March 20, 2016 - 10:07 PM EDT
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CLARCOR INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

The information presented in this discussion should be read in conjunction with other financial information provided in the Consolidated Condensed Financial Statements and accompanying notes and with the audited Consolidated Financial Statements and accompanying notes included in the 2015 Form 10-K. Except as otherwise set forth herein, references to particular years or quarters refer to our applicable fiscal year or quarter. The analysis of operating results focuses on our three reportable business segments: Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging. On June 27, 2015, the Company completed the disposition of J.L. Clark, which was the sole operating company within the Packaging segment. The financial results presented herein for fiscal 2015 reflect the results of J.L. Clark through the date of disposition.

EXECUTIVE SUMMARY

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

                                                                 First Quarter
                                                                                  Change
                                                  2016          2015            $           %
Net sales                                      $ 316,272     $ 351,123     $ (34,851 )    (10 )%
Cost of sales                                    215,371       238,148       (22,777 )    (10 )%
Gross profit                                     100,901       112,975       (12,074 )    (11 )%
Selling and administrative expenses               68,942        73,782        (4,840 )     (7 )%
Operating profit                                  31,959        39,193        (7,234 )    (18 )%
Other income (expense)                            (1,469 )      (1,046 )        (423 )
Provision for income taxes                         9,300        11,410        (2,110 )    (18 )%
Net earnings attributable to CLARCOR           $  21,163     $  26,709     $  (5,546 )    (21 )%
Weighted average diluted shares                   49,104        50,792        (1,688 )     (3 )%
Diluted earnings per share attributable to
CLARCOR                                        $    0.43     $    0.53     $   (0.10 )    (19 )%

Percentages:

Gross margin                                        31.9 %        32.2 %                 (0.3 )   pt
Selling and administrative percentage               21.8 %        21.0 %                  0.8     pt
Operating margin                                    10.1 %        11.2 %                 (1.1 )   pt
Effective tax rate                                  30.5 %        29.9 %                  0.6     pt
Net earnings margin                                  6.7 %         7.6 %                 (0.9 )   pt



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First Quarter

Net Sales

Net sales decreased $34.9 million, or 10%, in the first quarter of 2016 from the
first quarter of 2015. Estimated components of this 10% decrease in net sales
are as follows:
Divestiture of J.L. Clark    (4 )%
Organic volume               (3 )%
Pricing                       -  %
Foreign exchange             (3 )%
                            (10 )%


The decrease in net sales in the first quarter of 2016 from the first quarter of 2015 was driven primarily by the following factors:

•      Decreased net sales of $15.7 million due to the June 2015 divestiture of
       J.L. Clark, the sole operating company within our Packaging segment, which
       the Company sold to CCI on June 27, 2015.



•      Decreased net sales volume of $3.7 million, or 2%, at our
       Industrial/Environmental Filtration segment. This net sales decrease
       resulted from a $16.1 million, or 12%, decrease in sales within the 
U.S.
,
       partially offset by a $12.4 million, or 20%, increase in foreign net
       sales, excluding the impact of changes in foreign currency exchange rates.
       The 12% decrease in sales volume within the 
U.S.
 resulted primarily from
       decreased sales of industrial air filtration products, gas turbine air
       intake filtration systems and replacement filters, and lower sales of
       natural gas filtration vessels and aftermarket elements, partly offset by
       higher sales of HVAC air filter sales and higher sales of commercial and
       military aerospace filters. The 20% increase in foreign net sales
       primarily resulted from increased sales of natural gas filtration vessels
       and increased export sales of HVAC filters.



•      Decreased net sales volume of $6.5 million, or 4%, at our Engine/Mobile
       Filtration segment. This net sales decrease resulted from a $5.2 million,
       or 5%, decrease in sales within the 
U.S.
 and a $1.3 million, or 3%,
       decrease in foreign net sales, excluding the impact of changes in foreign
       currency exchange rates. The 5% decrease in sales volume within the 
U.S.
       resulted primarily from a reduction in heavy-duty engine filter
       aftermarket sales to original equipment suppliers and dealers, primarily
       reflecting lower demand for off-highway, agricultural and construction
       applications, and lower sales of heavy-duty engine filters to other
       filtration company customers, partly offset by an increase in sales of
       heavy-duty engine filter aftermarket sales to the retail channel. The 3%
       decrease in foreign net sales volume in this segment primarily resulted
       from lower export sales of diesel fuel filter assemblies and replacement
       filters and lower sales volume in 
China
 due to lower demand from original
       equipment manufacturers, partly offset by increased sales in 
Europe
,
       
Mexico
 and 
Australia
.



•      Net sales in the first quarter of 2016 compared to the first quarter of
       2015 also reflect a $9.0 million reduction due to changes in foreign
       currency exchange rates, primarily reflecting strengthening of the 
U.S.
       dollar against the British Pound and most other foreign currencies where
       our foreign income and cash flows are derived.


Cost of Sales

Cost of sales decreased $22.8 million, or 10%, in the first quarter of 2016 from the first quarter of 2015. This 10% decrease in cost of sales was slightly lower than the 10% decrease in net sales. As a result, our gross margin decreased to 31.9% in the first quarter of 2016 from 32.2% in the first quarter of 2015. This 0.3 percentage point decrease in gross margin reflects an approximately 1.6 percentage point reduction resulting from lower fixed cost absorption due to lower sales volume, as well as unfavorable sales mix at certain of our businesses. Gross margin in the first quarter of 2016 was also adversely impacted by approximately 0.2 percentage points resulting from $0.8 million of upfront expenses incurred in the first quarter of 2016 related to cost reduction initiatives in our Industrial/Environmental Filtration segment. These unfavorable impacts were partially offset by an approximately 1.0 percentage point improvement in gross margin due to lower costs resulting from previously announced restructuring actions and other cost reduction initiatives, an approximately 0.3 percentage point improvement in gross margin resulting from the favorable mix impact from the J.L. Clark divestiture and approximately 0.2 percentage points of other net favorable impacts, including increases in the selling prices of our products.

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Selling and Administrative Expenses

Selling and administrative expenses decreased $4.8 million, or 7%, in the first quarter of 2016 from the first quarter of 2015. This decrease was primarily driven by a $2.9 million reduction in costs resulting from previously announced restructuring actions and other cost reduction initiatives, primarily reflecting reduced headcount, a $1.9 million reduction due to the divestiture of J.L. Clark and a $1.1 million reduction resulting from our ongoing cost reduction and continuous improvement initiatives. These decreases were partly offset by approximately $1.0 million of increased compensation expense related to our company-wide profit sharing plan and $0.1 million of other net increases. Since selling and administrative expenses decreased 7% while net sales decreased 10%, our selling and administrative expenses as a percentage of net sales increased to 21.8% in the first quarter of 2016 from 21.0% in last year's first quarter.

Other Items

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

• Significant Acquisitions



On January 29, 2016, the Company acquired certain assets of TDC Filter Manufacturing, Inc., for a purchase price of approximately $10.9 million. TDC is now operated as part of CLARCOR Industrial Air which is included in the Company's Industrial/Environmental Filtration segment.

• Foreign Exchange

The average exchange rates for foreign currencies versus the

U.S.
dollar unfavorably impacted our 2016 translated
U.S.
dollar value of net sales and operating profit compared to the same period in 2015 as follows: (Dollars in millions) First Quarter Net sales
                 $        (9.0 )
Operating profit (loss)            (0.9 )



• Other income (expense)



Interest expense

We recognized net interest expense in other income (expense) as follows:
(Dollars in millions)    First Quarter
2016                    $        (2.0 )
2015                             (0.9 )


Net interest expense in the first quarter of 2016 was driven by $1.6 million of interest expense related to borrowings on the Company's credit agreement, which borrowings were originally undertaken to fund a portion of the purchase price of the Company's 2014 acquisitions of the GE Air Filtration business and the Stanadyne business. At the end of the first quarter of 2016, we had $200.0 million of outstanding term loans and $198.0 million of outstanding revolver loans under the Company's credit agreement.

Foreign currency gains and (losses)

We recognized foreign currency gains (losses) in other income (expense) as
follows:
(Dollars in millions)    First Quarter
2016                    $        0.5
2015                            (0.2 )




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Foreign currency gains (losses) in the first quarter of 2016 and in the first quarter of 2015 primarily reflect the translation of inter-company loans--in cases where such loans are expected to be settled in cash at some point in the future--at certain foreign subsidiaries denominated in currencies other than their functional currencies, as well as the translation of cash accounts at certain foreign subsidiaries denominated in currencies other than their functional currencies.

Other income (expense)

There was no significant other income (expense) in the first quarter of 2016 and 2015, respectively.

• Provisions for income taxes

Our effective tax rate increased 0.6 percentage points to 30.5% in the first quarter of 2016 from 29.9% in the first quarter of 2015. Our effective tax rate in the first quarter of 2016 reflected a 1.8 percentage point unfavorable impact from domestic manufacturing deduction adjustments related to the retroactive extension of bonus depreciation partially offset by a 1.0 percentage point favorable impact related to the extension of the research and development tax credit as well as a 0.2 percentage point favorable impact on other tax items.

• Shares outstanding

Average diluted shares outstanding decreased by approximately 1.7 million shares in the first quarter of 2016 from the first quarter of 2015, due primarily to our repurchases of common stock, partially offset by incremental dilutive shares related to stock option exercises and the issuance of stock options.



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SEGMENT ANALYSIS
                                                     First Quarter
                                                      %                      %
(Dollars in thousands)                   2016       Total       2015       Total
Net sales:
Engine/Mobile Filtration              $ 134,554       43 %   $ 144,458       41 %
Industrial/Environmental Filtration     181,718       57 %     190,916       54 %
Packaging1                                    -        - %      15,749        5 %
                                      $ 316,272      100 %   $ 351,123      100 %

Gross profit:
Engine/Mobile Filtration              $  43,556       43 %   $  50,400       45 %
Industrial/Environmental Filtration      57,345       57 %      60,248       53 %
Packaging1                                    -        - %       2,327        2 %
                                      $ 100,901      100 %   $ 112,975      100 %

Operating profit:
Engine/Mobile Filtration              $  19,067       60 %   $  24,746       63 %
Industrial/Environmental Filtration      12,892       40 %      14,008       36 %
Packaging1                                    -        - %         439        1 %
                                      $  31,959      100 %   $  39,193      100 %

Gross margin:
Engine/Mobile Filtration                   32.4 %                 34.9 %
Industrial/Environmental Filtration        31.6 %                 31.6 %
Packaging1                                    - %                 14.8 %
                                           31.9 %                 32.2 %

Operating margin:
Engine/Mobile Filtration                   14.2 %                 17.1 %
Industrial/Environmental Filtration         7.1 %                  7.3 %
Packaging1                                    - %                  2.8 %
                                           10.1 %                 11.2 %


1 - On June 27, 2015, the Company completed the disposition of J.L. Clark, which was the sole operating company within the Packaging segment. Refer to the Packaging Segment portion of this management discussion and analysis of financial condition and results of operations for further information.


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Engine/Mobile Filtration Segment

                                                        First Quarter
                                                                        Change
(Dollars in thousands)                     2016         2015          $          %
Net sales                               $ 134,554    $ 144,458    $ (9,904 )    (7 )%
Cost of sales                              90,998       94,058      (3,060 )    (3 )%
Gross profit                               43,556       50,400      (6,844 )   (14 )%

Selling and administrative expenses 24,489 25,654 (1,165 ) (5 )% Operating profit

                           19,067       24,746      (5,679 )   (23 )%

Gross margin                              32.4%        34.9%                   (2.5)  pt
Selling and administrative percentage     18.2%        17.8%                    0.4   pt
Operating margin                          14.2%        17.1%                   (2.9)  pt



Our Engine/Mobile Filtration segment primarily sells original equipment and aftermarket filters for heavy-duty trucks and off-highway vehicles, locomotives and automobiles. The largest market included in this segment includes heavy-duty engine filters produced at our Baldwin and CLARCOR Engine Mobile Solutions business units.

Net Sales

The change in net sales for our Engine/Mobile Filtration segment in the first
quarter of 2016 from the first quarter of 2015 is detailed in the following
tables:
                    First Quarter

Organic volume          (4 )%
Pricing                  -  %
Foreign exchange        (3 )%
                        (7 )%



(Dollars in millions)                   First Quarter
2015                                   $       144.5

U.S. net sales                                  (5.2 )
Foreign net sales (including export)            (1.3 )
Foreign exchange                                (3.4 )
Net change                                      (9.9 )

2016                                   $       134.6





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The net change in

U.S.
net sales for our Engine/Mobile Filtration segment in the first quarter of 2016 from the first quarter of 2015 is detailed as follows:
(Dollars in millions)                                                    First Quarter

Heavy-duty engine filtration aftermarket -- other filtration companies

                                                               $        (3.7 )

Heavy-duty engine diesel fuel filter assemblies and replacement filters

                                                                          (1.4 )

Heavy-duty engine filtration aftermarket -- original equipment supply channel

                                                                          (1.0 )
Light-duty (automotive) engine filtration aftermarket                            (0.9 )
Heavy-duty engine filtration aftermarket -- independent distributors             (0.2 )
Heavy-duty engine filtration aftermarket -- retail channel                        2.8
Other                                                                            (0.8 )
Change in U.S. net sales                                                $        (5.2 )


Our

U.S.
net sales decreased 5% in the first quarter of 2016 compared with the first quarter of 2015. The decrease in sales of $5.2 million was primarily the result of a $3.7 million, or 34%, reduction in heavy-duty engine filtration aftermarket sales to other filtration companies as the result of what we believe to be broader macroeconomic dynamics impacting many industrial companies, generally, and filtration companies, in particular. In addition, this decrease resulted from a $1.4 million, or 10%, reduction in sales of original equipment and replacement fuel filtration products for heavy-duty diesel engines used in off-road, agricultural and construction applications, a $1.0 million, or 13%, decline in sales of heavy-duty engine filter aftermarket sales to other original equipment suppliers and dealers and a $0.2 million, or 1%, decline in heavy-duty engine filter aftermarket sales to
U.S.
independent distributors, primarily reflecting lower demand for off-highway, agricultural and oil and gas trucking applications. We also experienced a decline of approximately $0.9 million, or 18%, in sales of light-duty engine filtration aftermarket products in the first quarter of 2016 compared to 2015, principally driven by lower demand for automotive applications. These decreases were partially offset by approximately $2.8 million of increased sales to a significant customer with whom we previously contracted to supply a full line of private-branded heavy-duty engine filtration aftermarket products through this customer's national retail network.

The net decrease in foreign net sales (including export sales and adjusted for changes in foreign currencies) for our Engine/Mobile Filtration segment in the first quarter of 2016 from the first quarter of 2015 is detailed as follows:

(Dollars in millions)                                                   First Quarter

Export sales of heavy-duty engine diesel fuel filter assemblies and replacement filters

                                                    $        (3.5 )
Heavy-duty engine filter sales in China                                         (0.4 )
Heavy-duty engine filter sales in Europe                                         0.7
Export sales primarily to the 
Middle East
, 
Southeast Asia
 and Latin
America                                                                          1.5
All other, net                                                                   0.4
Change in foreign net sales                                            $        (1.3 )


Our foreign net sales decreased 3% in the first quarter of 2016 compared with the first quarter of 2015, adjusted for changes in foreign currencies. This decrease principally resulted from a $3.5 million, or 32% decrease in export sales of diesel fuel filter assemblies and replacement filters by the Stanadyne Business (now operated as CLARCOR Engine Mobile Solutions), reflecting lower demand for off-highway, agricultural and construction applications in various export markets and a $0.4 million, or 8%, decrease in heavy-duty engine filter sales in

China
in the first quarter of 2016 compared to 2015, primarily due to continued slowing macroeconomic activity in
China
and lower end-market diesel engine sales. These effects were partly offset by an increase of $0.7 million, or approximately 8%, in heavy-duty engine filtration sales in
Europe
and an increase of $1.5 million, or 16%, in export sales of heavy-duty engine filters to various international markets.

Cost of Sales

Cost of sales decreased $3.1 million, or 3%, in the first quarter of 2016 from the first quarter of 2015. This decrease was less than the 7% decrease in net sales. As a result, our gross margin decreased to 32.4% in the first quarter of 2016 from 34.9% in the first quarter of 2015. This 2.5 percentage point decrease in gross margin primarily reflects a 3.0 percentage point decrease in gross

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margin resulting from lower fixed cost absorption due to lower sales levels, as well as an unfavorable changes in sales mix. Those impacts were partly offset by a 0.8 percentage point favorable impact due to cost reductions resulting from the Company's previously announced restructuring actions and other cost reduction initiatives.

Selling and Administrative Expenses

Selling and administrative expenses decreased $1.2 million, or 5%, in the first quarter of 2016 from the first quarter of 2015. This decrease was primarily the result of $1.5 million of cost reductions resulting from previously announced cost reduction initiatives, including headcount reductions, as well as reductions in travel, professional services and other costs through company-wide cost reduction initiatives. These decreases were partially offset by $0.3 million of increased bad debt expense as well as higher allocated corporate costs, including costs related to strategic growth initiatives including information technology and research and development capabilities. With selling and administrative expenses in this segment decreasing 5% while segment net sales decreased 7%, our selling and administrative expenses as a percentage of net sales increased to 18.2% in the first quarter of 2016 from 17.8% in the first quarter of 2015.

Industrial/Environmental Filtration Segment

                                                        First Quarter
                                                                        Change
(Dollars in thousands)                     2016         2015          $          %
Net sales                               $ 181,718    $ 190,916    $ (9,198 )    (5 )%
Cost of sales                             124,373      130,668      (6,295 )    (5 )%
Gross profit                               57,345       60,248      (2,903 )    (5 )%

Selling and administrative expenses 44,453 46,240 (1,787 ) (4 )% Operating profit

                           12,892       14,008      (1,116 )    (8 )%

Gross margin                              31.6%        31.6%                     -    pt
Selling and administrative percentage     24.5%        24.2%                    0.3   pt
Operating margin                           7.1%         7.3%                   (0.2)  pt



Our Industrial/Environmental Filtration segment sells a variety of filtration products to various end-markets. Included in these markets are HVAC filters, natural gas filtration vessels and aftermarket filters, aviation fuel filters and filter systems, filtration systems and replacement filters for gas turbine air intake applications, industrial air filters, and other markets including oil drilling, aerospace, fibers and resins and dust collector systems.

Net Sales

The changes in net sales for our Industrial/Environmental Filtration segment in
the first quarter of 2016 from the first quarter of 2015 are detailed in the
following tables:
                    First Quarter
Organic volume          (2 )%
Pricing                  -  %
Foreign exchange        (3 )%
                        (5 )%




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(Dollars in millions)                   First Quarter
2015                                   $       190.9

U.S. net sales                                 (16.1 )
Foreign net sales (including export)            12.4
Foreign exchange                                (5.5 )
Net change                                      (9.2 )

2016                                   $       181.7


The net decrease in

U.S.
net sales for our Industrial/Environmental Filtration segment in the first quarter of 2016 from the first quarter of 2015 is detailed as follows:
(Dollars in millions)                                           First Quarter

Dust collection and other industrial air filtration products $ (6.7 ) Gas turbine first-fit filters and systems

                               (6.3 )
Natural gas filtration vessels and aftermarket elements                 (6.1 )
Aerospace filtration products                                            3.4
All other, net                                                          (0.4 )
Change in U.S. net sales                                       $       (16.1 )



•      Lower sales of dust collection and other industrial air filtration
       products in the first quarter of 2016 from the comparable period in 2015
       were due to decreased sales of panel, cartridge, bag and other industrial
       air replacement filters.



•      Lower sales of gas turbine air intake filtration systems at CLARCOR
       Industrial Air in the first quarter of 2016 from the first quarter of 2015
       was driven primarily by the timing of large system sales.



•      Lower sales in the natural gas market in the first quarter of 2016 from
       the first quarter of 2015 was driven primarily by a decline in natural gas
       filtration vessel sales, resulting from decreased activity in extraction,
       transportation and processing of natural gas and natural gas liquids.



•      Higher sales of commercial and military aerospace filtration products in
       the first quarter of 2016 from the comparable period in 2015 resulted from
       a large increase in aftermarket demand from distributors and increased
       governmental spending.


The net changes in foreign net sales (including export sales and excluding the impact of changes in foreign currency exchange rates) for the Industrial/Environmental Filtration segment in the first quarter of 2016 from the first quarter of 2015 are detailed as follows: (Dollars in millions)

                        First Quarter

Gas turbine first-fit filters and systems $ 9.9 Export sales of HVAC filters

                          4.0
Oil and gas sand control filtration                  (2.1 )
All other, net                                        0.6
Increase in foreign net sales               $        12.4



•      Higher sales of gas turbine air intake filtration systems by CLARCOR
       Industrial Air in the first quarter of 2016 from the first quarter of 2015
       was driven primarily by the timing of large system sales.



•      Higher export sales of HVAC filters primarily reflect increased sales of
       air filtration products for animal husbandry applications to certain
       customers in the 
Middle East
.



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•      Lower sales of sand control filters in first quarter of 2016 from the
       first quarter of 2015 was driven by lower demand from oil and gas
       customers, which we believe reflects lower oil and gas exploration and
       production activity resulting primarily from continued depressed prices of
       oil.



Cost of Sales

Cost of sales decreased $6.3 million, or 5%, in the first quarter of 2016 from the first quarter of 2015. This decrease was equal to the 5% increase in net sales. As a result, our gross margin remained unchanged at 31.6% in the first quarter of 2016 from 31.6% in the first quarter of 2015. Gross margin in this reporting segment benefited in the first quarter of 2016 by 0.9 percentage points due to favorable changes in sales mix across various businesses as well as benefits from cost saving initiatives in 2016. This was offset by a 0.4 percentage point reduction in gross margin resulting from approximately $0.8 million of upfront expenses for cost reduction initiatives incurred in the first quarter of 2016, a 0.4 percentage point reduction in gross margin resulting from $0.7 million of increased expense related to inventory reserves and a 0.1 percentage point reduction in gross margin resulting from other net changes in cost of sales. The $0.8 million of upfront expenses for cost reduction initiatives noted above were primarily related to severance and other employee termination payments pursuant to a reduction-in-force in our natural gas business in

Europe
and lease termination payments related to our exit of a smaller natural gas capital vessel manufacturing facility in
Australia
.

Selling and Administrative Expenses

Selling and administrative expenses decreased $1.8 million, or 4%, in the first quarter of 2016 from the first quarter of 2015. This decrease was primarily the result of $1.8 million of lower employee costs resulting primarily from previously announced cost reduction initiatives and $1.2 million of other lower costs, including reductions in discretionary spending such as travel. These decreases were partially offset by a $1.2 million increase related to strategic growth initiatives, including costs for research and development and information technology activities. With selling and administrative expenses decreasing 4% while our net sales decreased 5%, our selling and administrative expenses as a percentage of net sales increased to 24.5% in the first quarter of 2016 from 24.2% in last year's first quarter.

Packaging Segment

                                                      First Quarter
                                                                    Change
(Dollars in thousands)                   2016      2015           $           %
Net sales                               $   -    $ 15,749    $ (15,749 )   (100 )%
Cost of sales                               -      13,422      (13,422 )   (100 )%
Gross profit                                -       2,327       (2,327 )   (100 )%

Selling and administrative expenses - 1,888 (1,888 ) (100 )% Operating profit

                            -         439         (439 )   (100 )%

Gross margin                              -%       14.8%                   (14.8)  pt
Selling and administrative percentage     -%       12.0%                   (12.0)  pt
Operating margin                          -%       2.8%                     (2.8)  pt



Prior to June 27, 2015, our Packaging segment manufactured and marketed consumer and industrial packaging products. As is discussed in Note 3 to the Consolidated Condensed Financial Statements, on June 27, 2015, the Company sold 100% of the outstanding shares of J.L. Clark to CCI. J.L. Clark was the sole operating company within the Packaging Segment. As a result of the sale, the Company has exited the packaging business, consistent with our strategic focus on being a leading global provider of filtration products, systems and services. The financial results presented above for the Packaging segment reflect the results of the J.L. Clark business, including its pro-rata share of allocated corporate administrative costs, through June 27, 2015, the date of closing of the disposition.



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FINANCIAL CONDITION

Liquidity and Capital Resources

We believe that our operations will continue to generate cash and that sufficient cash, cash equivalents and borrowings under our credit agreement, including our five-year revolving credit facility ("Credit Facility"), will be available to fund operating needs, pay dividends, invest in the development of new products and filter media, fund planned capital expenditures, including the expansion of facilities, provide for interest and principal payments related to debt agreements, fund pension contributions and fund potential repurchases of our common stock. We completed two acquisitions in December 2013, the acquisitions of the GE Air Filtration business and the Bekaert Advanced Filtration business, we acquired Stanadyne Corporation's diesel fuel filtration business in May 2014, we acquired Filter Resources in December 2014, and we acquired certain assets of TDC in January 2016, and we intend to continue to assess acquisition opportunities in related filtration businesses. Any such acquisitions could affect operating cash flows and require changes in our debt and capitalization. In addition, capital market disruptions may affect the cost or availability of future borrowings.

We had cash, cash equivalents and restricted cash of $104.6 million at the end of the first quarter of 2016. Approximately $99.5 million of this cash was held at entities outside the

U.S.
Although we plan to use this cash at our non-
U.S.
entities, if we repatriated this cash to the
U.S.
, we could incur significant tax expense since most of this cash is considered permanently invested for
U.S.
tax purposes. Cash and cash equivalents are held by financial institutions throughout the world. We regularly review the credit worthiness of these institutions and believe our funds are not at significant risk.

Our current ratio of 3.4 at the end of the first quarter of 2016 increased from 3.3 at year-end 2015. This increase reflects an $11.7 million decrease in other current liabilities, due primarily to a $4.9 million decrease in accrued employer matching contributions related to employee 401(k) contributions, which are funded by the Company annually, a $1.8 million decrease in accrued taxes and a $1.2 million decrease in accrued rebates payable as well as a $3.7 million decrease in accrued salaries, wages and commissions, due primarily to the annual payment of awards earned under our company-wide profit sharing program in the first quarter of the year. These effects were partially offset by a $20.5 million reduction in accounts receivable, partly due to seasonal trends in sales in the first quarter.

On April 5, 2012, we entered into a five-year multicurrency revolving credit facility agreement with a group of financial institutions, under which the Company could borrow up to $150.0 million under a selection of currencies and rate formulas. In November 2013, we entered into a credit facility agreement amendment to add a $100.0 million term loan facility to the revolving credit facility agreement, and in May 2014, we entered into another credit agreement amendment to increase the size of the term loan facility to $315.0 million. On November 2, 2015, we amended and restated the credit agreement, under which the Company may borrow up to $700.0 million under senior credit facilities comprised of a $500.0 million revolving credit facility (the "Revolving Credit Facility") and $200.0 million of term loans (the "Term Loans" and together with the Revolving Credit Facility the "Credit Facility"). The Revolving Credit Facility includes a $50.0 million swing-line sub-facility and a $50.0 million letter of credit sublimit, as well as an accordion feature that allows the Company to increase the Revolving Credit Facility by a total of up to $100.0 million, subject to securing additional commitments from existing lenders or new lending institutions and other customary terms and conditions. We believe the financial institutions that are party to this agreement have adequate capital resources and will be able to fund future borrowings under the Credit Facility. At our election, borrowings under the Revolving Credit Facility and Term Loans bear interest at either a defined base rate, or LIBOR plus an applicable margin determined with reference to the Company's consolidated leverage ratio. Swing line borrowings bear interest at the defined base rate plus an applicable margin. Commitment fees and letter of credit fees are also payable under the Revolving Credit Facility. Borrowings under the Credit Facility are unsecured, but are guaranteed by substantially all of the Company's material domestic subsidiaries. The amended and restated credit agreement also contains certain covenants customary for such agreements, including covenants that place limits on our ability to incur additional debt, require us to maintain minimum levels of interest coverage, and restrict certain changes in ownership, as well as customary events of default. The principal balance outstanding under the Revolving Credit Facility is payable in full at maturity on November 1, 2020. Principal is payable in respect of the Term Loans in quarterly installments based on specified percentages of the initial principal amount of the Term Loans, and the entire outstanding principal balance on the Term Loans is payable in full at maturity on November 1, 2020.

At the end of the first quarter of 2016, we had $200.0 million of outstanding Term Loans and we had $198.0 million outstanding on the Revolving Credit Facility, each with a weighted average interest rate including margin of approximately 1.68%. At February 27, 2016, we also had approximately $7.4 million outstanding on a $50.0 million letter of credit sub-facility. Accordingly, we had $294.6 million available for further borrowing at the end of the first quarter of 2016.


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Total long-term debt of $406.1 million at the end of the first quarter of 2016 included $200.0 million of Term Loans, $198.0 million outstanding on the Revolving Credit Facility, $7.4 million outstanding on an industrial revenue bond and $0.7 million of other long-term debt. At the end of the first quarter of 2016, we were in compliance with all financial covenant requirements of the Credit Facility. The ratio of total debt to total capitalization (defined as long-term debt plus total shareholders' equity) was 27.3% at the end of the first quarter of 2016 compared to 26.7% at year-end 2015, with the increase attributable to lower total shareholders' equity in the first quarter of 2016 versus year-end 2015.

We had 48.5 million shares of common stock outstanding at the end of the first quarter of 2016 and had 49.1 million shares outstanding at year-end 2015. Share of common stock outstanding decreased 0.6 million as shares issued pursuant to stock incentive plans in the first three months of 2016 was more than offset by the repurchase of 0.7 million shares during the same period. Shareholders' equity decreased to $1,082.4 million at the end of the first quarter of 2016 from $1,110.5 million at year-end 2015. This $28.1 million decrease resulted mainly from our repurchase of common stock of $31.0 million, dividend payments of $10.8 million and currency translation adjustments of $11.9 million, partially offset by additional net earnings of $21.2 million and items related to stock compensation and option activity pursuant to incentive plans of $4.0 million.

Cash Flow

Net cash provided by operating activities increased $42.4 million to $61.0 million in the first three months of 2016 from $18.6 million in the first three months of 2015. This increase was primarily due to the net effect on cash of changes in assets and liabilities, net of business acquisitions, which improved to a $22.9 million source of cash in the first quarter of 2016 from a $24.8 million use of cash in the first quarter of 2015, driven primarily by company-wide efforts to improve working capital efficiency.

Net cash used in investing activities decreased $22.4 million in the first three months of 2016 from the first three months of 2015 primarily due to a $10.0 million decrease in payments related to business acquisitions as $20.9 million of net cash was paid in the first quarter of 2015 for the acquisition of Filter Resources in comparison to $10.9 million of net cash payments related to the TDC acquisition in the first quarter of 2016. In addition, capital expenditures were $12.5 million lower in the first quarter of 2016 in comparison to the first quarter of 2015.

Net cash used in financing activities increased $53.2 million in the first three months of 2016 from the first three months of 2015 primarily as the result of an increase of $23.1 million in payments for the repurchase of common stock in the first quarter of 2016 in comparison to the prior year period. In addition, in the first quarter of 2016 the Company had net borrowings under the Credit Facility of $1.0 million, in comparison to net borrowings of $28.0 million in the first quarter of 2015.

We intend to continue to assess repurchases of our common stock. In June 2013, our Board of Directors authorized a $250.0 million stock repurchase program of our common stock in the open market and through private transactions over a three-year period. During the first three months of 2016, we repurchased and retired 0.7 million shares of our common stock for $31.0 million at an approximate average price of $46.31. At the end of the first quarter of 2016, there was approximately $106.7 million available for repurchase under the current authorization. Future repurchases of our common stock may be made after considering cash flow requirements for internal growth, debt repayments, capital expenditures, acquisitions, interest rates and the market price of our common stock.

At the end of the first quarter of 2016, our gross liability for uncertain income tax provisions was $4.0 million including interest and penalties. Due to the high degree of uncertainty regarding the timing of potential future cash outflows associated with these liabilities, we were unable to make a reasonably reliable estimate of the amount and period in which these remaining liabilities might be paid.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements relate to various operating leases as discussed in Note K to the Consolidated Financial Statements in our 2015 Form 10-K. We had no variable interest entity or special purpose entity agreements during the first three months of 2016 or 2015.

OTHER MATTERS

Critical Accounting Policies

Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in our 2015 Form 10-K in Management's Discussion and Analysis of Financial Condition and Results of Operations. As is discussed in Note 10 to

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this First Quarter 2016 Form 10-Q, the Company elected to change its estimate in the determination of discount rate assumptions used to determine net periodic benefit costs effective for fiscal year 2016 for each of its plans, changing from the single equivalent rate approach to the spot rate approach. There have been no other material changes in our critical accounting policies set forth in our 2015 Form 10-K. These policies have been consistently applied in all material respects. While the estimates and judgments associated with the application of these policies may be affected by different assumptions or conditions, we believe the estimates and judgments associated with the reported amounts are appropriate in the circumstances.

Environmental Matters and Climate Change and Energy Legislation and Regulation

Our operations are subject to

U.S.
and non-
U.S.
environmental laws and regulations governing emissions to air; discharges to water; the generation, handling, storage, transportation, treatment and disposal of waste materials; and the cleanup of contaminated properties. Currently, we believe that any potential environmental liabilities with respect to known environmental matters involving our former or existing operations are not material, but there is no assurance that we will not be adversely impacted by such liabilities, costs or claims in the future, either under present laws and regulations or those that may be adopted or imposed in the future.

Foreign, federal, state and local regulatory and legislative bodies have proposed various legislative and regulatory measures relating to climate change, regulating greenhouse gas emissions and energy policies. Due to the uncertainty in the regulatory and legislative processes, as well as the scope of such requirements and initiatives, we cannot currently determine the effect such legislation and regulation may have on our operations.

The potential physical impacts of climate change on our operations are also highly uncertain and would vary depending on type of physical impact and geographic location. Climate change physical impacts could include changing temperatures, water shortages, changes in weather and rainfall patterns, and changing storm patterns and intensities. The occurrence of one or more natural disasters, whether due to climate change or naturally occurring, such as tornadoes, hurricanes, earthquakes and other forms of severe weather in the

U.S.
or in a country in which we operate or in which our suppliers or customers are located could adversely impact our operations and financial performance. Such events could result in:
•      physical damage to and complete or partial closure of one or more of our
       manufacturing facilities


•      temporary or long-term disruption in the supply of raw materials from our
       suppliers

• disruption in the transport of our products to customers and end users

• delay in the delivery of our products to our customers

Recent Relevant Accounting Pronouncements

A discussion of recent relevant accounting pronouncements is included in Note 1 to the Consolidated Condensed Financial Statements.

Forward-Looking Information is Subject to Risk and Uncertainty

This First Quarter 2016 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 anticipated future growth,
       earnings, earnings per share, future cash flows and other financial
       performance measures;

• statements regarding management's short-term and long-term performance goals;

•      statements regarding anticipated order patterns and demand for products
       from our customers and our backlog or the anticipated economic conditions
       of the industries and markets that we serve;


•      statements related to the performance of the 
U.S.
, 
China
, 
Europe
 and other
       economies generally;


•      statements relating to the anticipated effects on results of operations or
       financial condition from recent and expected developments or events,
       including the acquisitions of TDC, Filter Resources, the Stanadyne
       business, the GE Air Filtration business and the Bekaert business and
       potential future acquisition opportunities;


•      statements regarding our current cost structure positions and ability to
       capitalize on anticipated development and growth initiatives, including
       the expansion of facilities and other planned capital expenditures;



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•      statements relating to our research and development activities, including
       the development of new products and filter media;

• statements related to future dividends or repurchases of our common stock;

• statements related to tax positions and unrecognized tax benefits;

•      statements related to our cash resources and borrowing capacity under the
       Credit Facility;

• statements related to cost savings or restructuring initiatives;

•      statements regarding anticipated contributions and other payments pursuant
       to our pension plans and for other post-retirement benefits;

• statements related to potential liability for environmental matters;

• statements related to pending claims or litigation;

•      statements relating to the availability of raw materials and other
       supplies; 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. The Company's past results of operations do not necessarily indicate its future results. The Company's future results may differ materially from the Company's past results due to various risks and uncertainties, including, but not limited to, risks associated with: global and national macroeconomic pressures, trends with respect to the health of the markets we serve, including with respect to challenging market conditions in various markets in the Engine/Mobile Filtration segment and the Industrial/Environmental Filtration segment, our ability to execute upon long-term strategic growth initiatives, our ability to execute upon restructuring and other cost reduction opportunities throughout the Company, customer concentration issues in certain geographic locations and in respect of certain of our businesses, our ability to integrate the businesses we have acquired, currency fluctuations, particularly increases or decreases in the

U.S.
dollar against other currencies, commodity price increases and/or limited availability of raw materials and component products, including steel, compliance costs associated with environmental laws and regulations, political factors, our international operations, highly competitive markets, governmental laws and regulations, potential information systems interruptions and intrusions, potential global events resulting in instability and unpredictability in the world's markets, including financial bailouts of sovereign nations, political changes, military and terrorist activities, health outbreaks and other factors, changes in accounting standards or adoption of new accounting standards, adverse effects of natural disasters, legal challenges with respect to intellectual property, product liability exposure, changes in tax rates or exposure to additional income tax liabilities, potential labor disruptions, other risks discussed in the "Risk Factors" section of our 2015 Form 10-K and other risks 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 First Quarter 2016 Form 10-Q. Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking or other statements included in this First Quarter 2016 Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Source: Equities.com News (March 20, 2016 - 10:07 PM EDT)

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