**Exhibit 13(a)(ii)****MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATION****(Dollars in millions except per share data)****Executive Summary**     Fiscal 2005 was the 13th consecutive year of both sales andearnings growth for CLARCOR. Fiscal 2005 sales, operating profitand net earnings increased from fiscal 2004 by 11.0%, 20.7% and19.4%, respectively. There were several key drivers of theincreases in sales and operating profit, including:(1) increased sales of heavy-duty engine filtrationproducts for the aftermarket and diesel locomotives,(2) sales and operating profit from the PEFP acquisitions(in fourth quarter 2004 Purolator EFP was acquired and in secondquarter 2005 Niagara Screen Products was acquired and they werecombined into PEFP), (3) increased sales due to priceincreases that were initiated to offset cost increases for rawmaterials, freight, employee benefits and energy, and(4) increased capacity utilization and productionefficiencies, particularly related to a manufacturing facilityin the U.K. Fiscal 2005 sales levels increased approximately$24 million due to the PEFP acquisitions which aredescribed in Note B to the Consolidated FinancialStatements. Cash flow from operating activities totaled$89.3 million of which $24.0 million was invested inplant asset additions and $28.1 million was used foracquisitions. Net earnings per diluted share totaled $1.46 infiscal 2005 compared to $1.24 in 2004.     The following are several significant items that occurred duringthe periods presented:     (1) A two-for-one stock split effected in the form of a100% stock dividend was distributed to shareholders onApril 29, 2005. All share and per share amounts for allperiods presented have been adjusted to reflect the stock split.     (2) Fiscal 2005 was a fifty-three week year for the Companyand fiscal years 2004 and 2003 were fifty-two week years. As aresult of the additional week in fiscal 2005, sales increasedapproximately $16.5 million, operating profit$2 million and diluted earnings per share $0.03.     (3) During fiscal 2004, the Company relocated its corporateheadquarters to Franklin, Tennessee. The costs related to therelocation were $2.2 million and reduced diluted earningsper share by $0.03 in fiscal 2004.     (4) In fiscal 2005 and 2004, one-time tax benefits in eachyear of approximately $1.2 million or $0.02 perdiluted share reduced income tax expense. The 2005 benefit inthe third quarter resulted from the favorable settlement of atax position related to a foreign subsidiary. The 2004 fourthquarter benefit was due to the reversal of a foreign tax creditvaluation allowance as a result of the American Jobs CreationAct of 2004.     The information presented in this financial review should beread in conjunction with other financial information provided inthe Consolidated Financial Statements. The following discussionof operating results focuses on the Company’s threereportable business segments: Engine/ Mobile Filtration,Industrial/ Environmental Filtration and Packaging.**Operating Results***Sales*     Net sales in fiscal 2005 were $874.0 million, an 11.0%increase from $787.7 million in fiscal 2004. The 2005 salesincrease was the 19th consecutive year of sales growth forthe Company. Included in the sales growth of $86.3 millionfor 2005 was approximately $24 million related to the PEFPacquisitions and approximately $16.5 million related to theadditional fiscal week in 2005. Sales were reduced by less than1% due to unfavorable currency translation rates in 2005.
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     Comparative net sales information related to CLARCOR’soperating segments is shown in the following tables.                        **2005 vs. 2004**      **Change**       **NET SALES** **2005** **% Total** **$** **%**             Engine/ Mobile Filtration $368.2   42.1% $48.1   15.0%    Industrial/ Environmental Filtration  427.5   48.9%  30.9   7.8%    Packaging  78.3   9.0%  7.3   10.3%                  Total $874.0   100.0% $86.3   11.0%                                     **2004 vs. 2003**      **Change**       **NET SALES** **2004** **% Total** **$** **%**             Engine/ Mobile Filtration $320.1   40.6% $32.3   11.2%    Industrial/ Environmental Filtration  396.6   50.4%  10.3   2.7%    Packaging  71.0   9.0%  3.7   5.5%                  Total $787.7   100.0% $46.3   6.2%                  The Engine/ Mobile Filtration segment’s sales increased15.0% in 2005 from 2004 and 11.2% in 2004 from 2003. The primarydriver of the sales growth in 2005 and 2004 was increaseddomestic and international heavy-duty filter sales totraditional aftermarket distribution and increased sales toOEM’s and OEM dealer organizations. New productintroductions and the breadth of the segment’s filterproduct line contributed to the sales growth in both years.Railroad filtration sales increased in both years due toincreased North American railway traffic. The segment’sinternational sales grew in both years primarily through itsoperations in China, Europe and South Africa and additionalinternational growth is expected in 2006. The additional fiscalweek in 2005 added approximately $7 million to fiscal 2005sales. Price increases improved the segment’s sales byapproximately 2.5 percentage points in 2005 and2.0 percentage points in 2004. Changes in currencytranslation rates had little impact in either year. The salesgrowth of $32.3 million in 2004 included approximately$5 million from an acquisition in the U.K. at the beginningof the second quarter of 2004.     The Company’s Industrial/ Environmental Filtration segmentrecorded a 7.8%, or $30.9 million, increase in sales in2005 over 2004. The sales growth included approximately$24 million due to the PEFP acquisitions and approximately$8 million due to the additional fiscal week in 2005. Thefourth quarter 2005 acquisition of Martin Kurz & Co.,Inc. (MKI) did not materially affect sales in fiscal 2005.Sales of specialty filters sold to industrial markets used inaviation, defense and fluid power applications increased againin fiscal 2005 after strong sales in fiscal 2004. Sales in 2005(on a same-weeks basis) were nearly even with 2004 sales of HVACfilters for industrial and commercial markets and for use inautomotive manufacturing facilities. Sales of HVAC filters forthe retail market increased in 2005 and 2004. The segment’soperations in Europe that sell primarily aviation and specialtyfiltration products grew in 2005 and 2004 and additional growthis expected in 2006. Sales of filters sold into the oil and gasmarket were very strong in 2004, but sales of these productswere lower in 2005 as customer demand was weaker than expected.Sales of oil and gas drilling filters are expected to rebound in2006 as a result of anticipated increases in drilling andexploration due to continuing demand and high prices for oil andgas. Price increases improved the segment’s sales byapproximately 1.0 percentage point in 2005. Changes incurrency translation rates did not significantly impact salesgrowth in 2005 or 2004. The segment’s sales increased$10.3 million in 2004 over fiscal 2003 and includedapproximately $5 million due to the fourth quarter 2004acquisition of Purolator EFP. Sales of specialty filters sold toindustrial markets used in applications for oil and gasdrilling, aviation and fluid power were strong during fiscal2004 and more than offset a decrease in sales of HVAC filtersfor industrial and commercial markets and for use in automotivemanufacturing facilities.     The Packaging segment’s sales were $78.3 million in2005, a 10.3% increase from 2004. Sales in 2005 increasedapproximately $1.5 million due to the additional fiscalweek in 2005 and approximately $4 million due to priceincreases to customers, primarily to offset increased metalcosts. The remaining sales increase was due to increasedcustomer demand for metal and plastic packaging, primarilyrelated to confectionery packaging and flat sheet metaldecorating. The segment’s sales were $71.0 million in2004, a 5.5% increase from 2003. Sales in 2004 increasedapproximately 1.0 percentage point due to price increases.The remaining sales increase in 2004 was due primarily to growthin flat sheet metal decorating and also from tooling chargesbilled to customers. These items more than offset lower sales ofplastic packaging and metal containers in 2004.
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*Operating Profit*     Operating profit of $118.5 million in 2005 reflectsincreased sales levels for each segment, including the PEFPacquisitions, and continued improvements in capacity utilizationand production efficiencies. The 2005 increase also includesapproximately $2 million related to the additional fiscalweek in 2005. Cost increases for raw materials andpetroleum-related expenses persisted throughout the year andwere primarily offset by price increases to customers. Operatingprofit of $98.2 million in fiscal 2004 included costs of$2.2 million related to the Company’s headquartersrelocation to Tennessee.     Operating margin improved to 13.6% in 2005 from 12.5% in 2004and 11.7% in 2003. Each of the segments reported improvedoperating margins for the periods presented primarily as aresult of increasing sales, which improved manufacturingleverage, and cost reduction efforts. Foreign currencyfluctuations did not have a material impact on consolidatedoperating profit in 2005, 2004 or 2003.     Comparative operating profit information related to theCompany’s business segments is as follows.                        **2005 vs. 2004**      **Change**       **OPERATING PROFIT** **2005** **% Total** **$** **%**             Engine/ Mobile Filtration $80.4   67.9% $13.9   20.8%    Industrial/ Environmental Filtration  31.3   26.4%  2.6   9.1%    Packaging  6.8   5.7%  1.6   32.2%    Relocation Costs  0.0   —   2.2   —                   Total $118.5   100.0% $20.3   20.7%                                     **2004 vs. 2003**      **Change**       **OPERATING PROFIT** **2004** **% Total** **$** **%**             Engine/ Mobile Filtration $66.5   67.8% $8.2   14.2%    Industrial/ Environmental Filtration  28.7   29.2%  4.5   18.6%    Packaging  5.2   5.2%  0.6   12.2%    Relocation Costs  (2.2)  -2.2%  (2.2)  —                   Total $98.2   100.0% $11.1   12.8%                           **OPERATING MARGIN AS A PERCENT OF NET SALES** **2005** **2004** **2003**           Engine/ Mobile Filtration  21.8%  20.8%  20.3%    Industrial/ Environmental Filtration  7.3%  7.2%  6.3%    Packaging  8.7%  7.3%  6.8%               Total  13.6%  12.5%  11.7%               Operating profit for the Engine/ Mobile Filtration segmentincreased 20.8% to $80.4 million from $66.5 million infiscal 2004. Operating margin improved to 21.8% in 2005 as aresult of increased sales and capacity utilization,discretionary spending controls, and significant improvement inthe operations of a manufacturing facility in the U.K. The U.K.manufacturing facility eliminated approximately$2.0 million of costs primarily through productivityimprovements and reduced spending. The segment incurredsubstantially higher costs for raw materials in 2005 and 2004,especially for metal products, filter media, petroleum-basedproducts and freight. These cost increases were principallyoffset by price increases to customers and cost reductionefforts. Operating profit in 2004 of $66.5 millionincreased 14.2% from 2003. Operating margin improved to 20.8% in2004 primarily as a result of increased sales and capacityutilization. The segment’s 2004 operating profit wasimpacted by a manufacturing facility in the U.K. that performedsignificantly below expectations in the second half of 2004,primarily as a result of the integration of a small acquisition.     The Industrial/ Environmental Filtration segment’soperating profit of $31.3 million in 2005 was an increaseof 9.1% over the 2004 profit of $28.7 million. Theadditional profit from the PEFP operations and an increase insales of aviation products more than offset reduced profit dueto lower sales of oil and gas drilling filtration products.Operating profit related to HVAC product sales improved slightlyin 2005. The segment’s operating results were impacted bycontinued costs to restructure and integrate manufacturingfacilities, to integrate the HVAC branch network and toimplement a related business system conversion. Over the pastseveral years, the segment has been actively integrating newlyacquired businesses (primarily acquired from 1999 through
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2002) and making organizational changes that have reducedongoing overhead and administrative costs. The segment reportedan increase of 18.6% in operating profit, or $4.5 million,in 2004 compared to 2003. The increase was primarily due to thesale of higher margin specialty filtration products and improvedprofitability from cost reduction and capacity utilizationinitiatives. Higher costs in 2005 and 2004, primarily for metalproducts, filter media, petroleum-based products and freight,were partially offset by increased prices to customers. As aresult of these efforts, the segment’s operating marginimproved to 7.3% in 2005 from 7.2% in 2004 and 6.3% in 2003.     The Packaging segment’s operating profit in 2005 increasedto $6.8 million from $5.2 million in 2004. Theincrease resulted primarily from pricing programs, increasedsales of higher margin products and continued cost reductionprograms. In 2004, operating profit improved to$5.2 million from $4.6 million in 2003. The increaseresulted from higher utilization of manufacturing capacityrelated to flat sheet metal decorating and improved operatingefficiencies. The segment’s raw material costs increasedduring the second half of 2004 and as a result, customer pricingwas increased to substantially offset the additional costs.*Other Income(Expense)*     Net other expense totaled $0.6 million in 2005, net otherincome totaled $0.9 million in 2004, and net other expensetotaled $1.0 million in 2003. Interest expense was$0.6 million in 2005 and increased slightly from 2004 dueto higher interest rates. Interest income increased to$0.9 million in 2005 as a result of higher cash balancesand increased interest rates. Other income(expense) itemsinclude currency losses of less than $0.1 million in 2005compared to gains of $0.5 million in 2004 and$1.0 million in 2003 and resulted primarily fromfluctuations of the Euro against the U.S. dollar. In 2004 again of $0.7 million resulted from the first quarter 2004sale of a building.*Provision for Income Taxes*     The provision for income taxes in 2005 resulted in an effectivetax rate of 34.7% compared to 35.0% in 2004 and 36.5% in 2003. Atax benefit of approximately $1.2 million in the thirdquarter of 2005 resulted from the favorable settlement of a taxposition related to a foreign subsidiary. The 2004 provisionincluded a $1.2 million reduction of tax expense related tothe reversal of a foreign tax credit valuation allowance due tothe American Jobs Creation Act of 2004 which extended the periodfor utilizing tax credits from five years to ten years. Theseone-time benefits reduced the effective rates in 2005 and 2004by approximately 1.0 percentage point. The effective taxrate in 2006 is expected to be approximately 35.5% to 36.0% andreflects an expected continued increase in pretax income fromlower tax rate locales, primarily in Asia.*Net Earnings and Earnings Per Share*     Net earnings were $76.4 million in 2005, or dilutedearnings per share of $1.46. Net earnings were$64.0 million in 2004, or diluted earnings per share of$1.24, compared to $54.6 million or diluted earnings pershare of $1.08 in 2003. As described in Note A to theConsolidated Financial Statements, diluted earnings per sharewould have been $1.31, $1.17 and $1.03 for 2005, 2004 and 2003,respectively, had compensation expense for stock options beenrecorded in accordance with SFAS No. 123. Dilutedaverage shares outstanding for fiscal 2005 were 52,215,689compared to 51,506,738 for 2004, an increase of 1.4%. Dilutedaverage shares outstanding for fiscal 2003 were 50,745,612. Theincrease in diluted average shares outstanding was primarily dueto additional stock option grants. Shares repurchased andretired under a $150 million repurchase program totaled368,200 shares (68,200 in the third quarter and 300,000 inthe fourth quarter) and did not materially impact dilutedaverage shares outstanding or diluted earnings per share forfiscal 2005.**Financial Condition***Corporate Liquidity*     Cash and short-term investments increased to $28.9 millionat year-end 2005 from $22.5 million at year-end 2004. Inthe Consolidated Statements of Cash Flows, which reflect certainreclassifications to present all years consistently, cashprovided by operating activities totaled $89.3 million in2005 compared to $71.8 million in 2004 and$85.4 million in 2003. The increase in cash provided byoperating activities in 2005 resulted from increased netearnings and reduced investment in working capital. Thereduction in cash provided by operating activities in 2004 fromthe 2003 levels resulted primarily from increased investment inworking capital. These are ordinary working capital fluctuationsdue to business level activities and result primarily from thetiming of payments made to vendors, the receipt of payments fromcustomers, changes in inventory requirements and the timing ofincome tax payments. In the fourth quarters of 2004 and 2003,voluntary contributions of $6.5 million and$3.0 million,
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respectively, were made to the Company’s defined benefitpension trust for covered U.S. employees. A contributionwas not made in 2005 and under the current assumptions forpension plan asset returns, benefit payments and costs andinterest rates, annual contributions are not expected to berequired for at least ten years for the qualifiedU.S. defined benefit plan.     The Company used cash of $51.5 million for investingactivities in 2005, $62.2 million in 2004 and$13.0 million in 2003. The Company made two acquisitions in2005 for a total investment of $28.1 million and there werealso two acquisitions in 2004 for a total investment of$41.9 million. The Company made no acquisitions in fiscal2003. Additions to plant assets totaled $24.0 million in2005 and were primarily for new products, facility additions andimprovements and cost reduction programs. Plant asset additionstotaled $22.4 million in 2004 and $13.0 million in2003.     Net cash used for financing activities totaled$35.7 million in 2005. Net cash from financing activitiestotaled $1.1 million in 2004 and cash used for financingactivities totaled $80.7 million in 2003. In 2004, proceedsfrom a revolving credit agreement were used primarily for afourth quarter acquisition whereas in 2005 and 2003, netpayments were made on revolving credit agreements. Dividendpayments totaled $13.4 million, $12.8 million and$12.4 million in 2005, 2004 and 2003, respectively. Thequarterly dividend rate was increased in 2005 and the Companyexpects to continue making quarterly dividend payments toshareholders. In June 2005, the Company’s Board ofDirectors authorized a $150 million share repurchaseprogram of CLARCOR common stock in the open market and throughprivate transactions over a two-year period. In 2005, theCompany acquired 368,200 shares at a total cost of$10.5 million.     CLARCOR believes that its current operations will continue togenerate cash and that sufficient lines of credit remainavailable to fund current operating needs, pay dividends,provide for additions and the replacement of necessary plantfacilities, and service and repay long-term debt. A$165 million credit facility with a group of financialinstitutions will expire in April 2008. As of year-end 2005,there were no outstanding borrowings against the facility. Undera related $40 million letter of credit subline,$8.5 million had been issued for letters of credit forindustrial revenue bonds. The Company’s long-term debttotaled $16.2 million at year-end 2005 and consistsprincipally of industrial revenue bonds. Required principalpayments on long-term debt will be approximately$0.2 million in 2006 based on scheduled payments in currentdebt agreements. The Company is in compliance with all covenantsrelated to its borrowings, as described in Note G to theConsolidated Financial Statements.     The Company expects to continue to use future additional cashflow for dividends, capital expenditures and acquisitions.Additional common stock repurchases may be made under theremaining authorized amount at year-end 2005 of$139.5 million after considering the current stock price,cash flow requirements for internal growth (including workingcapital requirements), capital expenditures and acquisitions.Capital expenditures for normal facility maintenance andimprovements, expansion of manufacturing and technicalfacilities, productivity improvements and new products areexpected to total $25 to $30 million in 2006. The Companyhas no material long-term purchase commitments.     The following table summarizes the Company’s current fixedcash obligations for the fiscal years indicated:                     **2007 &** **2009 &**    **2006** **2008** **2010** **Thereafter**             Long-Term Debt $0.2  $0.2  $0.0  $15.8     Credit Facility  —   —   —   —     Operating Leases  9.0   12.5   6.5   7.1 *Off-Balance Sheet Arrangements*     The Company’s off-balance sheet arrangements relate tovarious operating leases as discussed in Note H to theConsolidated Financial Statements. The Company had noderivative, swap, hedge, variable interest entity or specialpurpose entity agreements at fiscal year-end 2005 or 2004.*Capital Resources*     The Company’s financial position at November 30, 2005,continued to be sufficiently liquid to support currentoperations and reflects cash flow from operations that was usedfor acquisitions and plant asset additions during fiscal 2005.Total assets increased to $675.3 million at the end offiscal 2005, a 7.6% increase from the year-end 2004 level of$627.8 million. Total current assets increased to$324.9 million from $304.0 million at year-end 2004,primarily due to increased accounts receivables and inventoriesas a result of sales growth and acquisitions. Total currentliabilities at year-end 2005 decreased to $121.5 millionfrom
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$126.3 million at year-end 2004, primarily as a result ofreduced payables to vendors offset partially by increased incometaxes payable. The current ratio was 2.7 at year-end 2005compared to 2.4 at year-end 2004.     Long-term debt of $16.0 million at year-end 2005 relatesprimarily to industrial revenue bonds. Shareholders’ equityincreased to $482.8 million from $428.5 million atyear-end 2004. The increase in shareholders’ equityresulted primarily from net earnings of $76.4 millionoffset by stock repurchases of $10.5 million and dividendpayments of $13.4 million. Total debt was 3.3% of totalcapitalization at year-end 2005 compared to 5.4% at year-end2004.     At year-end 2005, CLARCOR had 51,594,781 shares of commonstock outstanding compared to 51,223,054 shares outstandingat the end of 2004.**Other Matters***Quantitative and Qualitative Disclosures about Market Risk*     The Company’s market risk is primarily related to thepotential loss arising from adverse changes in interest ratesand foreign currency fluctuations. However, based on the lowlevel of debt obligations as of year-end 2005, interest raterisk is not expected to be significant to the Company in fiscal2006, and as a result, it is anticipated that a 1% change inrates would not have a material impact on the Company’s netearnings or cash flows in fiscal 2006. The Company’s debtobligations are primarily at variable rates and are denominatedin U.S. dollars. In order to minimize the long-term costsof borrowing, the Company manages its interest rate risk bymonitoring trends in rates as a basis for determining whether toenter into fixed rate or variable rate agreements.     Although the Company continues to evaluate derivative financialinstruments, including forwards, swaps and purchased options, tomanage foreign currency exchange rate changes, the Company didnot hold derivatives during 2005, 2004 or 2003. The effect ofchanges in foreign currency translation rates was not materialto the Company’s financial condition and results ofoperations in fiscal 2005. The impact of future changes inforeign currency translation rates is difficult to estimate;however, if the U.S. dollar strengthened or weakened 10%relative to the currencies where the Company’s foreignincome and cash flows are derived there would not be a materialimpact on the Company’s financial condition or results ofoperations. As a result of continued foreign sales and businessactivities, the Company will continue to evaluate the use ofderivative financial instruments to manage foreign currencyexchange rate changes in the future.*Critical Accounting Policies*     The Company’s critical accounting policies, including theassumptions and judgments underlying them, are disclosed in theNotes to the Consolidated Financial Statements. These policieshave been consistently applied in all material respects andaddress such matters as revenue recognition, depreciationmethods, inventory valuation, asset impairment recognition,business combination accounting and pension and postretirementbenefits.     While the estimates and judgments associated with theapplication of these critical accounting policies may beaffected by different assumptions or conditions, the Companybelieves the estimates and judgments associated with thereported amounts are appropriate in the circumstances. Thefollowing critical accounting policies are used in preparing theconsolidated financial statements which require theCompany’s management to use significant judgment andestimates:     Goodwill and Indefinite-lived Intangible Assets — TheCompany periodically reviews goodwill and indefinite-livedintangible assets for impairment. These reviews of fair valueinvolve judgment and estimates of discount rates, transactionmultiples and future cash flows for the reporting units that maybe impacted by future sales and operating results for thereporting units, market conditions and worldwide economicconditions. The Company analyzed various discount rates,transaction multiples and cash flows for aggregated reportingunits. A sensitivity analysis was prepared which indicated thatif these assumptions were individually changed by 20%, there wasno indication of impairment.     Allowance for Losses on Accounts Receivable —Allowances for losses on customer accounts receivable balancesare estimated based on economic conditions in the industries towhich the Company sells and on historical experience byevaluating specific customer accounts for risk of loss,fluctuations in amounts owed and current payment trends. TheCompany’s concentration of risk is also monitored and atyear-end 2005, the largest outstanding customer account balancewas $7.5 million and the five largest account balancestotaled $19.2 million. The allowances provided areestimates that may be impacted by economic and market conditionswhich could have an effect on future allowance requirements andresults of operations.
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     Pensions — The Company’s pension obligations aredetermined using estimates including those related to discountrates, asset values and changes in compensation. The 5.5%discount rate used for the qualified plan forU.S. employees was determined based on the CitigroupPension Discount Curve for cash flows at the plan’sestimated liability duration of 13.5 years. This rate wasselected as the best estimate of the rate at which the benefitobligations could be effectively settled on the measurement datetaking into account the nature and duration of the benefitobligations of the plan using high-quality fixed-incomeinvestments currently available (rated Aa or better) andexpected to be available during the period to maturity of thebenefits. The 8.0% expected return on plan assets was determinedbased on historical long-term investment returns as well asfuture expectations given target investment asset allocationsand current economic conditions. The 4.0% rate of compensationincrease represents the long-term assumption for expectedincreases in salaries among continuing active participantsaccruing benefits. The assumptions are similarly determined foreach pension obligation. Actual results and future obligationswill vary based on changes in interest rates, stock and bondmarket valuations and employee compensation. In 2006, areduction in the expected return on plan assets of 0.25% wouldresult in additional expense in fiscal 2006 of approximately$0.2 million, while a reduction in the discount rate of0.25% would result in additional expense of approximately$0.3 million for the Company’s qualified definedbenefit pension plan for U.S. covered employees. Interestrates and pension plan valuations may vary significantly basedon worldwide economic conditions and asset investment decisions.The unrecognized net actuarial loss of $38.1 million atyear-end 2005 is due primarily to prior changes in assumptionsrelated to discount rates and expected asset returns and thisactuarial loss will be recognized as pension expense in thefuture over the average remaining service period of theemployees in the plans in accordance with SFAS No. 87.     Income Taxes — The Company is required to estimate andrecord income taxes payable for each of the U.S. andinternational jurisdictions in which the Company operates. Thisprocess involves estimating actual current tax expense andassessing temporary differences resulting from differingaccounting treatment between tax and book which result indeferred tax assets and liabilities. In addition, accruals arealso estimated for federal, state and international tax mattersfor which deductibility is subject to interpretation. Taxespayable and the related deferred tax differences may be impactedby changes to tax laws, changes in tax rates and changes intaxable profits and losses.*Recent Relevant Accounting Pronouncements*     On December 16, 2004, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 123R,“Share-Based Payment,” which requires companies toexpense the value of employee stock options and similar awards.In accordance with a Securities and Exchange Commission ruleissued in April 2005, SFAS No. 123R is effective forthe Company’s 2006 fiscal year. The Company will also adoptthe non-substantive vesting period approach for awards withretirement eligibility options, which requires recognition ofcompensation expense immediately for grants to retirementeligible employees or over the period from the grant date to thedate retirement eligibility is achieved. Adoption of thisstandard is expected to reduce the Company’s net earningsand earnings per share for interim and annual periods afteradoption. Management expects fiscal year 2006 diluted earningsper share will be reduced by approximately $0.03 under themodified prospective method of reporting based on the unvestedoptions outstanding as of November 30, 2005.     In March 2005, the Compensation Committee of the Company’sBoard of Directors approved accelerating the vesting ofnonqualified stock options granted on December 12, 2004 tocurrent employees, including executive officers. All of theseoptions had an exercise price equal to $26.08 per share andprovided for vesting at the rate of 25% per year beginningon the first anniversary of the date of grant. The action by theCommittee made these options 100% vested on March 22, 2005.At the time of the action by the Compensation Committee, theprice of the Company’s Common Stock was $25.89, as reportedon the New York Stock Exchange Composite Transactions at themarket close on March 21, 2005. On November 18, 2005,the Compensation Committee also approved a grant of stockoptions at the market price on the date of grant to employeesand executive officers that were fully vested on the date ofgrant. This grant would normally have been made in fiscal 2006.The decision to accelerate vesting of these options was made toavoid recognizing compensation expense in the statement ofearnings in future financial statements after the effective dateof SFAS No. 123R. The Company’s CompensationCommittee is not expected to approve significant additionalstock option grants to employees and executive officers untilfiscal 2007.     On December 21, 2004, the FASB issued two FSPs regardingthe accounting implications of the American Jobs Creation Act of2004 (the Act). FSP No. 109-1, “Application of FASBStatement No. 109 ‘Accounting for Income Taxes’to the Tax Deduction on Qualified Production Activities Providedby the American Jobs Creation Act of 2004” will not have aneffect of the Company’s effective tax rate until fiscal2006. FSP No. 109-2, “Accounting and DisclosureGuidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004” was effective forfiscal year 2004 and allowed the Company additional time toevaluate the impact of the Act on its plan for repatriation offoreign earnings. In fourth quarter 2005,
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under the provisions of the Act, the Company elected torepatriate a dividend of $2.5 million from a foreignaffiliate that resulted in additional U.S. tax expense of$0.1 million.*Outlook*     The Company expects that sales and diluted earnings per sharewill continue to grow in 2006 that should make it the14th consecutive year of both sales and earnings per sharegrowth. The Company expects diluted earnings per share to be inthe range of $1.52 to $1.60 in 2006, which includes an estimatedreduction of approximately $0.03 from the implementation ofSFAS No. 123R in fiscal 2006. The Company expects thatcontinued cost increases will be incurred for raw materials,petroleum-based products, freight and employee health insuranceand that customer pricing will continue to be increased torecover cost increases. International growth is expected tocontinue at a rate higher than the Company’s domesticgrowth rate and significant currency movements could have animpact on sales and operating profit.     Continued sales growth and increased operating profits areexpected for the Engine/ Mobile Filtration segment as productdemand for aftermarket heavy-duty filtration products remainsgood due in part to high levels of freight transport and railwayusage. Growth is also expected due to new product introductionsand from sales and marketing initiatives, including growth insales to OEM dealers and increased sales of off-road filterapplications for construction, mining and agricultural equipment.     Sales growth for the Industrial/ Environmental segment is alsoexpected primarily due to continued growth in sales of specialtyprocess liquid filters. The Company also remains optimistic thatthere will be a continued increase in demand for filtrationsystems sold into the capital goods markets. Although demand wasweak in 2005 for filters sold into the oil and gas market, anupturn in sales of these products is expected in 2006 as aresult of anticipated increases in drilling and exploration dueto continuing demand and high prices for oil and gas. The latefourth quarter 2005 acquisition of MKI is expected to increasesales in 2006 approximately $12.0 million. Ongoing pricecompetition related to HVAC filtration products contributed toreduced sales in 2004; however, price increases were implementedin 2005 that increased sales and additional price increases areexpected in 2006.     In late November 2005, the Company was informed by a majorcustomer of the Industrial/ Environmental segment of their plansto manufacture, at their non-US plants, products that arecurrently manufactured at several of the Company’s domesticplants. For 2006, this loss of sales may approximate$11 million and reduce operating profit by$1.8 million. Offsetting this, however, are plans for thesegment’s operations to consolidate manufacturing lines forthese products which will improve overhead absorption and expandsales of products that directly compete with this customer. Byselling these competing products under the segment’s ownbrands and by removing one layer from the distribution channel,the segment expects to increase its selling margin for theseproducts. In addition, the Company intends to increase prices onthe products that the segment will continue to sell to thecustomer. The segment’s management is proceedingaggressively to implement these changes. Even with the changesrelated to this specific customer, the operating margin for theIndustrial/ Environmental segment is expected to continue toimprove towards the Company’s goal of a 10% annual marginfor the segment.     The Packaging segment’s sales are expected to grow in 2006as emphasis continues on increasing sales of flat sheet metaldecorating and non-promotional metal and plastic packagingproducts. Customer demand for packaging products forconfectionery products is expected to grow overall in 2006 andthere is expected to be some shift from metal to plasticpackaging. The Company intends to continue to increase customerpricing to offset higher costs of raw materials, particularlyfor metal.     Capital investments will continue to be made to improveproductivity, increase manufacturing and distribution capacity,develop new filter media and to produce new products, and fornew enterprise planning systems.     The Company continues to assess acquisition opportunities,primarily in related filtration businesses. It is expected thatthese acquisitions would expand the Company’s market base,distribution coverage or product offerings. The Company hasestablished financial standards that will continue to bevigorously applied in the review of all acquisitionopportunities and the Company believes that it has sufficientcash flow and borrowing capacity to continue this acquisitionprogram.**Forward-Looking Statements**     This 2005Form 10-K containsforward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, asamended. All statements made in this 2005Form 10-K, otherthan statements of historical fact, are forward-lookingstatements. You can identify these statements from use of thewords “may,” “should,” “could,”“potential,” “continue,” “plan,”“forecast,” “estimate,” “project,”“believe,” “intent,” “anticipate,”“expect,” “target,” “is likely,”“will,” or the negative of these terms, and similarexpressions. These statements are made pursuant
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to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. These forward-looking statementsmay 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;  •     statements relating to the Company’s business and growth    strategies; and  •     any other statements or assumptions that are not historical    facts.     The Company believes that its expectations are based onreasonable assumptions. However, these forward-lookingstatements involve known and unknown risks, uncertainties andother important factors that could cause the Company’sactual results, performance or achievements, or industryresults, to differ materially from the Company’sexpectations of future results, performance or achievementsexpressed or implied by these forward-looking statements. Inaddition, the Company’s past results of operations do notnecessarily indicate its future results. These and otheruncertainties are discussed in the “Risk Factors”section of this 2005Form 10-K. Thefuture results of the Company may fluctuate as a result of theseand other risk factors detailed from time to time in theCompany’s filings with the Securities and ExchangeCommission.     You should not place undue reliance on any forward-lookingstatements. These statements speak only as of the date of this2005 Form 10-K.Except as otherwise required by applicable laws, the Companyundertakes no obligation to publicly update or revise anyforward-looking statements or the risk factors described in this2005 Form 10-K,whether as a result of new information, future events, changedcircumstances or any other reason after the date of this 2005Form 10-K.
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