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

EXECUTIVE SUMMARY

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

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

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

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

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

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

SALES

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

Engine/Mobile Filtration

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

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

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

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

Industrial/Environmental Filtration

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

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

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

· Heating, ventilating and air conditioning ("HVAC")

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

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

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

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

· Natural gas original equipment vessels and replacement filters

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

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

· Aviation fuel filters and filter systems

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

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

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

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

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

Packaging

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

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

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

OPERATING PROFIT

                              Operating Profit and Margin by Segment (Dollars in Thousands)
                                        Third Quarter Ended                                Nine Months Ended
                            August 29,       August 30,                       August 29,       August 30,
                               2009             2008           Change            2009             2008           Change
Engine/Mobile Filtration   $     21,904     $     28,669           -23.6 %   $     53,662     $     75,461           -28.9 %
Industrial/Environmental
Filtration                        7,944           10,404           -23.6 %         14,471           26,133           -44.6 %
Packaging                         2,232            1,747            27.8 %          2,864            4,423           -35.2 %
CLARCOR                    $     32,080     $     40,820           -21.4 %   $     70,997     $    106,017           -33.0 %

Engine/Mobile Filtration           22.7 %           24.3 %     -1.6 pts.             19.6 %           22.8 %     -3.2 pts.
Industrial/Environmental
Filtration                          6.9 %            7.5 %     -0.6 pts.              4.2 %            6.5 %     -2.3 pts.
Packaging                          11.6 %            8.8 %      2.8 pts.              5.6 %            7.7 %     -2.1 pts.
CLARCOR                            13.9 %           14.8 %     -0.9 pts.             10.5 %           13.4 %     -2.9 pts.

Engine/Mobile Filtration

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

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

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

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

Industrial/Environmental Filtration

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

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

· Heating, ventilating and air conditioning ("HVAC")

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

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

· Natural gas original equipment vessels and replacement filters

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

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

· Aviation fuel filters and filter systems

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

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

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

Each of these markets has been negatively impacted by the global . . .