Norm Johnson, CLARCOR’s chairman and chief executive officer, said, “As we had expected, this year’s second quarter was difficult, though operating results were much stronger than in our first fiscal quarter. Operating margins in the second quarter of 2009 were 11% compared to 6.4% in the first quarter of 2009. In general, replacement aftermarket filter sales were significantly better than were sales of filters and filter systems that are permanent and not periodically replaced. Fortunately, over 80% of our filter sales are to the replacement market. Order rates overall improved during the quarter, and we expect that third quarter sales and operating profit this year will be sequentially better than the second quarter and that the fourth quarter will be better than the third quarter.”

“Based upon the second quarter results, we have revised our earnings guidance for 2009. We now expect diluted earnings per share to be in the range of $1.40 to $1.60. Though not another record year, 2009 will still be another solidly profitable year for CLARCOR. We expect that sales in the last half of 2009 will increase by 13% to 15% and operating profit by 50% to 60% compared to the first six months of 2009. More importantly, we have increased investments in new products, improved manufacturing efficiencies in our plants and have expanded our sales and customer service programs. We believe that these efforts lay the groundwork for significant improvement in 2010 and 2011.”

“Because we operate in so many different markets, it is usually the case that some markets are stronger than others. Though slow at the start of the quarter, sales of HVAC filters were significantly better by the end of the second quarter. Compared to last year’s second quarter, natural gas and aviation fuel filter sales declined slightly in this year’s second quarter. Sales were slow for filters sold to the over-the-road trucking, railroad, aerospace and oil drilling markets compared to last year’s second quarter. Sales of replacement maintenance filters to the automobile industry and sales of dust collector systems were weak as we had expected.”

“Our order rates, overall, have stabilized, and we are beginning to see indications of increased product demand in selected markets. As I noted above, we focus on the replacement filter aftermarket where over 80% of our filter sales are generated. Even if companies decide not to buy new transportation or production equipment or build new production facilities, maintenance of equipment and facilities they already own continues, and that is the primary market we serve.”

“We completed several acquisitions in China in the second quarter, including acquiring the remaining 20% of our Baldwin-Weifang engine filter company and purchasing another engine filter manufacturer. These acquisitions will have a very small sales impact on our results for 2009, but provide greater capacity for heavy-duty engine filter manufacturing in Asia. We also acquired a manufacturer of metal mesh filters for the plastic resins and fibers markets that we believe lays the groundwork for a significant presence in this market throughout Asia in future years. We are also significantly expanding our technical facilities in China for product development and testing.”

Financial Matters

Other income included net interest expense of about $500,000 and a currency gain of $600,000 in the 2009 quarter compared to net interest income of about $400,000 and a currency loss of $100,000 in the comparable 2008 quarter. The company’s tax rate was about 32.3% for the quarter. The company expects the rate to be about 34.0% for the next two quarters.

Foreign currency fluctuations reduced sales and operating profit by about $12 million and $2 million, respectively, for the quarter.

Capital expenditures were $11 million for the six-month period just ended compared to $17 million in the 2008 six-month period. The company expects capital spending will be about $15 million to $20 million during the second half of 2009.

Cash flow continues to be strong. Cash flow from operations, excluding changes in the company’s short-term investments, was $53 million in the 2009 six-month period compared to $56 million in the comparable period last year. The company did not repurchase any of the company’s common stock in the second quarter. Approximately $187 million remains outstanding under the company’s current share repurchase authorization.

The company expects free cash flow to remain strong for the remainder of 2009. Our balance sheet is very strong, and the company has available borrowing capacity under the company’s current credit facility. Barring more acquisitions or share repurchases later this year, the company expects to continue to repay outstanding borrowings and expect to be largely debt-free, net of the company’s available cash, by the end of 2009.

In the second quarter of 2009, the company recorded about a $300,000 reduction in interest expense due to a mark-to-market adjustment in the company’s interest rate swap which expires in early 2010. In the second quarter of 2008, the company had recorded a $1.1 million reduction in interest expense related to the swap. If interest rates remain unchanged, the company estimates that the company will record a further reduction of $900,000 in the third quarter and a $1.2 million reduction in the fourth quarter of 2009 in interest expense as the swap unwinds.

Our principal raw material costs were much lower in the second quarter of 2009 than they were in the same quarter in 2008 particularly for most grades of steel, but also for filter media, packaging materials, aluminum, specialty metals, gaskets and resins. The company is beginning to see signs of increasing costs for certain raw materials, though not for steel which is the company’s purchased commodity.

The company has implemented many cost reduction programs throughout CLARCOR, including headcount reductions, wage freezes, consolidation of manufacturing plants and controls over discretionary spending. As cost controls take hold, the company expects to see an increasing drop in discretionary spending as 2009 unfolds compared to 2008. Selling and administrative costs declined by 3% in the first fiscal quarter of 2009 compared to 2008 and by 8% in the second quarter of 2009 compared to the prior year’s second quarter.

Based on the company’s first half results and current backlog, we expect the company’s 2009 full-year sales to decline by about 10% to 12% from 2008, but that second-half sales will decline by 7% to 9% compared to the second half of 2008. Although the company will not record the company’s 17th consecutive year of record sales and earnings in 2009, the company expects 2009 will still be the company’s fourth most profitable year in a company with a 105-year history. The company believes it has many opportunities to grow in 2010 and 2011. In 2010, the company expects the over-the-road trucking and railroad markets to recover, the company’s CLC Air operation to reach an 8% operating margin on higher sales and the company’s natural gas filtration business to have another good year. The company expects to see a recovery in most other markets, particularly in oil drilling, aerospace and fibers, and growth for the company’s packaging operations.