year 2010 and will affect the disclosures in
the financial statements. The impact of adopting this FSP is not expected to be
material.





In April
2009, the FASB issued FSP SFAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly.” FSP SFAS 157-4 provides
additional guidance for estimating fair value in accordance with SFAS No. 157
when the volume and level of activity for the asset or liability have
significantly decreased and re-emphasizes that regardless of market conditions
the fair value measurement is an exit price concept as defined in SFAS No. 157.
The scope of this FSP does not include assets and liabilities measured under
level 1 inputs (quoted prices in active markets for identical assets). The
Company adopted FSP SFAS 157-4, which is applied prospectively to all fair value
measurements where appropriate, effective as of the beginning of the third
quarter of fiscal year 2009. The impact of adopting FSP SFAS 157-4 was not
material.




Page
22




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




In April
2009, the FASB issued FSP SFAS 107-1and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments.”  This FSP
amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to
require publicly-traded companies to provide disclosures on the fair value of
financial instruments in interim financial statements. FSP SFAS 107-1 and APB
28-1 were adopted effective as of the beginning of the third quarter of fiscal
year 2009. The impact of adopting these new accounting standards was not
material.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events.” This standard
establishes general standards for accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued and shall be applied to subsequent events not
addressed in other applicable generally accepted accounting principles. SFAS No.
165, among other things, sets forth the period after the balance sheet date
during which management should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures an entity should make about events or transactions that occurred
after the balance sheet date. SFAS No. 165 was adopted for the Company’s
quarterly period ended August 29, 2009. The impact of adopting SFAS No. 165 was
not material. See Note 1 for further information.





On June
29, 2009, the FASB issued SFAS No. 168, “FASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles” which establishes the
FASB Accounting Standards CodificationTM
(“Codification”) as the source of authoritative U.S. generally accepted
accounting principles (“U.S. GAAP”) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative U.S. GAAP for SEC registrants. When effective, the
Codification will supersede all existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting literature not included
in the Codification will become nonauthoritative. Subsequent to SFAS No. 168,
the FASB will not issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue
Accounting Standards Updates, which will serve only to update the Codification,
provide background information about the guidance and provide the bases for
conclusions on changes in the Codification. All content in the Codification will
carry the same level of authority when effective, and the U.S. GAAP hierarchy
will be modified to include only two levels of U.S. GAAP: authoritative and
nonauthoritative. SFAS No. 168 and the Codification are effective for the
Company’s interim and annual periods beginning with the Company’s year ending
November 30, 2009. The impact of adopting SFAS No. 168 and the Codification is
not expected to be material.




Page
23


Part
I -Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations




The
information presented in this discussion should be read in conjunction with
other financial information provided in the Consolidated Condensed Financial
Statements and Notes thereto. Except as otherwise set forth herein, references
to particular years refer to our applicable fiscal year. The analysis of
operating results focuses on our three reportable business segments:
Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging. The
Engine/Mobile Filtration segment sells filtration products used on engines and
in mobile equipment applications generally, including trucks, automobiles,
buses, locomotives and marine, construction, industrial, mining and agricultural
equipment. Our Industrial/Environmental Filtration segment focuses on 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 include liquid process filtration products, engineered
filtration products and technologies and air filtration products and systems
used to maintain high interior air quality and to control exterior pollution.
The Packaging segment manufactures and markets consumer and industrial packaging
products. Our products are manufactured and sold throughout the
world.








EXECUTIVE
SUMMARY





Management
      Discussion Snapshot(Dollars
      in thousands except per share data)Third
      Quarter Ended
                
                
                Nine
      Months EndedAugust
      29,
                
                
                August
      30,
                
                
                
                
                
                August
      29,
                
                
                August
      30,2009
                
                
                2008
                
                
                Change
                
                
                2009
                
                
                2008
                
                
                ChangeNet
      sales
                
                $
                230,271
                
                
                $
                276,300
                
                
                
                -16.7
                %
                
                $
                673,356
                
                
                $
                793,618
                
                
                
                -15.2
                %Operating
      profit
                
                
                32,080
                
                
                
                40,820
                
                
                
                -21.4
                %
                
                
                70,997
                
                
                
                106,017
                
                
                
                -33.0
                %Operating
      margin
                
                
                13.9
                %
                
                
                14.8
                %
                
                -0.9
      pts.
                
                
                10.5
                %
                
                
                13.4
                %
                
                -2.9
      pts.Other
      income (expense)
                
                
                (87
                )
                
                
                (1,349
                )
                
                
                -93.6
                %
                
                
                (944
                )
                
                
                (4,675
                )
                
                
                -79.8
                %Provision
      for income taxes
                
                
                10,669
                
                
                
                13,578
                
                
                
                -21.4
                %
                
                
                22,886
                
                
                
                34,422
                
                
                
                -33.5
                %Effective
      tax rate
                
                
                33.3
                %
                
                
                34.4
                %
                
                -1.1
      pts.
                
                
                32.7
                %
                
                
                34.0
                %
                
                -1.3
      pts.Net
      earnings
                
                
                21,282
                
                
                
                25,811
                
                
                
                -17.5
                %
                
                
                46,865
                
                
                
                66,594
                
                
                
                -29.6
                %Net
      earnings margin
                
                
                9.2
                %
                
                
                9.3
                %
                
                -0.1
      pts.
                
                
                7.0
                %
                
                
                8.4
                %
                
                -1.4
      pts.Diluted
      earnings per share
                
                $
                0.42
                
                
                $
                0.50
                
                
                
                -16.0
                %
                
                $
                0.92
                
                
                $
                1.30
                
                
                
                -29.2
                %Average
      diluted sharesoutstanding
                
                
                50,942,825
                
                
                
                51,455,710
                
                
                
                -1.0
                %
                
                
                51,132,860
                
                
                
                51,252,593
                
                
                
                -0.2
                %


Similar
to the first two quarters of 2009, the global recession continued to negatively
impact our business in the third quarter of 2009 compared to
2008.  For the third quarter of 2009, we reported net sales of $230.3
million and operating profit of $32.1 million which were 16.7% and 21.4%,
respectively, lower than the third quarter of 2008.  Net earnings of
$21.3 million and diluted earnings per share of $0.42 were also lower than net
earnings of $25.8 million and diluted earnings per share of $0.50 in the third
quarter of 2008.  In the third quarter of 2009 compared to the third
quarter of 2008, net sales within the U.S. declined 16.8%, and net sales outside
the U.S. declined 16.3%.  The stronger dollar in the third quarter of
2009 compared to the third quarter of 2008 lowered net sales and operating
profit by $6.7 million and $0.7 million, respectively.





For the
first nine months of 2009, we reported net sales of $673.4 million and operating
profit of $71.0 million which were 15.2% and 33.0%, respectively, lower than the
first nine months of 2008.  Net earnings of $46.9 million and diluted
earnings per share of $0.92 were also lower than net earnings of $66.6 million
and diluted earnings per share of $1.30 in the first nine months of
2008.  Compared to the first nine months of 2008, net sales within the
U.S. declined 13.9%, and net sales outside the U.S. declined
17.8%.  The stronger dollar in the first nine months of 2009 compared
to the first nine months of 2008 lowered net sales and operating profit by $27.6
million and $3.2 million, respectively.




Page
24


MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED


For each of the third
quarter and the first nine months of 2009, the lower operating profit compared
to 2008 was driven primarily by lower sales volumes offset by the positive
impact of several cost reduction programs includingheadcount reductions,
wage freezes for all domestic units, the consolidation of several manufacturing
plants and the reduction of discretionary spending.  As a result,
selling and administrative expenses were $5.5 million or 11.5% lower in the
third quarter of 2009 compared to the third quarter of 2008 and $10.8 million or
7.5% lower in the first nine months of 2009 compared to the first nine months of
2008.





Despite
the negative comparisons to prior year results due to global economic
conditions, we have generated sequentially improving operating performance for
each quarter in 2009 as follows:





(Dollars
      in thousands)2009First
              
              
              Second
              
              
              ThirdQuarter
              
              
              Quarter
              
              
              QuarterNet
      sales
              
              $
              213,690
              
              
              $
              229,395
              
              
              $
              230,271Operating
      profit
              
              
              13,687
              
              
              
              25,230
              
              
              
              32,080Operating
      margin
              
              
              6.4
              %
              
              
              11.0
              %
              
              
              13.9
              %





Our
financial position remains strong with adequate cash resources and sufficient
borrowing capacity under our line of credit. At the end of the third quarter
2009, we had over $81.0 million of cash and short-term investments and
approximately $181.5 million of availability under our line of
credit.





During
the first nine months of 2009, we acquired several businesses. Although none of
these acquisitions were large, each added to our product offerings, expanded our
reach in certain geographies and markets and, for certain acquisitions in China,
allowed us to lower the cost of products previously purchased from other
third-parties. The acquisitions, individually or in total, are not material to
our operating results for 2009.





On
December 29, 2008, we purchased the Keddeg Company (“Keddeg”), a manufacturer of
aerospace filtration products based in Lenexa, Kansas, for $5.5 million
including acquisition costs and net of cash acquired. Keddeg’s results are
included as part of our Industrial/Environmental Filtration segment from the
date of acquisition.





On
January 16, 2009, we purchased certain assets of Meggitt (UK) Limited, a
manufacturer of aerospace filters based in the United Kingdom, for approximately
$0.6 million. This business was acquired to expand our product range of
aerospace filters sold primarily to European aircraft manufacturers and
aerospace parts distributors. The purchased assets were combined into an
existing subsidiary which is part of our Industrial/Environmental Filtration
segment.





On
February 1, 2009, we purchased 85% ownership interests in Pujiang Novaeastern
International Mesh Co., Ltd. (“Pujiang”) and Quzhou Chinagrace Filter Co., Ltd.
(“Quzhou”). Both companies are based in China and were under common
ownership.  Pujiang and Quzhou are manufacturers of wire mesh
filtration products sold primarily to the fibers, resin and aerospace
industries.  The combined purchase price for the ownership interests
in both companies was approximately $0.6 million. During July 2009, we invested
an additional $1.3 million, and we are committed to invest an additional $1.5
million within two years to fund growth initiatives. We have the right, but not
the obligation, to purchase the remaining 15% ownership interests using a
formula based on the combined companies’ future operating results. These
businesses are included in our Industrial/Environmental Filtration
segment.




Page
25




MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED




On April
6, 2009, we purchased Weifang Yuhua Filters Ltd. (“Yuhua”), a manufacturer of
heavy-duty engine filters, based in Weifang, China, for approximately $0.6
million. Yuhua is included in our Engine/Mobile Filtration segment.





On April
20, 2009, we purchased the remaining 20% minority interest in our consolidated
subsidiary based in Weifang, China, for approximately $4.6 million. This
subsidiary is part of our Engine/Mobile Filtration segment and manufactures
heavy-duty engine filters and certain lines of environmental filters and filter
systems and also filters used in off-shore oil drilling.








RESULTS OF
OPERATIONS





SALES





Net
      Sales by Segment (Dollars in Thousands)Third
      Quarter Ended
              
              
              Nine
      Months EndedAugust
      29,
              
              
              August
      30,
              
              
              
              
              
              August
      29,
              
              
              August
      30,2009
              
              
              2008
              
              
              Change
              
              
              2009
              
              
              2008
              
              
              ChangeEngine/Mobile
      Filtration
              
              $
              96,445
              
              
              $
              117,753
              
              
              
              -18.1
              %
              
              $
              274,102
              
              
              $
              331,520
              
              
              
              -17.3
              %Industrial/EnvironmentalFiltration
              
              
              114,630
              
              
              
              138,708
              
              
              
              -17.4
              %
              
              
              347,977
              
              
              
              404,456
              
              
              
              -14.0
              %Packaging
              
              
              19,196
              
              
              
              19,839
              
              
              
              -3.2
              %
              
              
              51,277
              
              
              
              57,642
              
              
              
              -11.0
              %CLARCOR
              
              $
              230,271
              
              
              $
              276,300
              
              
              
              -16.7
              %
              
              $
              673,356
              
              
              $
              793,618
              
              
              
              -15.2
              %




Engine/Mobile
Filtration





Net sales
for the Engine/Mobile Filtration segment for the third quarter of 2009 were
$96.4 million, a $21.4 million or 18.1% reduction from net sales of $117.8
million in the third quarter of 2008.  Compared to the third quarter
of 2008, net sales within the U.S. declined 17.9%, and net sales outside the
U.S. declined 18.1%.  The stronger dollar in the third quarter of 2009
compared to the third quarter of 2008 lowered net sales by $3.4
million.  Compared to the third
quarter of 2008, net sales declined by approximately 19.0% in the combined
over-the-road (“OTR”) trucking, automotive, agriculture, mining and construction
after-markets and by approximately 10.0% in the railroad
market.





Net sales
for the Engine/Mobile Filtration segment for the first nine months of 2009 were
$274.1 million, a $57.4 million or 17.3% reduction from net sales of $331.5
million in the first nine months of 2008.  Compared to the first nine
months of 2008, net sales within the U.S. declined 14.8%, and net sales outside
the U.S. declined 17.3%.  The stronger dollar in the first nine months
of 2009 compared to the first nine months of 2008 lowered net sales by $13.0
million.  Compared to the first nine
months of 2008, net sales declined by approximately 18.0% in the combined OTR
trucking, automotive, agriculture, mining and construction after-markets and by
approximately 12.0% in the railroad market.




Page
26




MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED


Although
net sales in the Engine/Mobile Filtration segment are lower for each of the
third quarter and the first nine months of 2009 compared to 2008, this segment
has generated sequentially improving net sales for each quarter in 2009 as
follows:  first quarter ($85.4 million), second quarter ($92.3
million) and third quarter ($96.4 million).  In the fourth quarter of
2009, we expect the combined OTR, automotive, agriculture, mining and
construction after-market to improve slightly from the third quarter of 2009
while we anticipate the commercial rail industry to remain soft through the
remainder of the year due to continued economic pressures in the coal, housing
and automotive sectors.





Accordingly,
we expect net sales in the Engine/Mobile Filtration segment in the fourth
quarter of 2009 to be consistent with net sales in the third quarter of
2009.





Industrial/Environmental
Filtration





Net sales
for the Industrial/Environmental Filtration segment for the third quarter of
2009 were $114.6 million, a $24.1 million or 17.4% reduction from net sales of
$138.7 million in the third quarter of 2008.  Net sales within the
U.S. declined 18.8% compared to the third quarter of 2008, and net sales outside
the U.S. increased by 14.4%.  The stronger dollar in the third quarter
of 2009 compared to the third quarter of 2008 lowered net sales by $3.3
million.





Net sales
for the Industrial/Environmental Filtration segment for the first nine months of
2009 were $348.0 million, a $56.5 million or 14.0% reduction from net sales of
$404.5 million in the first nine months of 2008.  Net sales within the
U.S. declined 14.0% compared to the first nine months of 2008, and net sales
outside the U.S. increased 13.9%.  The stronger dollar in the first
nine months of 2009 compared to the first nine months of 2008 lowered net sales
by $14.6 million.





The 17.4%
and 14.0% reduction in net sales compared to the third quarter and the first
nine months of 2008, respectively, were driven by lower sales in many of the
markets included in this segment:





·
              Heating, ventilating
      and air conditioning
(“HVAC”)





Net sales
of HVAC filters were 12.7% lower than the third quarter of 2008 and 10.7% lower
than the first nine months of 2008 as lower U.S. manufacturing production has
driven lower demand for HVAC replacement filters used in industrial, commercial
and residential applications.





As
previously disclosed in the second quarter of 2009, we commenced selling our
high-end Purolator® brand HVAC
residential filters to a large retail store chain in one of its sales
regions.  This program has been successful with product re-orders
coming sooner than initially expected.  We estimate that annual HVAC
filter sales for this one sales region to be $4.0 million to $5.0
million.  The customer is expected to evaluate the success of this
program during the fourth quarter.  After this evaluation we are
hopeful that we will begin to sell this product to this retail store chain in
additional sales regions.





The HVAC
filters that our filters replaced at this retail store chain were being supplied
by 3M Company
(“3M”),one of our existing customers.  We have been supplying
HVAC filters to 3M for many years although our annual sales have been declining
for several years as 3M moved production in-house into its Mexican manufacturing
facilities.  In the third quarter of 2009, we were informed by 3M that
it would no longer be purchasing HVAC filters from us on a go-forward
basis.  As a result, reduced sales to 3M in the third quarter of 2009
negatively impacted net sales by an estimated $1.5 million compared to the
average net sales from 3M in the previous four quarters.  We estimate
that annual net sales will be reduced between $15.0 million and $18.0 million
although additional future sales to the retail store chain could more than
offset this reduction if we are awarded additional sales regions.




Page
27




MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED




As a
result of the foregoing, we expect our fourth quarter net sales in the HVAC
market to be approximately 6% lower than the third quarter of 2009.





·
              Natural gas original
      equipment vessels and replacement
filters





Net sales
of original equipment vessels and replacement filter elements to the natural gas
market were 23.3% lower than the third quarter of 2008 and 9.7% lower than the
first nine months of 2008.  However, we have received several purchase
orders for original equipment vessel projects that were previously
delayed.  In general, these vessels are built over six to twenty-four
month periods.  Accordingly, the net sales impact from these purchase
orders will not be recognized until fiscal years 2010 and 2011.  We
continue to quote many new original equipment vessel projects, and we have not
received any significant project cancellations although some projects have been
delayed indefinitely.  In addition, we expect to aggressively further
invest in our natural gas after-market replacement filter business with
increased new product development efforts and investments in customer service,
product availability and marketing programs.





Net sales
to the natural gas market were lower in the third quarter of 2009 compared to
each of the first two quarters of 2009 by an average of 13.7%.  We
anticipate net sales in the fourth quarter of 2009 to be approximately 5.0%
lower than the third quarter of 2009.





·
              Aviation fuel filters
      and filter systems





Net sales
of filters and filter systems to the aviation market were 13.7% higher than the
third quarter of 2008 and 1.7% higher than the first nine months of
2008.  The increase in net sales was heavily impacted by sales outside
the U.S. which increased 20.9% in the third quarter of 2009 compared to 2008 and
4.3% in the first nine months of 2009 compared to 2008.





Net sales
to the aviation market have increased each quarter in 2009.  We
anticipate that this positive sales trend will continue in the fourth quarter of
2009 with net sales expected to be 8.0% to 10.0% higher than the third quarter
of 2009.





·
              Oil drilling,
      aerospace, fibers and resins and dust collector
    systems





Net sales
to these combined markets were 39.8% lower than the third quarter of 2008 and
33.9% lower than the first nine months of 2008 as each of these markets has been
negatively impacted by global economic conditions.  Sales to these
combined markets have been trending downward through the first three quarters of
2009 although we do expect to experience some strengthening in the fourth
quarter of 2009.





We expect
net sales in the fourth quarter of 2009 to be higher than in each of the first
three quarters but still significantly below 2008 quarterly levels.




Page
28




MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED


Packaging





Net sales
for the Packaging segment for the third quarter of 2009 were $19.2 million, a
$0.6 million or 3.2% reduction from net sales of $19.8 million in the third
quarter of 2008.  Net sales for this segment for the first nine months
of 2009 were $51.3 million, a $6.3 million or 11.0% reduction from net sales of
$57.6 million for the first nine months of 2008.  Virtually all net
sales in this segment are within the U.S.





Although
net sales in the Packaging segment were lower for each of the third quarter and
the first nine months of 2009 compared to 2008, this segment has generated
sequentially improving net sales for each quarter in 2009, as is usually the
case due to this segment’s seasonality, as follows:  first quarter
($14.9 million), second quarter ($17.2 million) and third quarter ($19.2
million).





Due in
part to the seasonality inherent in this industry and the incremental sales
generated from a previously disclosed five-year sales agreement with a major
consumer products company, we expect fourth quarter sales in this segment to be
15% to 20% greater than the third quarter of 2009.





OPERATING
PROFIT




Operating
      Profit and Margin by Segment (Dollars in Thousands)Third
      Quarter Ended
              
              
              Nine
      Months EndedAugust
      29,
              
              
              August
      30,
              
              
              
              
              
              August
      29,
              
              
              August
      30,2009
              
              
              2008
              
              
              Change
              
              
              2009
              
              
              2008
              
              
              ChangeEngine/Mobile
      Filtration
              
              $
              21,904
              
              
              $
              28,669
              
              
              
              -23.6
              %
              
              $
              53,662
              
              
              $
              75,461
              
              
              
              -28.9
              %Industrial/EnvironmentalFiltration
              
              
              7,944
              
              
              
              10,404
              
              
              
              -23.6
              %
              
              
              14,471
              
              
              
              26,133
              
              
              
              -44.6
              %Packaging
              
              
              2,232
              
              
              
              1,747
              
              
              
              27.8
              %
              
              
              2,864
              
              
              
              4,423
              
              
              
              -35.2
              %CLARCOR
              
              $
              32,080
              
              
              $
              40,820
              
              
              
              -21.4
              %
              
              $
              70,997
              
              
              $
              106,017
              
              
              
              -33.0
              %Engine/Mobile
      Filtration
              
              
              22.7
              %
              
              
              24.3
              %
              
              -1.6
      pts.
              
              
              
              19.6
              %
              
              
              22.8
              %
              
              -3.2
      pts.Industrial/EnvironmentalFiltration
              
              
              6.9
              %
              
              
              7.5
              %
              
              -0.6
      pts.
              
              
              
              4.2
              %
              
              
              6.5
              %
              
              -2.3
      pts.Packaging
              
              
              11.6
              %
              
              
              8.8
              %
              
              2.8
      pts.
              
              
              
              5.6
              %
              
              
              7.7
              %
              
              -2.1
      pts.CLARCOR
              
              
              13.9
              %
              
              
              14.8
              %
              
              -0.9
      pts.
              
              
              
              10.5
              %
              
              
              13.4
              %
              
              -2.9
      pts.




Engine/Mobile
Filtration





Operating
profit for the Engine/Mobile Filtration segment for the third quarter of 2009
was $21.9 million, a $6.8 million or 23.6% reduction from operating profit of
$28.7 million in the third quarter of 2008.  The stronger dollar in
the third quarter of 2009 compared to the third quarter of 2008 lowered
operating profit by $0.5 million.  The lower operating profit for the
third quarter of 2009 compared with the third quarter of 2008 was driven by a
$21.4 million or 18.1% reduction in net sales.  The negative impact of
this net sales reduction was partially offset by a $1.3 million reduction in
selling and administrative expenses driven by headcount reductions and limits on
discretionary spending such as travel and outside professional
services.





Operating
profit for the Engine/Mobile Filtration segment for the first nine months of
2009 was $53.7 million, a $21.8 million or 28.9% reduction from operating profit
of $75.5 million for the first nine months of 2008.  The stronger
dollar in the first nine months of 2009 compared to the first nine months of
2008 lowered operating profit by $1.6 million.  The lower operating
profit for the first nine months of 2009 compared with the first nine months of
2008 was driven by a $57.4 million or 17.3% reduction in net
sales.  The negative impact of this net sales reduction was offset by
a $5.8 million reduction in selling and administrative expenses, once again,
driven by headcount reductions and limits on discretionary spending such as
travel and outside professional services.




Page
29




MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED


Although
operating profit in the Engine/Mobile Filtration segment is lower for each of
the third quarter and the first nine months of 2009 compared to 2008, this
segment has generated sequentially improving operating profit / operating margin
for each quarter in 2009 as follows:  first quarter ($13.3 million /
15.6%), second quarter ($18.5 million / 20.0%) and third quarter ($21.9 million
/ 22.7%).





In the
fourth quarter of 2009 we expect operating profit and operating margin for the
Engine/Mobile Filtration segment to be consistent with the third quarter of
2009.





Industrial/Environmental
Filtration





Operating
profit for the Industrial/Environmental Filtration segment for the third quarter
of 2009 was $7.9 million, a $2.5 million or 23.6% reduction from operating
profit of $10.4 million in the third quarter of 2008.  The stronger
dollar in the third quarter of 2009 compared to the third quarter of 2008
lowered operating profit by $0.3 million.





Operating
profit for the Industrial/Environmental Filtration segment for the first nine
months of 2009 was $14.5 million, an $11.6 million or 44.6% reduction from
operating profit of $26.1 million for the first nine months of
2008.  The stronger dollar in the first nine months of 2009 compared
to the first nine months of 2008 lowered operating profit by $1.7
million.





·
              Heating, ventilating
      and air conditioning
(“HVAC”)





The
operating performance of our HVAC filter manufacturing operations continued to
improve as we realized further benefits of the restructuring program we
commenced in 2006.  The HVAC operations generated an operating profit
in the third quarter of 2009 compared to operating losses in the third quarter
of 2008 and the first two quarters of 2009.





As we
move forward into the fourth quarter of 2009 and into 2010, we expect the
operating results of these operations to continue to improve with a target
operating margin of 8.0% for 2010.





·
              Natural gas original
      equipment vessels and replacement
filters





The
operating margin for our natural gas operations for the third quarter of 2009
was 8.6% compared to 12.3% in the third quarter of 2008.  This lower
operating margin was driven by a 23.3% reduction in sales.  The
operating margin for the first nine months of 2009 was consistent with the first
nine months of 2008 at approximately 10.0%.  These operations have
partially offset 9.7% lower year-to-date net sales with approximately $1.6
million of lower selling and administrative expenses driven by headcount
reductions and lower other employee-related costs.





We
anticipate that these operations will continue to be challenged by lower sales,
and we expect operating profit and operating margin in the fourth quarter of
2009 to be significantly lower than the third quarter of 2009.




Page
30




MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED


·
              Aviation fuel filters
      and filter systems





The
operating margins for aviation filters and filter systems continue to trend
upward.  Both the third quarter and first nine months operating
margins have exceeded comparable prior year period operating margins, and
operating margins have improved each quarter in 2009.  The improvement
in operating margin is driven in part by increasing sales which have also
improved each quarter in 2009.  Also contributing to the increased
operating margins is lower selling and administrative expenses, which have been
reduced by approximately $2.8 million in the first nine months of 2009 compared
to 2008 driven in part by headcount reductions.





·
              Oil drilling,
      aerospace, fibers and resins and dust collector
    systems





The
operating margins for these combined markets were approximately 8.0% for the
third quarter of 2009 and approximately 7.0% for the first nine months of
2009.  These operating margins were lower than the 2008 operating
margins of approximately 16.0% for the third quarter and approximately 17.0% for
the first nine months almost entirely driven by reduced net sales.





Each of
these markets has been negatively impacted by the global
recession.  However, we do expect strengthening in net sales in these
markets in the fourth quarter of 2009 with the expectation that operating margin
will significantly improve compared to the first three quarters of 2009 though
still below 2008.





Packaging





Operating
profit for the Packaging segment for the third quarter of 2009 was $2.2 million,
a $0.5 million or 27.8% increase from operating profit of $1.7 million in the
third quarter of 2008.  This increase in operating profit and the
resultant increase in operating margin from 8.8% to 11.6%, despite lower sales
compared to the third quarter of 2008, was driven by various manufacturing
efficiencies implemented during 2009.  Operating profit for the
Packaging segment for the first nine months of 2009 was $2.9 million, a $1.5
million or 35.2% decrease from operating profit of $4.4 million in the first
nine months of 2008.  This decrease in operating profit is driven by
lower sales of $6.3 million in the first nine months of 2009 compared to 2008
offset by the positive impact of various manufacturing efficiency
improvements.





We expect
operating margin in the fourth quarter of 2009 to be consistent with the third
quarter of 2009, but we expect an increase in operating profit compared to the
third quarter of 2009 driven by a 15% to 20% increase in sales.





OTHER
EXPENSE





Net other
expense of $0.1 million in the third quarter of 2009 decreased by $1.2 million
from net other expense of $1.3 million in the third quarter of
2008.  This $1.2 million decrease was driven by a $1.0 million
decrease in interest expense including a $0.7 million decrease in interest on
our bank credit facility and a $0.3 million difference in the mark-to-market
recognized on the fixed interest rate swap agreement.  We recorded a
$0.1 million loss on the mark-to-market in the third quarter of 2009 compared to
a $0.4 million loss in the third quarter of 2008.




Page
31




MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED


Net other
expense of $0.9 million in the first nine months of 2009 decreased $3.8 million
from net other expense of $4.7 million in the first nine months of
2008.  This $3.8 million decrease was driven by a $3.1 million
decrease in interest expense including a $2.2 million decrease in interest on
our bank credit facility (due to lower interest rates and outstanding balances)
and a $0.4 million difference in the mark-to-market recognized on the fixed
interest rate swap agreement.  We recorded a $1.1 million loss on the
mark-to-market in the third quarter of 2009 compared to a $1.5 million loss in
the third quarter of 2008.  The remainder of the decrease in net other
expense was driven by a $1.5 million decrease in foreign currency transactions
losses offset by a $0.7 million decrease in interest income.





INCOME
TAXES





Income
taxes for the third quarter of 2009 were $10.7 million compared to $13.6 million
for the third quarter of 2008.  The effective tax rate for the third
quarter of 2009 was 33.3% compared to 34.4% in the third quarter of
2008.  Income taxes for the first nine months of 2009 were $22.9
million compared to $34.4 million for the first nine months of
2008.  The effective tax rate for the first nine months of 2009 was
32.7% compared to 34.0% for the first nine months of 2008.





This
decrease in the effective tax rate in 2009 compared to 2008 is driven by
discrete items including research and development credits and the mix of
earnings from U.S. and international operations.





We expect
our overall effective tax rate for fiscal 2009 to be 32.0% to
33.0%.





NET EARNINGS AND EARNINGS
PER SHARE





Net
earnings for the third quarter of 2009 were $21.3 million, or $0.42 per diluted
share, compared to net earnings of $25.8 million, or $0.50 per diluted share,
for the third quarter of 2008.  Average diluted shares outstanding of
50.9 million in the third quarter of 2009 were lower than the 51.5 million
average diluted shares outstanding for the third quarter of 2008 due in part to
0.7 million of shares we repurchased in the third quarter of 2009 at an average
price of $28.72 per share.





Net
earnings for the first nine months of 2009 were $46.9 million, or $0.92 per
diluted share, compared to net earnings of $66.6 million, or $1.30 per diluted
share, for the first nine months of 2008.








FINANCIAL
CONDITION





LIQUIDITY AND CAPITAL
RESOURCES





Our
financial position remains strong with adequate cash resources and sufficient
borrowing capacity under our line of credit. The global credit market
experienced a significant tightening of credit availability and interest rate
volatility during fiscal 2008 that is continuing into 2009.  This
resulted in reduced funding available from commercial banks and for corporate
debt issuers.  As a result, capital became more expensive and less
available; however, we do not foresee any difficulties meeting our cash
requirements or accessing credit over the next twelve months. In December 2007,
we entered into a five-year multicurrency revolving credit agreement (“the
Credit Facility”) with a group of financial institutions under which we may
borrow up to $250.0 million under a selection of currencies and rate
formulas.  We believe the financial institutions that are party to
this arrangement have adequate capital and resources and will be able to fund
future borrowings under the credit agreement.  The interest rate is
based upon either, at our election, a defined Base Rate or the London Interbank
Offered Rate (LIBOR) plus or minus applicable margins.  At the end of
the third quarter of 2009, the interest rate plus margin was
0.59%.  Commitment fees, letter of credit fees and other fees are
payable as provided in the credit agreement.  As of the end of the
third quarter, $60.0 million was outstanding on the $250.0 million facility and
$8.5 million in letters of credit had been issued against the Credit Facility’s
$75.0 million letter of credit sub-line. We had approximately $181.5 million
available for further borrowing at the end of the third quarter of
2009.




Page
32




MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED


On
January 2, 2008, we entered into an interest rate agreement with a bank to
manage our interest rate exposure on certain amounts outstanding under our
$250.0 million revolving credit agreement.  The interest rate
agreement provides for us 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 $100.0 million and expires January 1, 2010. This agreement mitigates our
economic interest rate risk until January 2010.  This swap agreement
has not been designated as a hedge pursuant to SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.”Unrealized
gains or losses are recorded in interest expense in the Consolidated Condensed
Statements of Earnings, and periodic settlement payments are a component of cash
flows from operating activities in the Consolidated Condensed Statements of Cash
Flows. The fair value of the interest rate agreement at the end of the third
quarter of 2009 was $1.8 million.  This fair value was recorded as
part of Other accrued liabilities in the Consolidated Condensed Balance
Sheet.





By using
derivative instruments, we are exposed, 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 us, which
creates credit risk for us. We minimize this credit risk by entering into
transactions with counterparties which we believe have the financial resources
to meet their obligations. We minimize market risk by establishing and
monitoring parameters that limit the types and degree of market risk that may be
undertaken. Our swap agreement incorporates by reference the non-financial and
financial covenants included in our 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,
restricted cash and short-term investments of $81.4 million at the end of the
third quarter of 2009 have increased $32.9 million from $48.5 million at the end
of 2008.  Short-term investments include tax-exempt municipal money
market funds.  Cash and cash equivalents are held by financial
institutions throughout the world.  We regularly review the
creditworthiness of these institutions and believe our funds at these
institutions are not at significant risk.  The current ratio of 3.2 at
the end of the third quarter of 2009 is slightly higher than 3.0 at the end of
2008.  Long-term debt of $77.1 million at the end of the third quarter
of 2009 included $60.0 million of borrowings under our revolving credit
agreement and industrial revenue bonds of approximately $16.0
million.  At August 29, 2009, we were in compliance with all debt
covenants including the interest coverage ratio and leverage ratio as defined in
our Credit Facility. We expect to remain in compliance with these covenants in
the foreseeable future despite the global economic downturn.  The
ratio of total debt to total capitalization, defined as long-term debt plus
shareholders’ equity, was 10.1% at the end of the third quarter of 2009 compared
to 11.4% at the end of 2008.





We had
50.3 million shares of common stock outstanding at the end of the third quarter
of 2009 compared to 50.8 million shares outstanding at the end of 2008. The
decrease in shares outstanding was primarily due to our repurchase of 0.7
million shares in the third quarter of 2009 offset by the issuance of shares
under stock award and option programs during the first nine months of
2009.  Shareholders’ equity increased to $683.7 million from $651.8
million at the end of 2008 primarily as a result of net earnings, stock
issuances related to stock option activity and stock award programs offset by
dividend payments of $13.8 million and other comprehensive loss of $11.8 million
due to currency translation and pension liability adjustments.




Page
33




MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED


Net cash
provided by operating activities increased by $1.1 million to $76.3 million for
the first nine months of 2009 compared to $75.2 million for the first nine
months of 2008.  This increase was driven by additional cash provided
from changes in assets and liabilities of $33.9 million offset by lower net
earnings adjusted for non-cash items of ($18.5) million and additional cash used
for short-term investments of ($14.3) million.  The components of
differences of changes in assets and liabilities for the first nine months of
2009 compared to 2008 are as follows (adjusted for foreign
currency):





Changes in assets and
      liabilities, excluding short-term investments(Dollars
      in thousands)Nine
      Months EndedAugust
      29,
              
              
              August
      30,2009
              
              
              2008
              
              
              ChangeRestricted
      cash - current
              
              $
              (13
              )
              
              $
              587
              
              
              $
              (600
              )Accounts
      receivable
              
              
              21,817
              
              
              
              (22,512
              )
              
              
              44,329Inventories
              
              
              (8,518
              )
              
              
              (13,096
              )
              
              
              4,578Prepaid
      expenses and other current assets
              
              
              814
              
              
              
              367
              
              
              
              447Other
      noncurrent assets
              
              
              744
              
              
              
              2,198
              
              
              
              (1,454
              )Accounts
      payable, accrued liabilities and other liabilities
              
              
              (4,026
              )
              
              
              14,791
              
              
              
              (18,817
              )Pension
      assets and liabilities, net
              
              
              3,581
              
              
              
              160
              
              
              
              3,421Income
      taxes
              
              
              7,472
              
              
              
              5,782
              
              
              
              1,690Deferred
      income taxes
              
              
              (2,065
              )
              
              
              (2,377
              )
              
              
              312$
              19,806
              
              
              $
              (14,100
              )
              
              $
              33,906





Net cash
used in investing activities decreased by $73.9 million to $28.1 million for the
first nine months of 2009 compared to $102.0 million for the first nine months
of 2008.  This decrease in cash used in investing activities was
driven by a $63.5 million reduction in cash used for business
acquisitions.  The $75.3 million invested in business acquisitions in
the first nine months of 2008 was primarily driven by our acquisition of Perry
Equipment Corporation.  The $11.8 million invested in business
acquisitions in the first nine months of 2009 was driven by various smaller
acquisitions. Additions to plant assets decreased $9.9 million from $24.9
million in the first nine months of 2008 to $15.0 million in the first nine
months of 2009.  Additions to plant assets for the first nine months
of 2009 were primarily for the HVAC filter manufacturing restructuring program,
new product and filter media development programs, facility improvements and
cost reduction programs.  Additions to plant assets for the full year
2009 are expected to be $25.0 to $30.0 million compared to $35.0 million in
2008.  Additions to plant assets for the full year 2009 related to the
HVAC restructuring program are estimated to be approximately $4.5 million
compared to $11.5 million for the full year 2008.  In late 2008, we
postponed certain capacity expansion and information technology projects until
the U.S. and world economies recover.  We expect to continue to invest
aggressively in new product and media development, cost reduction projects and
safety initiatives.  We also intend to expand our technical facilities
in China for product development and testing.  Wehave not stopped or
reduced any spending or investment in inventory availability, customer service
and sales or marketing programs.  We believe that to be successful in
the filtration aftermarket, having the right product at the right time with the
sales and marketing programs that customers need is
critical.





Net cash
used in financing activities increased $70.4 million in the first nine months of
2009 compared to the first nine months of 2008.  This increase in the
use of cash was driven by a $(95.0) million change in activity under our Credit
Facility.  We paid down $15.0 million on the line of credit in 2009
while we borrowed $80.0 million in 2008.  This use of cash was offset
by $17.5 million reduced payments for the repurchase of our common stock for
treasury and $8.4 million proceeds from the re-issuance of an industrial revenue
bond.  For additional information regarding our share repurchase
program, see Part II, Item 2, “Unregistered Sales of Equity Securities and Use
of Proceeds.”  We paid $13.8 million of dividends in the first nine
months of 2009 compared to $12.3 million in the first nine months of
2008.  Our current annual dividend rate is $0.36 per
share.




Page
34




MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED


We
believe that our 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 our debt agreements, fund pension plan
contributions and repurchase stock. We also continue to assess acquisition
opportunities, primarily in related filtration businesses. It is expected that
these acquisitions, if completed, would expand our market base, distribution
coverage or product offerings.  Any such acquisitions may also affect
operating cash flows and may require changes in our debt and
capitalization.  In addition, capital market disruptions may affect
the cost or availability of future borrowings.  We will also continue
to assess repurchases of our stock. At the end of the third quarter of 2009,
there was approximately $167.4 million available for repurchase under the
current authorization.  Future repurchases of our stock will 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 our stock.





Interest
payments on our variable rate debt are determined based on current interest
rates. The $60.0 million outstanding at the end of the third quarter under our
five-year revolving line of credit will be due by the end of the five-year
term.  Interest payments related to the $60.0 million outstanding on
the revolving line of credit were $0.1 million in the third quarter of
2009.  In addition, we made a $0.7 million payment in the third
quarter of 2009 related to the fixed interest rate swap agreement.  We
anticipate two final payments of a combined $1.8 million over the next two
quarters on the fixed interest rate swap agreement.





As of the
end of the third quarter 2009, our liability for uncertain income tax provisions
reported in accordance with FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” was $2.5 million including
interest.  Due to the high degree of uncertainty regarding the timing
of potential future cash outflows associated with these liabilities, we were
unable to make a reasonably reliable estimate of the amount and period in which
these remaining liabilities might be paid.





OFF-BALANCE SHEET
ARRANGEMENTS





Our
off-balance sheet arrangements relate to various operating leases as discussed
in Note H to the Consolidated Financial Statements in our 2008 Form 10-K. There
have been no material changes to the disclosure regarding leases set forth in
the 2008 Form 10-K. We had no variable interest entity or special purpose entity
agreements during the nine months ending August 29, 2009 or during fiscal
2008.








OTHER
MATTERS





CRITICAL ACCOUNTING
POLICIES





Our
critical accounting policies, including the assumptions and judgments underlying
them, are disclosed in our 2008 Form 10-K in Management’s Discussion and
Analysis of Financial Condition and Results of Operations. There have been no
material changes in our critical accounting policies set forth in the 2008 Form
10-K. These policies have been consistently applied in all material respects.
While the estimates and judgments associated with the application of these
policies may be affected by different assumptions or conditions, we believe the
estimates and judgments associated with the reported amounts are appropriate in
the circumstances.




Page
35




MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED




RECENT RELEVANT ACCOUNTING
PRONOUNCEMENTS





A
discussion of recent relevant accounting pronouncements is included in Note 16
to the Consolidated Condensed Financial Statements.





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
manufacturing companies. We have 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.
We do not believe that current market conditions and economic events have
significantly impacted our current liquidity. We believe that
our after-market focus, current investment policies and contractual
relationships reduce the risks faced by us in this economy. We continue to
monitor accounts receivable collection activity, and we have not experienced any
significant issues. We believe we are adequately reserved for any potential bad
debts.





OUTLOOK





We are
not expecting any significant improvement in the U.S. or world economies for the
rest of this year.  Our Asian business is stronger than our U.S. or
European businesses, and we expect this difference will continue for the fourth
quarter and into 2010.  We are looking at several sales opportunities
in South Asia and South America, but these will not have a material impact in
the fourth quarter or in the first half of 2010.  We expect the
aftermarket to remain stronger than the OEM market for the rest of 2009 and
throughout 2010.  We also expect to report higher sales and operating
profit in our fourth quarter this year than in the previous three quarters.
Nevertheless, given the current U.S. and world economies and other factors
impacting our business as described above, we have revised our previous earnings
per share forecast and now expect diluted earnings per share for 2009 to be in a
range of $1.30 to $1.40.





We
believe we have a strong balance sheet, strong and consistent cash flows and
available access to cash resources and credit, as needed. We believe our broad
product, market and channel diversification is a distinct advantage.
Nevertheless, given the unpredictable severity and length of the current global
recession, our forecast for the remainder of fiscal 2009 is subject to
change.




Page
36




MANAGEMENT’S DISCUSSION AND
ANALYSIS
 
 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED


FORWARD-LOOKING INFORMATION
IS SUBJECT TO RISK AND UNCERTAINTY





This
Third Quarter 2009 Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements made in
this Form 10-Q, other than statements of historical fact, are forward-looking
statements. You can identify these statements from use of 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:





·
            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, including
      acquisitions;


·
            statements
      relating to our business and growth strategies;
  and


·
            any
      other statements or assumptions that are not historical
    facts.





We
believe that our expectations are based on reasonable assumptions. However,
these forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause our actual results, performance or
achievements, or industry results, to differ materially from our expectations of
future results, performance or achievements expressed or implied by these
forward-looking statements. In addition, our past results of operations do not
necessarily indicate our future results. These and other uncertainties are
discussed in the “Risk Factors” section of our 2008 Form 10-K. Our future
results may fluctuate as a result of these and other risk factors detailed from
time to time in our filings with the Securities and Exchange
Commission.





You
should not place undue reliance on any forward-looking statements. These
statements speak only as of the date of this Third Quarter 2009 Form
10-Q.  Except as otherwise required by applicable laws, we undertake
no obligation to publicly update or revise any forward-looking statements or the
risks described in this Form 10-Q, whether as a result of new information,
future events, changed circumstances or any other reason after the date of this
Form 10-Q.




Page
37




Part
I -Item 3.
Quantitative and Qualitative Disclosure About Market
Risk





Our
interest expense on long-term debt is sensitive to changes in interest rates. In
addition, changes in foreign currency exchange rates may affect assets,
liabilities and commitments that are to be settled in cash and are denominated
in foreign currencies. Market risks are also discussed in our 2008 Form 10-K in
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. There have
been no material changes to the disclosure regarding market risk set forth in
the 2008 Form 10-K.





Part I -Item 4.
Controls and Procedures





We have
established disclosure controls and procedures which are designed to ensure that
information required to be disclosed in reports filed or submitted under the
Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms. We, with the participation of Norman E.
Johnson, Chairman of the Board, President, and Chief Executive Officer and Bruce
A. Klein, Chief Financial Officer and Chief Accounting Officer, evaluated the
effectiveness of our disclosure controls and procedures as of August 29, 2009.
Based on our evaluation, such officers concluded that our disclosure controls
and procedures pursuant to Rules 13a – 15(e) of the Exchange Act were effective
as of August 29, 2009, in achieving the objectives for which they were designed.
No change in our internal control over financial reporting occurred during our
most recent fiscal quarter ended August 29, 2009, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.




Page
38





Part II -Other
Information





Part II -
Item 1.
Legal Proceedings





The
information required by this Item is incorporated by reference from Note 13
included in Part I, Item 1 of this Form 10-Q.





Part II -Item 1A.
Risk Factors





There
have been no material changes to the risk factors disclosed in Item 1A. “Risk
Factors” in our Annual Report on Form 10-K for the year ended November 29,
2008.





Part II -Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds





On June
25, 2007, our Board of Directors approved a three-year, $250 million stock
repurchase program. Pursuant to the authorization, we may purchase shares from
time to time in the open market or through privately negotiated transactions
through June 25, 2010. We have no obligation to repurchase shares under the
authorization, and the timing, actual number and values of shares to be
purchased will depend on our stock price and market conditions. As set forth in
the table below, we repurchased 688,200 shares of our common stock during the
fiscal quarter ended August 29, 2009. The amount of $167,422,663 remained
available for purchase under such program at the end of the third quarter of
2009.




COMPANY
      PURCHASES OF EQUITY SECURITIES (1)(a)
              
              
              (b)
              
              
              (c)
              
              
              (d)Total
      number of
              
              
              Maximum
      approximateTotal
              
              
              Average
              
              
              shares
      purchased as
              
              
              dollar
      value of sharesnumber
      of
              
              
              price
      paid
              
              
              part
      of the
              
              
              that
      may yet beshares
              
              
              per
      share
              
              
              Company's
      publicly
              
              
              purchased
      under thePeriod
              
              purchased
              
              
              
              
              
              announced
      plan
              
              
              PlanMay
      31, 2009 through June 30, 2009
              
              
              225,500
              
              
              $
              28.57
              
              
              
              225,500
              
              
              
              $180,768,439July
      1, 2009 through July 31, 2009
              
              
              462,700
              
              
              $
              28.80
              
              
              
              462,700
              
              
              
              $167,442,663August
      1, 2009 through August 29, 2009
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              $167,442,663Total
              
              
              688,200
              
              
              
              
              
              
              
              688,200




(1) The
Purchase Plan announced June 25, 2007 provides for aggregate purchases up to
$250 million. The program expires June 25, 2010.





Part II -Item 6.
Exhibits





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




Page
39





SIGNATURES




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







CLARCOR
Inc.


(Registrant)




September
      18, 2009
            
            By
            /s/
      Norman E. Johnson(Date)
            
            
            Norman
      E. Johnson
              Chairman
      of the Board, President and Chief Executive OfficerSeptember
      18, 2009
            
            By
            /s/
      Bruce A. Klein(Date)
            
            
            Bruce
      A. Klein
              Chief
      Financial Officer and
              Chief
      Accounting Officer




Page
40