UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) | |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 2008 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
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Commission file number 1-12557 |
CASCADE CORPORATION
(Exact name of registrant as specified in its charter)
Oregon | 93-0136592 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
2201 N.E. 201st Ave. Fairview, Oregon 97024-9718
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 503-669-6300
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.50 per share
Name of exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No ý
The aggregate market value of common stock held by non-affiliates of the registrant as of July 31, 2007 was $699,465,694, based on the closing sale price of the common stock on the New York Stock Exchange on that date.
The number of shares outstanding of the registrant's common stock as of March 17, 2008 was 10,822,064.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be filed within 120 days after the registrant's fiscal year end of January 31, 2008, to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held June 3, 2008 are incorporated by reference into Part III.
PART I | 4 | ||||
Item 1. | Business | 4 | |||
General | 4 | ||||
Products | 4 | ||||
Markets | 4 | ||||
Competition | 5 | ||||
Customers | 6 | ||||
Backlog | 6 | ||||
Research and Development | 6 | ||||
Environmental Matters | 6 | ||||
Employees | 6 | ||||
Construction Attachments | 6 | ||||
Foreign Operations | 7 | ||||
Available Information | 7 | ||||
Item 1A. | Risk Factors | 7 | |||
Item 1B. | Unresolved Staff Comments | 11 | |||
Item 2. | Properties | 12 | |||
Item 3. | Legal Proceedings | 12 | |||
Item 4. | Submission of Matters to a Vote of Security Holders | 13 | |||
Officers of the Registrant | 13 | ||||
PART II | 14 | ||||
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 14 | |||
Item 6. | Selected Financial Data | 17 | |||
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 18 | |||
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 36 | |||
Item 8. | Financial Statements and Supplementary Data | 37 | |||
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 73 | |||
Item 9A. | Controls and Procedures | 73 | |||
Item 9B. | Other Information | 73 | |||
PART III | 74 | ||||
Item 10. | Directors, Executive Officers and Corporate Governance | 74 | |||
Item 11. | Executive Compensation | 74 | |||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 74 | |||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 75 | |||
Item 14. | Principal Accounting Fees and Services | 75 | |||
PART IV | 76 | ||||
Item 15. | Exhibits and Financial Statement Schedules | 76 | |||
SIGNATURES | 78 |
NOTE: All references to fiscal years are defined as year ended January 31, 2008 (fiscal 2008), year ended January 31, 2007 (fiscal 2007) and year ended January 31, 2006 (fiscal 2006).
This Annual Report on Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" (Item 7) contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, gross profit, expenses, earnings or losses from operations, synergies or other financial items; any statements of plans, strategies, and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties, and assumptions referred to above include, but are not limited to:
We undertake no obligation to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report. See "Risk Factors" (Item 1A) for additional information on risk factors with the potential to impact our business.
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General
Cascade Corporation (Cascade) was organized in 1943 under the laws of the state of Oregon. The terms "Cascade", "we", and "our" include Cascade Corporation and its subsidiaries. Our headquarters are located in Fairview, Oregon, a suburb of Portland, Oregon. We are one of the world's leading manufacturers of materials handling load engagement devices and related replacement parts, primarily for the lift truck industry and to a lesser extent the construction industry. We also manufacture construction attachments for the construction industry.
Products
We manufacture an extensive range of materials handling load engagement products that are widely used on lift trucks and, to a lesser extent, on construction and agricultural vehicles.
Our products are primarily manufactured with the Cascade name and symbol, for which we have secured trademark protection. The primary function of lift truck related products is to provide the lift truck with the capability of engaging, lifting, repositioning, carrying and depositing various types of loads and products. We offer a wide variety of functionally different products, each of which has numerous sizes, models, capacities and optional combinations. Lift truck related products are designed to handle loads with pallets and for specialized application loads without pallets. Examples of specialized products include devices specifically designed to handle loads such as appliances, carpet and paper rolls, baled materials, textiles, beverage containers, drums, canned goods, bricks, masonry blocks, lumber, plywood, and boxed, packaged and containerized products. Certain construction related products allow vehicles such as wheel loaders, tractor-loader-backhoes skid steer loaders and rough terrain lift trucks to move materials in much the same manner as conventional lift trucks. Our other construction related products are used on excavators and wheel loaders for both conventional and specialized ground engagement applications.
Our products are subject to strict design, construction and safety requirements established by industry associations and the International Organization for Standardization (ISO). Our major manufacturing facilities are ISO certified. Product specifications and characteristics are determined by the expected capacity to be lifted, the characteristics of the load, the environment in which employed, the terrain over which the load will be moved and the operational life cycle of the vehicle. Accordingly, while there are some standard products, the market demands a wide range of products in custom configurations and capacities.
The manufacturing of our products includes the purchase of raw materials and components: principally rolled bar, plate and extruded steel products; unfinished castings and forgings; hydraulic cylinders and motors; and hardware items such as fasteners, rollers, hydraulic seals and hose assemblies. Certain purchased parts are provided worldwide by a limited number of suppliers. Difficulties in obtaining alternative sources of rolled bar, plate and extruded steel products and other materials from a limited number of suppliers could affect operating results. We are not currently experiencing any shortages in obtaining raw materials, purchased parts, or other steel products.
Markets
We market our products throughout the world. Our primary customers are companies and industries that use lift trucks for materials handling. Examples of these industries include pulp and paper, grocery products, textiles, recycling and general consumer goods. Our products are sold to the end-user customer through the retail lift truck dealer distribution channel and to lift truck manufacturers as original equipment manufacturer (OEM) equipment.
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In major industrialized countries, lift trucks are a widely utilized method of materials handling. In these markets lift trucks are generally considered maintenance capital investment. This tends to subject the industry in general to the cyclical patterns similar to the broader capital goods economic sector.
However, many of our products measurably improve overall materials handling and lift truck productivity. Further, we are continually developing products to serve new types of materials handling applications to meet specific customer and industry requirements. In this sense, our products may also be generally considered a productivity enhancing investment. Historically, this has somewhat cushioned the negative impact of downward trends in the lift truck market on our net sales.
In emerging industrialized countries, China in particular, lift trucks are replacing manual labor and other less productive methods of materials handling. As such, lift trucks are generally considered productivity enhancing investments in these markets. We believe this makes the lift truck markets in these countries generally less susceptible to downward trends in overall capital goods spending.
Competition
We are one of the leading global independent suppliers of load engagement products for industrial lift trucks. We compete with a number of companies in different parts of the world. Our primary competitor is Bolzoni Auramo, an Italian public company. The majority of our remaining competitors are privately-owned companies with a strong presence in local and regional markets. A smaller number of these competitors compete with us globally.
In addition, several lift truck manufacturers, who are customers of ours, are also competitors in varying degrees to the extent they manufacture a portion of their load engagement product requirements. Since we offer a broad line of products capable of supplying a significant part of the total requirements for the entire lift truck industry, our experience has shown that lower costs resulting from our relatively high unit volume would be difficult for any individual lift truck manufacturer to achieve for most products. We design and position our products to be the performance and service leaders in their respective product categories and geographic markets.
Our market share and gross profit throughout the world vary by geographic region due to the different competitive environments we face in each of these regions. Fluctuations in gross profit within a geographic region over time are generally due to a change in the competitive environment, such as new competitors entering a market or existing entities merging or otherwise leaving the market. Additionally, cyclical variations in product demand directly affect margins as higher manufacturing volumes generally result in greater fixed cost absorption and increased gross profit.
A further discussion of the competition in each geographic region follows:
North AmericaWe are the leading manufacturer in North America and the preferred supplier of many OEMs as well as OEDs (original equipment dealers) and distributors. We compete in this region primarily with smaller regionally-based companies and a limited number of smaller foreign competitors. Our leading position is the result of our continued focus on providing high quality products and outstanding customer service.
EuropeWhile we are also a leading manufacturer in Europe, we compete with Bolzoni Auramo and several privately-owned companies with a strong presence in local and regional markets. Competition in this region is based principally on price, resulting in lower gross profit.
Asia PacificThis region includes operations in Japan, Australia, New Zealand, Korea and South Africa. The competitive environment varies somewhat from country to country, and competitors vary in size from smaller regionally-based private companies to some larger lift truck manufacturers. In general, we believe we have established a strong presence in all markets throughout the region.
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ChinaWe have operated in China for over 20 years and have established a strong presence in the lift truck market. As a result of the continued growth in China's economy and the expanded use of lift trucks for various industrial purposes, we are seeing an increase in the number of competitors in the Chinese market, including European based manufacturers.
Customers
Our products are marketed and sold primarily to lift truck OEDs, OEMs and distributors globally. Our primary markets are North America, Europe, China and Asia Pacific. In addition to sales to the lift truck market, we do sell products to OEMs who manufacture construction, mining, agricultural and industrial vehicles other than lift trucks.
No single customer accounts for more than 10% of our consolidated net sales. Our sales to OEM customers account for approximately 45% of our consolidated net sales.
Backlog
Our products are manufactured with short lead times of generally less than one month. Accordingly, the level of backlog orders is not a significant factor in evaluating our overall level of business activity.
Research and Development
The majority of our research and development activities are performed at our corporate headquarters in Fairview, Oregon and at our manufacturing facility in Guelph, Ontario, Canada. Our engineering staff develops and designs substantially all of the products we sell and is continually involved in developing products for new applications. We generally do not consider patents to be important to our business.
Environmental Matters
From time to time, we are the subject of investigations, conferences, discussions and negotiations with various federal, state, local and foreign agencies with respect to cleanup of hazardous waste and compliance with environmental laws and regulations. "Risk Factors" (Item 1A), Notes to Consolidated Financial Statements (Item 8), "Legal Proceedings" (Item 3) and "Management's Discussion and Analysis of Financial Condition and Results of Operations" (Item 7) contain additional information concerning our environmental matters.
Employees
At January 31, 2008, we had approximately 2,400 full-time employees throughout the world. The majority of these employees are not subject to collective bargaining agreements. We believe our relations with our employees are excellent.
Construction Attachments
Since December 2006, we have acquired two companies on the West coast of the United States that manufacture attachments for construction vehicles. The construction attachments are for medium and heavy duty construction vehicles used in a variety of construction markets, including infrastructure, demolition, recycling, forestry, utility and general construction. The prevailing levels of commercial, infrastructure and general construction activity have a significant influence on sales of these products. Housing construction has some overall influence. These products are sold through construction equipment dealers and major equipment manufacturers throughout the western United States. We have approximately 100 employees working to design, manufacture and market these products.
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Foreign Operations
We have substantial operations outside the United States. There are additional business risks attendant to our foreign operations, including the risk that the relative value of the underlying local currencies may weaken when compared to the U.S. dollar. For further information about foreign operations, see "Risk Factors" (Item 1A), "Management's Discussion and Analysis of Financial Condition and Results of Operations" (Item 7) and Notes to Consolidated Financial Statements (Item 8).
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on or through our website at www.cascorp.com when such reports are available on the Securities and Exchange Commission (SEC) websitewww.sec.gov. Once filed with the SEC, such documents may be read and/or copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
In addition to the other information contained in this Form 10-K, the following are certain risks that we believe should be considered carefully in evaluating Cascade's business. Our business, financial condition, cash flows or results of operations could be materially adversely affected by any of these risks. The risks summarized below do not represent an exclusive list, and additional risks not presently known to the Company or that the Company currently deems immaterial may also impair its business and operations.
Economic or industry downturns
Our business has historically experienced periodic cyclical downturns generally consistent with economic cycles in the markets in which we operate. The level of sales of our products reflects to a significant extent the capital investment decisions of the customers who buy our products and the lift trucks and other vehicles on which our products are used. These customers have had a tendency to delay capital projects, including the purchase of new equipment or upgrades, during industry or general economic downturns. Past downturns have been characterized by diminished product demand, excess manufacturing capacity and erosion of gross profit. Therefore, a significant downturn in the markets of our customers, including lift truck manufacturers and to a lesser extent construction equipment manufacturers, or in general economic conditions is likely to result in a reduction in demand for our products and could negatively affect our business.
Fluctuations in raw material costs and availability
Significant cost increases in raw materials and components or shortages in these items could adversely affect our operating results and financial condition.
To manufacture our products we purchase a variety of raw materials and components. These consist principally of rolled bar, plate and extruded steel products, unfinished castings and forgings, hydraulic cylinders and motors and various hardware items. The price of steel is particularly significant to our manufacturing costs since most of our products are manufactured using specialty steel as a primary raw material and specialty steel based components as purchased parts. As a result, we are exposed to increases in the market prices of raw materials and components. We may not be able to mitigate these increases by changing the selling prices of our products or through other means.
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We may also experience shortages of raw materials and purchased parts, which in certain cases are provided by a limited number of suppliers. Shortages may require us to curtail production or to devote additional financial resources to maintaining inventories of raw materials and purchased parts in excess of our normal requirements.
Impact of acquisitions
We have historically expanded our business through acquisitions and expect we will do so in the future if appropriate opportunities arise. If we are not successful in integrating acquisitions, we may not realize the operating results we anticipated at the time of acquisition. Future acquisitions may require us to incur additional debt and contingent liabilities, which may materially and adversely affect our business, operating results, cash flows and financial condition. The acquisition and integration of businesses involve a number of risks, including:
Economic, political and other risks associated with international operations
Foreign operations represent a significant portion of our business. We expect revenue from foreign markets to continue to represent a significant portion of our total sales. As noted in "Properties" (Item 2), we own or lease facilities in several foreign countries throughout the world. Since we manufacture and sell our products worldwide, our business is subject to risks associated with doing business internationally. Accordingly, our future results could be harmed by a variety of factors, including:
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Original equipment manufacturers sourcing practices
We sell approximately 45% of our products directly to OEMs, who carry inventories of finished products as part of ongoing operations and adjust those inventories based on their assessments of future needs. Such adjustments can have an impact on our quarterly results. In addition, OEMs may, as they have in the past, attempt to alter the distribution channels of certain products by acquiring all or part of their dealer network or by exerting influence over the sale of replacement parts and attachments through their distribution channels. Such efforts, if successful, could have a negative impact on our financial results.
Foreign currency fluctuations
Changes in economic or political conditions globally and in any of the countries in which we operate could result in exchange rate movements, new currency or exchange controls or other restrictions being imposed on our operations.
Fluctuations in the value of the U.S. dollar may adversely affect our results of operations. Because our combined financial results are reported in U.S. dollars, translation of sales or earnings generated in other currencies into U.S. dollars can result in a significant increase or decrease in the amount of those sales or earnings. In addition, our debt service requirements are primarily in U.S. dollars, even though a portion of our cash flow is generated in foreign currencies. Significant changes in the value of these foreign currencies relative to the U.S. dollar could have a material adverse effect on our financial condition and our ability to meet interest and principal payments on U.S. dollar-denominated debt.
Fluctuations in currencies relative to currencies in which our earnings are generated make it more difficult to perform period-to-period comparisons of our reported results of operations. For purposes of accounting, the assets and liabilities of our foreign operations, where the local currency is the functional currency, are translated using period-end exchange rates, and the revenues, expenses and cash flows of our foreign operations are translated using average exchange rates during each period.
In addition to currency translation risks, we incur currency transaction risk whenever we enter into either a purchase or a sales transaction using a currency other than the local currency of the transacting entity. Given the volatility of exchange rates, we cannot be assured we will be able to effectively manage our currency transaction and/or translation risks. Volatility in currency exchange rates may have a material effect on our financial condition or results of operations. We have purchased and may continue to purchase foreign currency hedging instruments protecting or offsetting positions in certain currencies to reduce the risk of adverse currency fluctuations. We have in the past experienced and expect to experience at times in the future an impact on earnings as a result of foreign currency exchange rate fluctuations.
Competition
Our products do not depend upon proprietary technology to any significant degree, and therefore can be subject to intense competition. Competitive characteristics of our products include overall performance, ease of use, quality, safety, customer service and support, manufacturing lead times, global reach, brand reputation, breadth of product line and price. Our customers increasingly demand more technologically advanced and integrated products in certain cases and we must continue to develop our expertise and technical capabilities in order to manufacture and market these products successfully. To retain our competitive position, we will need to invest continuously in research and
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development and improve our manufacturing, marketing, customer service and support and our distribution networks.
Loss of senior management
The success of our business is dependent on our ability to attract and retain qualified personnel. Several members of our senior management team have been with us for over 20 years, including our President and Chief Executive Officer and Chief Financial Officer, who have each been with us for over 35 years. Our current Senior Vice PresidentHuman Resources, Gregory Anderson, will be retiring in June 2008. The loss of the services of key management personnel or the failure to attract and develop additional personnel as required could adversely effect our business, financial condition and results of operations.
Reliance on lift truck dealers
Approximately 55% of our products are sold to the end-user customer through OEDs. Therefore, a significant portion of our sales is dependent on the quality and effectiveness of these dealers, who are not subject to our control. As a result, poor performance by retail lift truck dealers could adversely affect our business, financial condition, cash flows and results of operations.
Environmental compliance costs and liabilities
Our operations and properties are subject to stringent U.S. and foreign, federal, state and local laws and regulations relating to environmental protection. These laws and regulations govern the investigation and cleanup of contaminated properties as well as air emissions, water discharges, waste management and disposal and workplace health and safety. We can be held responsible under these laws and regulations no matter if the original actions were legal or illegal and no matter if we knew of, or were responsible for, the presence of such hazardous or toxic substances. We could be responsible for payment of the full amount of any liability, whether or not any other responsible party also is liable.
These laws and regulations affect a significant percentage of our operations, are different in every jurisdiction and can impose substantial fines and sanctions for violations. Further, they may require substantial clean-up costs for our properties, many of which are sites of long-standing manufacturing operations, and the installation of costly pollution control equipment or operational changes to limit pollution emissions and/or decrease the likelihood of accidental hazardous substance releases. We must conform our operations and properties to these laws and adapt to regulatory requirements in all jurisdictions as these requirements change.
We routinely deal with natural gas, oil and other petroleum products. As a result of our operations, we generate, manage and dispose of or recycle hazardous wastes and substances such as solvents, thinner, waste paint, waste oil, wash-down wastes and sandblast material. Hydrocarbons or other hazardous substances or wastes may have been disposed or released on, under or from properties owned, leased or operated by us or on, under or from other locations where such substances or wastes have been taken for disposal. These properties may be subject to investigatory, clean-up and monitoring requirements under U.S. and foreign, federal, state and local environmental laws and regulations.
We entered into settlement agreements with insurance providers with respect to litigation to recover various expenses incurred in connection with environmental and related proceedings. We released all rights we might have under insurance policies issued by these providers.
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Underfunded benefit plans
Our obligations under our postretirement benefit plan and certain foreign subsidiaries' defined benefit pension plans are currently underfunded. At some time in the future we may have to make significant cash payments to fund these plans, which would reduce the cash available for our business.
As of January 31, 2008, our projected benefit obligations under our defined benefit pension plans exceed the fair value of assets by $2.3 million. As of January 31, 2008 our accumulated postretirement benefit obligation under our postretirement benefit plan, which is not funded, was $7.1 million. The underfunding in our defined benefit pension plans is due in part to fluctuations in the financial markets that caused the valuation of the assets to decrease. We expect any required cash payments to our plans that are not fully funded will be made from future cash flows from operations. If our cash contributions are insufficient to adequately fund the plans to cover our future obligations, the performance of the pension plan assets do not meet our expectations or assumptions are modified, our contributions could be materially higher than we expect. This would reduce the cash available for our business. Changes in U.S. or foreign laws governing these plans could require us to make additional contributions and changes to generally accepted accounting principles in the United States could require the recording of additional costs related to these plans.
Item 1B. Unresolved Staff Comments
None.
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We own and lease various types of properties located throughout the world. Our executive offices are located in Fairview, Oregon. We generally consider the productive capacity of our manufacturing facilities to be adequate and suitable to meet our requirements. Our primary locations are presented below:
Location |
Primary Activity |
Approximate Square Footage |
Status |
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NORTH AMERICA | ||||||
Springfield, Ohio | Manufacturing | 200,000 | Owned | |||
Fairview, Oregon | Manufacturing/Headquarters | 155,000 | Owned | |||
Guelph, Ontario Canada | Manufacturing | 125,000 | Owned | |||
Toronto, Ontario Canada | Manufacturing | 73,000 | Leased | |||
Woodinville, Washington | Manufacturing | 68,000 | Leased | |||
Warner Robins, Georgia | Manufacturing | 65,000 | Owned | |||
Findlay, Ohio | Manufacturing | 52,000 | Owned | |||
San Juan Capistrano, California | Manufacturing | 9,000 | Leased | |||
EUROPE | ||||||
Almere, The Netherlands | Manufacturing/European Headquarters | 162,000 | Owned | |||
Schalksmuhle, Germany | Manufacturing | 81,000 | Owned | |||
Verona, Italy | Manufacturing | 74,000 | Leased | |||
Manchester, England | Manufacturing | 44,000 | Owned | |||
La Machine, France | Manufacturing | 37,000 | Owned | |||
Brescia, Italy | Manufacturing | 19,000 | Owned | |||
Ancenis, France | Distribution | 12,000 | Owned | |||
Vaggeryd, Sweden | Sales | 2,000 | Leased | |||
Epignay, France | Sales | 2,000 | Leased | |||
Barcelona, Spain | Sales | 1,000 | Leased | |||
Vantaa, Finland | Sales | 500 | Leased | |||
ASIA PACIFIC | ||||||
Brisbane, Australia | Manufacturing | 46,000 | Leased | |||
Osaka, Japan | Sales/Distribution | 24,000 | Owned | |||
Osaka, Japan | Sales/Distribution | 16,000 | Leased | |||
Inchon, Korea | Manufacturing | 12,000 | Owned | |||
Auckland, New Zealand | Sales/Distribution | 9,000 | Leased | |||
Johannesburg, South Africa | Sales/Distribution | 9,000 | Leased | |||
CHINA | ||||||
Hebei, China | Manufacturing | 88,000 | Leased | |||
Xiamen, China | Manufacturing | 78,000 | Leased | |||
Xiamen, China | Manufacturing | 72,000 | Leased | |||
Hebei, China | Manufacturing | 65,000 | Leased |
Neither Cascade nor any of our subsidiaries are involved in any material pending legal proceedings. We are insured against product liability, personal injury and property damage claims, which may occasionally arise.
On April 9, 2007, we entered into a settlement agreement with Employers Reinsurance Corporation with respect to litigation to recover various expenses incurred in connection with environmental and related proceedings. The recovery from the settlement of $16,000,000, net of
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expenses, was recorded in our consolidated financial statements for the first quarter of fiscal 2008. This settlement concluded all litigation against our insurance companies regarding environmental matters.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Officers of the Registrant
Robert C. Warren, Jr.Chief Executive Officer and President(1)Mr. Warren, 59, has served as President and Chief Executive Officer of Cascade since 1996. He was President and Chief Operating Officer from 1993 until 1996 and was formerly Vice PresidentMarketing. Mr. Warren joined Cascade in 1972.
Gregory S. AndersonSenior Vice PresidentHuman Resources(1)Mr. Anderson, 59, has served in his current position since 2002. He joined Cascade in 1984, and has served as Vice PresidentHuman Resources since 1991. Mr. Anderson will be retiring from Cascade in June 2008.
Richard S. AndersonSenior Vice President and Chief Financial Officer(1)Mr. Anderson, 60, has served as Chief Financial Officer since 2001. Mr. Anderson has been employed by Cascade since 1972 and held several positions including his appointments as Vice PresidentMaterial Handling Product Group in 1996 and Senior Vice PresidentInternational in 1999.
Frank R. Altenhofen, Vice PresidentNorth America(1)Mr. Altenhofen, 46, was appointed Vice President, Americas in 2007. He started his career with Cascade in 1983 and held numerous manufacturing, marketing, and management positions including General Manager of Cascade's operations in China, until his departure in 2001. During 2001 to 2007, Mr. Altenhofen held various management positions at a couple medical device companies. This included serving as President of an international medical device company from 2003 to 2007.
Herre Y. Hoekstra, Vice President and Managing Director, Europe(1)Mr. Hoekstra, 46, joined Cascade in 2005. Prior to joining Cascade, Mr. Hoekstra held various management positions with Royal Ten Cate, REMU and Royal Dutch Shell, in The Netherlands.
Michael E. Kern, Vice PresidentConstruction Attachment Division(1)Mr. Kern, 61, has served as Vice PresidentConstruction Attachment Division since November 2007. He has been employed by Cascade since 1966 and has held several positions, including his appointments as Vice PresidentSales and Marketing in 2003, as Vice PresidentDirector of Dealer Marketing and Sales in 2001 and Aftermarket Sales Manager in 1999.
Kevin B. Kreiter, Vice PresidentEngineering and Marketing(1)Mr. Kreiter, 54, has served in his current position since 2007. He has been employed by Cascade since 1979 and has held several positions within the engineering group, including his appointment as Vice PresidentEngineering in 2006.
Jeffrey K. Nickoloff, Vice PresidentCorporate Manufacturing(1)Mr. Nickoloff, 52, has served in his current position since 2002. He has held several positions with Cascade, including his appointments as Director of North American Manufacturing in 2000 and Plant Manager in 1993. Mr. Nickoloff joined Cascade in 1979.
Joseph G. Pointer, Vice PresidentFinance(1)Mr. Pointer, 47, has served as Vice PresidentFinance since 2000. Prior to joining Cascade in 2000, Mr. Pointer was a partner at PricewaterhouseCoopers LLP in Portland, Oregon.
John A. CushingTreasurerMr. Cushing, 47, has served as Treasurer since 2001. He previously was Assistant Treasurer from 1999 until 2001. Prior to joining Cascade in 1999, Mr. Cushing was Assistant Treasurer for Fred Meyer, Inc., a retail company in Portland, Oregon.
(1)These individuals are considered executive officers of Cascade Corporation.
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Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of March 17, 2008, there were 173 shareholders of record of Cascade's common stock including blocks of shares held by various depositories. It is our belief that when the shares held by the depositories are attributed to the beneficial owners, the total exceeds 2,000.
Performance Graph
The following graph compares the annual percentage change in the cumulative shareholder return on our common stock with the cumulative total return of the Russell 2000 Index and an industry group of peer companies, in each case assuming investment of $100 on January 31, 2003, and reinvestment of dividends. The stock price performance shown in the graph below is not necessarily indicative of future stock price performance. Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, the stock performance graph shall not be incorporated by reference into any such filings and shall not otherwise be deemed filed under such acts.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cascade Corporation, The Russell 2000 Index
And A Peer Group
The peer group comprises the following companies: Actuant Corporation., Alamo Group Inc., Ampco-Pittsburgh Corporation, Astec Industries, Inc., Columbus-McKinnon Corporation, Gehl Company, Gulf Island Fabrication, Inc., IDEX Corporation, Lindsay Manufacturing Company, Nordson Corporation.
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Market Information
The high and low sales prices of our common stock based on intra-day prices on the New York Stock Exchange for each quarter during the last two fiscal years were as follows:
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Year ended January 31 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 |
2007 |
||||||||||
|
High |
Low |
High |
Low |
||||||||
First quarter | $ | 66.20 | $ | 53.28 | $ | 53.96 | $ | 37.85 | ||||
Second quarter | 89.87 | 60.02 | 42.17 | 35.20 | ||||||||
Third quarter | 77.85 | 54.92 | 52.63 | 35.75 | ||||||||
Fourth quarter | 64.87 | 40.06 | 55.54 | 47.15 |
Common Stock Repurchase
Our Board of Directors had previously authorized plans in September 2006 and 2007 to repurchase up to $130 million of our common stock. The table below summarizes information about our purchases of our common shares during the three month period ended January 31, 2008 and the years ended January 31, 2008 and 2007.
Period |
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Year ended January 31, 2007 | 757,119 | $ | 51.27 | 757,119 | ||||||||
Nine months ended October 31, 2007 |
691,116 |
59.59 |
691,116 |
|||||||||
November 1 - 30, 2007 |
280,800 |
59.28 |
280,800 |
$ |
33,354,000 |
|||||||
December 1 - 31, 2007 | 139,300 | 53.62 | 139,300 | 25,884,000 | ||||||||
January 1 - 31, 2008 | 548,400 | 45.54 | 548,400 | 910,000 | ||||||||
Three months ended January 31, 2008 | 968,500 | $ | 50.69 | 968,500 | ||||||||
Year ended January 31, 2008 | 1,659,616 | $ | 54.39 | 1,659,616 | ||||||||
Total common stock repurchases |
2,416,735 |
$ |
53.41 |
2,416,735 |
||||||||
15
Common Stock Dividends
The common stock dividends declared during each quarter of the last two fiscal years were as follows:
|
Year ended January 31 |
|||||
---|---|---|---|---|---|---|
|
2008 |
2007 |
||||
First quarter | $ | 0.16 | $ | 0.15 | ||
Second quarter | 0.18 | 0.15 | ||||
Third quarter | 0.18 | 0.15 | ||||
Fourth quarter | 0.18 | 0.16 | ||||
Total | $ | 0.70 | $ | 0.61 | ||
Stock Exchange Listing and Transfer Agent
Cascade's stock is traded on the New York Stock Exchange under the symbol CAE.
Cascade's registrar and transfer agent is Mellon Shareholder Services, L.L.C., Shareholder Relations, P.O. Box 3315, South Hackensack, N.J., 07606, (800) 522-6645.
Equity Compensation Plan Information
For information on our equity compensation plans, see Item 12 of this report.
16
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with our consolidated financial statements and accompanying notes contained in Item 8 of this Form 10-K.
|
Year Ended January 31 |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 |
2007 |
2006 |
2005 |
2004 |
|||||||||||
|
(In thousands, except per share amounts and employees) |
|||||||||||||||
Income statement data: | ||||||||||||||||
Net sales | $ | 558,073 | $ | 478,850 | $ | 450,503 | $ | 385,719 | $ | 297,756 | ||||||
Operating income(1) | $ | 95,613 | $ | 68,351 | $ | 63,894 | $ | 47,777 | $ | 32,025 | ||||||
Net income(2) | $ | 60,147 | $ | 45,481 | $ | 42,051 | $ | 28,490 | $ | 18,506 | ||||||
Cash flow data: | ||||||||||||||||
Cash flows from operating activities | $ | 53,326 | $ | 57,109 | $ | 50,425 | $ | 37,808 | $ | 26,241 | ||||||
Cash flows from investing activities | $ | (31,627 | ) | $ | (33,582 | ) | $ | (31,723 | ) | $ | (14,857 | ) | $ | (19,612 | ) | |
Cash flows from financing activities | $ | (33,432 | ) | $ | (22,153 | ) | $ | (13,191 | ) | $ | (16,892 | ) | $ | (14,715 | ) | |
Stock information: | ||||||||||||||||
Basic earnings per share(2) | $ | 5.08 | $ | 3.64 | $ | 3.40 | $ | 2.34 | $ | 1.55 | ||||||
Diluted earnings per share(2) | $ | 4.88 | $ | 3.48 | $ | 3.27 | $ | 2.24 | $ | 1.49 | ||||||
Book value per common share(3) | $ | 24.73 | $ | 22.51 | $ | 20.69 | $ | 17.82 | $ | 15.18 | ||||||
Dividends declared | $ | 0.70 | $ | 0.61 | $ | 0.54 | $ | 0.45 | $ | 0.41 | ||||||
Balance sheet information: | ||||||||||||||||
Cash and marketable securities | $ | 21,223 | $ | 36,593 | $ | 58,497 | $ | 31,985 | $ | 31,586 | ||||||
Working capital(4) | $ | 151,971 | $ | 113,130 | $ | 124,962 | $ | 94,154 | $ | 81,720 | ||||||
Property, plant and equipment, net | $ | 98,350 | $ | 84,151 | $ | 75,374 | $ | 82,027 | $ | 75,244 | ||||||
Total assets | $ | 462,500 | $ | 397,432 | $ | 361,283 | $ | 328,092 | $ | 292,819 | ||||||
Total debt | $ | 110,716 | $ | 51,119 | $ | 29,922 | $ | 40,564 | $ | 53,934 | ||||||
Shareholders' equity | $ | 268,025 | $ | 271,636 | $ | 259,406 | $ | 217,883 | $ | 183,688 | ||||||
Other: | ||||||||||||||||
Capital expenditures | $ | 22,808 | $ | 18,078 | $ | 10,580 | $ | 13,581 | $ | 11,403 | ||||||
Depreciation | $ | 13,898 | $ | 13,753 | $ | 14,562 | $ | 13,912 | $ | 12,152 | ||||||
Amortization | $ | 3,214 | $ | 1,472 | $ | 1,443 | $ | 658 | $ | 512 | ||||||
Share-based compensation expense(5) | $ | 4,451 | $ | 4,033 | $ | 2,278 | $ | 2,492 | $ | | ||||||
Interest expense, net of interest income | $ | 3,315 | $ | 400 | $ | 1,762 | $ | 3,008 | $ | 3,554 | ||||||
Diluted weighted average shares outstanding | 12,333 | 13,071 | 12,850 | 12,726 | 12,409 | |||||||||||
Number of employees | 2,400 | 2,100 | 1,900 | 1,800 | 1,700 |
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of certain significant factors that have affected our financial condition as of January 31, 2008, and the results of operations and cash flows for the fiscal years ended January 31, 2008, 2007 and 2006. This information should be read in conjunction with our consolidated financial statements and notes thereto under Item 8, "Financial Statements and Supplementary Data" of this report.
Our businesses globally manufacture and distribute material handling load engagement products primarily for the lift truck industry and to a lesser extent the construction industry. We operate our business in four geographic segments: North America, Europe, Asia Pacific and China. A further discussion of the nature of our business is contained in Item 1, "Business," of this report.
RECENT TRENDS AND DEVELOPMENTS AFFECTING OUR RESULTS
European Business
Europe's lift truck industry continued to be strong in fiscal 2008 with shipments increasing over 21% from the previous year. We have captured some of this growth with a 15% increase in sales, excluding currency changes, and an increase in operating income. However, our profitability in Europe continues to fall short of our expectations. In particular, the fourth quarter results in Europe were disappointing in that our improved results in the first part of the year proved not to be sustainable. This is due to several reasons, which include operational issues at several European facilities and delays in fully executing our plan to import Chinese manufactured forks (discussed further in "China Expansion" below). As a result, we are currently completing a fundamental review of our entire European business to identify specific areas of improvement, including purchasing improvements, product sourcing and streamlining of manufacturing and administrative functions. This review also includes consideration of further rationalization of production capacity at our European facilities. As we have stated previously, improving our operational performance and increasing our market share in Europe, the world's largest lift truck market, remains a key priority.
Material Cost Increases
Like many manufacturing companies around the world, we are feeling the pressures of increasing material costs. We have previously mentioned there has been some degree of material cost increases ongoing in various parts of the world for the past few years. Recently this seems to be a more consistent trend throughout the world. We are generally able to recover a portion of cost increases through higher sales prices to customers in certain markets in which we operate, but there are markets, such as Europe, where increased competition makes this more challenging. This has required us to be even more diligent than we previously were in seeking out lower cost suppliers. We have also stepped up our efforts to improve internal processes, both manufacturing and administrative, to create internal efficiencies, which we believe will ultimately result in lower costs.
China Expansion
Our work to expand operations in China continued in fiscal 2008. The objectives of this expansion were to keep pace with the rapidly expanding Chinese lift truck market, expand our business in the
18
Asia Pacific region and provide production capacity to begin exporting Chinese-made products to other parts of the world. The highlights of our expansion in fiscal 2008 included the following:
Acquisition StrategyConstruction Business
We have completed two acquisitions in the construction attachment business in just over a year. During this time the U.S. construction industry has slowed considerably. We have taken steps at the acquired operations to improve existing production processes to lower costs and create additional capacity when production volumes increase. We are still investigating opportunities to expand this business as they arise. We are beginning to develop this business in China.
Global Product Sourcing
We are continuing to see the globalization of our business, which is affecting the dynamics and business model previously used by global lift truck manufacturers. Whereas the previous practice was to source products locally or regionally, the current trend is to look more towards global sourcing. In addition, the lift truck manufacturers are attempting to alter the distribution channels for certain products through changes in their dealer network or with influence over the sale of replacement parts and attachments through their distribution channels. We are closely monitoring these efforts and assessing the effect on our current business.
COMPARISON OF FISCAL 2008 AND FISCAL 2007
Executive Summary
|
Year Ended January 31 |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Change % |
||||||||||
|
2008 |
2007 |
Change |
|||||||||
|
(In thousands except per share amounts) |
|
||||||||||
Net sales | $ | 558,073 | $ | 478,850 | $ | 79,223 | 17 | % | ||||
Operating income | $ | 95,613 | $ | 68,351 | $ | 27,262 | 40 | % | ||||
Net income | $ | 60,147 | $ | 45,481 | $ | 14,666 | 32 | % | ||||
Diluted earnings per share | $ | 4.88 | $ | 3.48 | $ | 1.40 | 40 | % |
The following are financial highlights for fiscal 2008:
19
and our capital expansion plan in China. Excluding the impact of foreign currency, net sales increased 9% during fiscal 2008, primarily due to increased shipment volumes and to a lesser extent price increases. Global lift truck shipments increased 10% compared to the prior year.
North America
|
Year Ended January 31 |
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Change % |
||||||||||||||
|
2008 |
% |
2007 |
% |
Change |
|||||||||||
|
(In thousands) |
|
|
|||||||||||||
Net sales | $ | 286,832 | 90 | % | $ | 263,312 | 91 | % | $ | 23,520 | 9 | % | ||||
Transfers between areas | 33,118 | 10 | % | 25,367 | 9 | % | 7,751 | 31 | % | |||||||
Net sales and transfers | 319,950 | 100 | % | 288,679 | 100 | % | 31,271 | 11 | % | |||||||
Cost of goods sold |
210,118 |
66 |
% |
185,869 |
64 |
% |
24,249 |
13 |
% |
|||||||
Gross profit | 109,832 | 34 | % | 102,810 | 36 | % | 7,022 | 7 | % | |||||||
Selling and administrative |
51,020 |
16 |
% |
46,750 |
16 |
% |
4,270 |
9 |
% |
|||||||
Loss (gain) on disposition of assets, net | (1,135 | ) | (1 | )% | 16 | | (1,151 | ) | | |||||||
Amortization | 2,482 | 1 | % | 598 | 1 | % | 1,884 | | ||||||||
Insurance litigation recovery, net | (15,977 | ) | (5 | )% | | | (15,977 | ) | | |||||||
Operating income | $ | 73,442 | 23 | % | $ | 55,446 | 19 | % | $ | 17,996 | 32 | % | ||||
The following are financial highlights for North America for fiscal 2008:
20
Europe
|
Year Ended January 31 |
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Change % |
||||||||||||||
|
2008 |
% |
2007 |
% |
Change |
|||||||||||
|
(In thousands) |
|
|
|||||||||||||
Net sales | $ | 171,435 | 99 | % | $ | 137,755 | 99 | % | $ | 33,680 | 24 | % | ||||
Transfers between areas | 1,497 | 1 | % | 1,468 | 1 | % | 29 | 2 | % | |||||||
Net sales and transfers | 172,932 | 100 | % | 139,223 | 100 | % | 33,709 | 24 | % | |||||||
Cost of goods sold |
145,288 |
84 |
% |
116,582 |
84 |
% |
28,706 |
25 |
% |
|||||||
Gross profit | 27,644 | 16 | % | 22,641 | 16 | % | 5,003 | 22 | % | |||||||
Selling and administrative |
26,201 |
15 |
% |
22,921 |
16 |
% |
3,280 |
14 |
% |
|||||||
Gain on disposition of assets, net | | | (588 | ) | (1 | )% | 588 | | ||||||||
Amortization | 732 | 1 | % | 851 | 1 | % | (119 | ) | (14 | )% | ||||||
Operating income | $ | 711 | | $ | (543 | ) | | $ | 1,254 | | ||||||
The following are financial highlights for Europe for fiscal 2008:
Our financial results in Europe have improved marginally over the prior year but still fell short of our expectations. A robust European lift truck market enabled us to post strong sales growth over the prior year. However, we were unable to capture the benefits of the expanded sales volume at the operating income level. There are several ongoing initiatives in Europe to improve our overall performance over the long-term. We have provided below an overview of these initiatives, our progress to date and additional changes planned in the upcoming year:
21
Asia Pacific
|
Year Ended January 31 |
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Change % |
||||||||||||||
|
2008 |
% |
2007 |
% |
Change |
|||||||||||
|
(In thousands) |
|
|
|||||||||||||
Net sales | $ | 59,776 | 100 | % | $ | 48,256 | 100 | % | $ | 11,520 | 24 | % | ||||
Transfers between areas | 179 | | 220 | | (41 | ) | (19 | )% | ||||||||
Net sales and transfers | 59,955 | 100 | % | 48,476 | 100 | % | 11,479 | 24 | % | |||||||
Cost of goods sold |
44,892 |
75 |
% |
36,383 |
75 |
% |
8,509 |
23 |
% |
|||||||
Gross profit | 15,063 | 25 | % | 12,093 | 25 | % | 2,970 | 25 | % | |||||||
Selling and administrative |
8,297 |
14 |
% |
7,996 |
17 |
% |
301 |
4 |
% |
|||||||
Gain on disposition of assets, net | (34 | ) | | (17 | ) | | (17 | ) | | |||||||
Amortization | | | 19 | | (19 | ) | | |||||||||
Operating income | $ | 6,800 | 11 | % | $ | 4,095 | 8 | % | $ | 2,705 | 66 | % | ||||
The following are financial highlights for Asia Pacific for fiscal 2008:
China
|
Year Ended January 31 |
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Change % |
||||||||||||||
|
2008 |
% |
2007 |
% |
Change |
|||||||||||
|
(In thousands) |
|
|
|||||||||||||
Net sales | $ | 40,030 | 70 | % | $ | 29,527 | 79 | % | $ | 10,503 | 36 | % | ||||
Transfers between areas | 17,410 | 30 | % | 7,853 | 21 | % | 9,557 | 122 | % | |||||||
Net sales and transfers | 57,440 | 100 | % | 37,380 | 100 | % | 20,060 | 54 | % | |||||||
Cost of goods sold |
38,805 |
68 |
% |
24,944 |
67 |
% |
13,861 |
56 |
% |
|||||||
Gross profit |
18,635 |
32 |
% |
12,436 |
33 |
% |
6,199 |
50 |
% |
|||||||
Selling and administrative | 3,927 | 6 | % | 3,042 | 8 | % | 885 | 29 | % | |||||||
Loss on disposition of assets, net | 48 | | 37 | | 11 | | ||||||||||
Amortization | | | 4 | | (4 | ) | | |||||||||
Operating income | $ | 14,660 | 26 | % | $ | 9,353 | 25 | % | $ | 5,307 | 57 | % | ||||
22
The following are financial highlights for China for fiscal 2008:
Non-Operating Items
The following are financial highlights for non-operating items during fiscal 2008:
Lift Truck Market Outlook
Based on our review of industry statistics and data we believe the general lift truck market outlook for fiscal 2009 is as follows:
Additional information on lift truck industry trends can be found at www.cascorp.com/investor/industrytrends.
23
Fourth Quarter Results (2008/2007)
|
Three Months Ended January 31 |
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Change % |
||||||||||||||
|
2008 |
% |
2007 |
% |
Change |
|||||||||||
|
(In thousands) |
|
|
|||||||||||||
Net sales | $ | 136,247 | 100 | % | $ | 118,891 | 100 | % | $ | 17,356 | 15 | % | ||||
Cost of goods sold | 97,629 | 72 | % | 83,406 | 70 | % | 14,223 | 17 | % | |||||||
Gross profit | 38,618 | 28 | % | 35,485 | 30 | % | 3,133 | 9 | % | |||||||
Selling and administrative expenses |
23,603 |
17 |
% |
21,130 |
18 |
% |
2,473 |
12 |
% |
|||||||
Loss on disposition of assets | 57 | | 20 | | 37 | 185 | % | |||||||||
Amortization | 808 | 1 | % | 497 | | 311 | 63 | % | ||||||||
Operating income |
14,150 |
10 |
% |
13,838 |
12 |
% |
312 |
2 |
% |
|||||||
Interest expense, net | 988 | 1 | % | 338 | | 650 | 192 | % | ||||||||
Other expense (income), net | 412 | | (864 | ) | | 1,276 | 148 | % | ||||||||
Income before taxes | 12,750 | 9 | % | 14,364 | 12 | % | (1,614 | ) | (11 | )% | ||||||
Provision for taxes | 3,963 | 3 | % | 4,123 | 3 | % | (160 | ) | (4 | )% | ||||||
Net income | $ | 8,787 | 6 | % | $ | 10,241 | 9 | % | $ | (1,454 | ) | (14 | )% | |||
Diluted earnings per share | $ | 0.74 | $ | 0.80 | ||||||||||||
Operating income (loss) by region: |
||||||||||||||||
North America | $ | 10,277 | $ | 11,038 | $ | (761 | ) | (7 | )% | |||||||
Europe | (1,974 | ) | (894 | ) | (1,080 | ) | (121 | )% | ||||||||
Asia Pacific | 1,752 | 1,290 | 462 | 36 | % | |||||||||||
China | 4,095 | 2,404 | 1,691 | 70 | % | |||||||||||
$ |
14,150 |
$ |
13,838 |
$ |
312 |
2 |
% |
|||||||||
The following are financial highlights from the fourth quarter of fiscal 2008:
24
COMPARISON OF FISCAL 2007 AND FISCAL 2006
Executive Summary
|
Year Ended January 31 |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Change % |
||||||||||
|
2007 |
2006 |
Change |
|||||||||
|
(In thousands, except per share amounts) |
|
|
|||||||||
Net sales | $ | 478,850 | $ | 450,503 | $ | 28,347 | 6 | % | ||||
Operating income | $ | 68,351 | $ | 63,894 | $ | 4,457 | 7 | % | ||||
Net income | $ | 45,481 | $ | 42,051 | $ | 3,430 | 8 | % | ||||
Diluted earnings per share | $ | 3.48 | $ | 3.27 | $ | 0.21 | 6 | % |
During fiscal 2007 we posted increased levels of consolidated net sales, operating income and net income. This reflected the strength of lift truck markets throughout the world, where shipments were up 12%. Financial results in both North America and China were very strong. Asia Pacific's operating income fell short of the prior year. Europe had record net sales but incurred an operating loss.
North America
|
Year Ended January 31 |
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Change % |
||||||||||||||
|
2007 |
% |
2006 |
% |
Change |
|||||||||||
|
(In thousands) |
|
|
|||||||||||||
Net sales | $ | 263,312 | 91 | % | $ | 250,576 | 92 | % | $ | 12,736 | 5 | % | ||||
Transfers between areas | 25,367 | 9 | % | 22,461 | 8 | % | 2,906 | 13 | % | |||||||
Net sales and transfers | 288,679 | 100 | % | 273,037 | 100 | % | 15,642 | 6 | % | |||||||
Cost of goods sold |
185,869 |
64 |
% |
175,168 |
64 |
% |
10,701 |
6 |
% |
|||||||
Gross profit | 102,810 | 36 | % | 97,869 | 36 | % | 4,941 | 5 | % | |||||||
Selling and administrative |
46,750 |
16 |
% |
45,083 |
17 |
% |
1,667 |
4 |
% |
|||||||
Loss on disposition of assets, net | 16 | | 4 | | 12 | | ||||||||||
Amortization | 598 | 1 | % | 151 | | 447 | | |||||||||
Operating income | $ | 55,446 | 19 | % | $ | 52,631 | 19 | % | $ | 2,815 | 5 | % | ||||
The following are financial highlights for North America in fiscal 2007:
25
Europe
|
Year Ended January 31 |
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Change % |
||||||||||||||
|
2007 |
% |
2006 |
% |
Change |
|||||||||||
|
(In thousands) |
|
|
|||||||||||||
Net sales | $ | 137,755 | 99 | % | $ | 132,213 | 98 | % | $ | 5,542 | 4 | % | ||||
Transfers between areas | 1,468 | 1 | % | 2,616 | 2 | % | (1,148 | ) | (44 | )% | ||||||
Net sales and transfers | 139,223 | 100 | % | 134,829 | 100 | % | 4,394 | 3 | % | |||||||
Cost of goods sold |
116,582 |
84 |
% |
111,083 |
82 |
% |
5,499 |
5 |
% |
|||||||
Gross profit | 22,641 | 16 | % | 23,746 | 18 | % | (1,105 | ) | (5 | )% | ||||||
Selling and administrative |
22,921 |
16 |
% |
21,799 |
17 |
% |
1,122 |
5 |
% |
|||||||
Loss (gain) on disposition of assets, net | (588 | ) | (1 | )% | 441 | | (1,029 | ) | | |||||||
Amortization | 851 | 1 | % | 1,264 | 1 | % | (413 | ) | (33 | )% | ||||||
Operating income | $ | (543 | ) | | $ | 242 | | $ | (785 | ) | | |||||
The following are financial highlights for Europe in fiscal 2007:
26
Asia Pacific
|
Year Ended January 31 |
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Change % |
||||||||||||||
|
2007 |
% |
2006 |
% |
Change |
|||||||||||
|
(In thousands) |
|
|
|||||||||||||
Net sales | $ | 48,256 | 100 | % | $ | 45,471 | 100 | % | $ | 2,785 | 6 | % | ||||
Transfers between areas | 220 | | 177 | | 43 | 24 | % | |||||||||
Net sales and transfers | 48,476 | 100 | % | 45,648 | 100 | % | 2,828 | 6 | % | |||||||
Cost of goods sold |
36,383 |
75 |
% |
33,254 |
73 |
% |
3,129 |
9 |
% |
|||||||
Gross profit | 12,093 | 25 | % | 12,394 | 27 | % | (301 | ) | (2 | )% | ||||||
Selling and administrative |
7,996 |
17 |
% |
7,657 |
16 |
% |
339 |
4 |
% |
|||||||
Gain on disposition of assets, net | (17 | ) | | (65 | ) | | 48 | | ||||||||
Amortization | 19 | | | | 19 | | ||||||||||
Operating income | $ | 4,095 | 8 | % | $ | 4,802 | 11 | % | $ | (707 | ) | (15 | )% | |||
The following are financial highlights for Asia Pacific in fiscal 2007:
China
|
Year Ended January 31 |
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Change % |
||||||||||||||
|
2007 |
% |
2006 |
% |
Change |
|||||||||||
|
(In thousands) |
|
|
|||||||||||||
Net sales | $ | 29,527 | 79 | % | $ | 22,243 | 80 | % | $ | 7,284 | 33 | % | ||||
Transfers between areas | 7,853 | 21 | % | 5,652 | 20 | % | 2,201 | 39 | % | |||||||
Net sales and transfers | 37,380 | 100 | % | 27,895 | 100 | % | 9,485 | 34 | % | |||||||
Cost of goods sold |
24,944 |
67 |
% |
19,175 |
69 |
% |
5,769 |
30 |
% |
|||||||
Gross profit | 12,436 | 33 | % | 8,720 | 31 | % | 3,716 | 43 | % | |||||||
Selling and administrative |
3,042 |
8 |
% |
2,468 |
9 |
% |
574 |
23 |
% |
|||||||
Loss on disposition of assets, net | 37 | | 5 | | 32 | | ||||||||||
Amortization | 4 | | 28 | | (24 | ) | | |||||||||
Operating income | $ | 9,353 | 25 | % | $ | 6,219 | 22 | % | $ | 3,134 | 50 | % | ||||
The following are financial highlights for China in fiscal 2007:
27
Non-Operating Items
Our interest expense in fiscal 2007 decreased 16% in comparison with fiscal 2006. The reduction reflected our scheduled paydown of long-term debt in November 2006.
Consolidated interest income increased $915,000 through increased investing activity and higher interest rates in fiscal 2007.
Our effective tax rate for fiscal 2007 increased to 34% in comparison to 32% in fiscal 2006. This increase was due to the reduced tax benefits from international financing and the discontinued special deduction for U.S. export sales, combined with the utilization of previously recorded foreign tax credits.
The statements of cash flows reflect the changes in cash and cash equivalents for the three years ended January 31, 2008 by classifying transactions into three major categories of activities: operating, investing and financing.
Our overall balance of cash and cash equivalents has decreased from over $36 million at January 31, 2007 and 2006 to $21 million at January 31, 2008. This decrease and a corresponding increase in our long-term borrowings are primarily the result of our share repurchase program, acquisitions, working capital requirements and our capital expansion plan in China. In the future we would expect our balance of cash and cash equivalents for ongoing operations to remain at approximately the $20 million level. Legal restrictions in certain jurisdictions limit our ability to repatriate cash to the United States. Certain transactions could result in negative tax consequences.
Operating
Our main source of liquidity is cash generated from operating activities. The major operating activity is net income adjusted for non-cash operating items such as depreciation, amortization and share-based compensation and changes in working capital. The following are operating activity highlights:
Investing
During the three years ended January 31, 2008, the major investing activities were capital expenditures, business acquisitions and the sale and purchase of marketable securities.
28
Capital expenditures are primarily for equipment and tooling related to product improvements, more efficient production methods and replacement for normal wear and tear. Capital expenditures by geographic segment were as follows (in thousands):
|
Year Ended January 31 |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2008 |
2007 |
2006 |
||||||
North America | $ | 7,986 | $ | 6,174 | $ | 5,923 | |||
Europe | 4,439 | 2,469 | 3,189 | ||||||
Asia Pacific | 5,302 | 481 | 336 | ||||||
China | 5,081 | 8,954 | 1,132 | ||||||
$ | 22,808 | $ | 18,078 | $ | 10,580 | ||||
The following are capital expenditures highlights during the three years ended January 31, 2008:
We completed the following acquisitions during the three years ended January 31, 2008:
We held marketable securities of $23 million at January 31, 2006. We held no marketable securities at January 31, 2008 and 2007. There were no realized or unrealized gains or losses related to our marketable securities.
Financing
The following are major financing activities during the three years ended January 31, 2008:
29
FINANCIAL CONDITION AND LIQUIDITY
Working capital, defined as current assets less current liabilities at January 31, 2008 was $152.0 million as compared to $113.1 million of working capital at January 31, 2007. Our current ratio, defined as current assets divided by current liabilities, at January 31, 2008 was 3.4 to 1 in comparison to 2.6 to 1 at January 31, 2007. Increases in accounts receivable and inventories during fiscal 2008 were the primary reasons for the changes in our working capital and the current ratio.
Total outstanding debt, including notes payable to banks, at January 31, 2008 was $110.7 million in comparison with $51.1 million at January 31, 2007. The debt increase is a result of funding various initiatives including our common stock repurchase and acquisition of American Compaction Equipment, Inc. Our debt agreements contain covenants relating to net worth and leverage ratios. We are in compliance with debt covenants at January 31, 2008. Borrowing arrangements currently in place with commercial banks provide available lines of credit totaling $150 million. As of January 31, 2008, we had outstanding borrowings of $104.0 million, with an additional $3.6 million committed through the issuance of letters of credit. Average interest rates on notes payable to banks were 4.3% at January 31, 2008 and 4.9% at January 31, 2007.
We believe our cash and cash equivalents, existing credit facilities and cash flows from operations will be sufficient to satisfy our expected working capital, capital expenditure and debt retirement requirements for fiscal 2009.
Defined Benefit Pension Plans
We maintain defined benefit pension plans in England and France covering certain employees. We calculate the liability and net periodic pension costs related to our defined benefit plans on an annual basis. The following are highlights of these defined benefit pension plans for fiscal 2008:
Postretirement Health Care Plan
We maintain a postretirement health care benefit plan in the United States consisting of health care coverage for approximately 170 eligible retirees and qualifying dependents. Another 105 current employees, all over 53 years of age, will be eligible to participate upon retirement. No additional employees will be eligible to participate in the plan. We calculate the liability and net periodic cost related to this health care plan on an annual basis. The following are highlights of the postretirement plan for fiscal 2008:
30
Environmental Matters
We are engaged in ongoing environmental remediation efforts at our Fairview, Oregon and Springfield, Ohio manufacturing facilities. Current estimates provide for some level of remediation activities in Fairview through 2019 and Springfield through 2013. Costs of certain remediation activities at the Fairview facility are shared with The Boeing Company, with Cascade paying 70% of actual remediation costs. The following are highlights of environmental matters during fiscal 2008:
Contractual Obligations and Commitments
The following summarizes our contractual obligations and commitments as of January 31, 2008:
|
Payment due by fiscal year |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total |
2009 |
2010 - 2011 |
2012 - 2013 |
After 2013 |
||||||||||
|
(In thousands) |
||||||||||||||
Notes payable to banks | $ | 2,484 | $ | 2,484 | $ | | $ | | $ | | |||||
Long-term debt | 108,232 | 423 | 846 | 104,846 | 2,117 | ||||||||||
Estimated interest payments(1) | 16,241 | 4,196 | 8,294 | 3,624 | 127 | ||||||||||
Operating leases | 8,395 | 3,440 | 4,077 | 878 | | ||||||||||
Defined benefit pension obligations(2) | 10,285 | 267 | 547 | 614 | 8,857 | ||||||||||
Postretirement benefit obligation(3) | 7,087 | 336 | 807 | 947 | 4,997 | ||||||||||
Total | $ | 152,724 | $ | 11,146 | $ | 14,571 | $ | 110,909 | $ | 16,098 | |||||
31
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. We evaluate our estimates and judgments on an on-going basis, including those related to uncollectible receivables, inventories, impairment of goodwill, warranty obligations, environmental liabilities, benefit plans, share-based compensation and deferred taxes. We base our estimates on our historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies reflect our more significant judgments and estimates in the preparation of our consolidated financial statements.
Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses on accounts receivable resulting from the inability of customers to make required payments. Such allowances are based on an ongoing review of customer payments against terms and a review of customer financial statements and financial information. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventory Reserves
Inventories are stated at the lower of cost or market. We maintain reserves to write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value, less costs to sell, based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which would result in cost of goods sold in the consolidated statements of income being greater than expected in the period in which more information becomes available.
Impairment of Goodwill
We review goodwill for impairment either annually or when events or changes in circumstances indicate the carrying value of the assets might exceed their current fair values. The review is performed for reporting units including North America, Europe, Australia and our construction attachment business in North America. Certain factors we consider important which could trigger an impairment review at an interim date outside of the annual review, include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or our overall business and significant industry or economic trends. The impairment review is based on a discounted projected cash flow model that uses estimates of future sales, sales growth rates, gross profits, expense and capital expenditure levels, a discount rate and estimated terminal values to determine the fair value of the operating entities should an impairment exist. We use our weighted average cost of capital (WACC) to discount future cash flows for goodwill impairment tests. The WACC is the expected rate of return based on our existing debt and equity capital structure. Changes in these and other factors could result in impairments in the carrying value of goodwill, which would require a writedown to the asset's fair value. If actual results are not consistent with our assumptions and judgments, we could be exposed to a material impairment charge.
32
Our goodwill impairment test for Europe assumes future operating results will reflect the benefits of our current efforts to improve our financial performance. If we do not realize these improvements it could result in an impairment of our goodwill in Europe in the future.
Warranty Obligations
We offer certain warranties with the sale of our products, which generally range from six months to one year. The warranty obligation is recorded as a liability on the balance sheet and is estimated through historical customer claims, product failure rates, material usage and service delivery costs incurred in correcting a product failure. Changes in these factors and statutory requirements for product warranties in markets in which we sell our products may require an adjustment to the recorded warranty obligations.
Environmental Liabilities
We accrue environmental remediation and litigation costs if it is probable a liability has been incurred at the financial statement date and the amount can be reasonably estimated. Our liability for environmental costs, other than for costs of assessments themselves, are generally determined after the completion of investigations and studies and are based on the estimated cost of remediation activities we are then required to undertake. The gross liability is based on our best estimate of undiscounted future costs using currently available technology and applying current regulations, as well as our own historical experience regarding environmental cleanup costs. The reliability and precision of the estimates are affected by numerous factors, such as site evaluation and reevaluation of the degree of remediation required, claims by third parties and changes to environmental laws and regulations. We adjust our liabilities as new remediation requirements are defined, as information becomes available permitting reasonable estimates to be made and to reflect new facts.
Benefit Plans
We make a number of assumptions with regard to both future financial conditions and future actions by plan participants to calculate on an actuarial basis the amount of income or expense and assets and liabilities recognized in association with our defined benefit and postretirement benefit plans. These assumptions include the expected return on plan assets, discount rates, expected increases in compensation levels, health care cost trend rates and expected rates of retirement and life expectancy for plan participants. We review the assumptions on an annual basis and make changes to reflect market conditions and the administration of the plans. While we believe the current assumptions are appropriate in the circumstances, actual results and changes in these assumptions in the future will result in adjustments that could impact the income or expense recognized in future years in relation to these plans.
The assumed rate of return on plan assets for our defined benefit plans is evaluated on an annual basis. We select the assumed rate of return based on information considering historical returns, our current and target asset allocation and the expected returns by asset class. We believe this assumption is reasonable given the asset composition and long-term historic trends. Our discount rate reflects the rate at which the pension benefits could be effectively settled. We increased our discount rate assumption to determine the January 31, 2008 liability to 5.8% from 5.2% at January 31, 2007 due to the market increases in interest rates during the year. Our most significant defined benefit plan is in England so interest rates on high-quality corporate bonds in that market have more influence on the overall discount rate.
Our discount rate, used to determine the liability for our postretirement plan, increased to 6.25% at January 31, 2008 from the discount rate of 5.75% at January 31, 2007. We determine our discount rate using a "yield curve expected benefit payment" methodology. This methodology uses individual
33
curve rates to discount each future year's expected plan benefit payments. We select our health care cost trend rates based on recent plan experience and expectations about future increases in plan costs. We assume health care costs in fiscal 2009 will increase by 9% and future increases will decline by 1% per year until 4.5% is reached in 2017. This assumption reflects a change from the prior year in which future costs were estimated to increase by 10% and decline to 4.5% in 2013. The following presents the sensitivity of the key postretirement plan assumptions (in thousands):
|
Increase |
|||
---|---|---|---|---|
The following presents the sensitivity of a 1% decrease in the discount rate: | ||||
Effect on net periodic benefit cost | $ | 142 | ||
Effect on postretirement benefit obligation | $ | 838 | ||
The following presents the sensitivity of a 1% increase in the health care cost trend: |
||||
Effect on net periodic benefit cost | $ | 223 | ||
Effect on postretirement benefit obligation | $ | 850 |
Share-based Compensation
We account for share-based compensation, for which we receive employee services in exchange for our equity instruments, using a fair value method. Share-based compensation cost is measured at the grant date based on the value of the award and is recognized as a corporate headquarter expense in North America over the service period the award is expected to vest. Determining the fair value share-based awards at the grant date requires judgment, including estimating the expected term of stock awards, the expected volatility of our common stock and expected dividends. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. We consider many factors when estimating expected forfeitures, including types of awards, award recipient class and historical experience. Significant changes in the assumptions for future awards and actual forfeiture rates could materially impact share-based compensation expense and our results of operations. Subsequent changes in forfeiture rates will be recorded as a cumulative adjustment in the period estimates are revised. See Notes 2 and 13 to the Consolidated Financial Statements (Item 8) for further discussion of our share-based awards and the related accounting treatment.
Deferred Taxes
Our provision for income taxes and the determination of the resulting deferred tax assets and liabilities involves a significant amount of management judgment. We are subject to taxation from federal, state and international jurisdictions. The taxes paid to these jurisdictions are subject to audit, although to date the results of any tax audits have been minor.
Judgment is also applied in determining whether deferred tax assets will be realized in full or in part. We record a valuation allowance to reduce our deferred tax assets when it is more likely than not that all or some portion of specific deferred tax assets, such as foreign tax credit carryovers or net operating loss carryforwards, will not be realized. We have recorded on our consolidated balance sheets a valuation allowance against various deferred tax assets. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged against income in the period such determination was made. Likewise, should we determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. We continually evaluate strategies that could allow for the future utilization of our deferred tax assets.
34
OFF BALANCE SHEET ARRANGEMENTS
At January 31, 2008 and 2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity market or credit risk that could arise if we had engaged in such relationships.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 157In September 2006, the FASB issued SFAS No. 157 (SFAS 157), "Fair Value Measurements." SFAS 157 provides a common definition of fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. In February 2008, the FASB issued final staff positions that will (1) defer the effective date of this statement for one year for certain nonfinancial assets and nonfinancial liabilities and (2) remove certain leasing transactions from the scope of the statement. We will apply this new accounting standard to all other fair value measurements effective February 1, 2008. We are currently evaluating the impact of the adoption of this standard on our financial statements.
SFAS 158In September 2006, the FASB issued SFAS No. 158 (SFAS 158), "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R)." This statement requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in other comprehensive income, net of tax effects, until they are amortized as a component of net periodic benefit cost. In addition, the measurement date, the date at which plan assets and the benefit obligation are measured, is required to be the company's fiscal year end. Presently, we use a December 31 measurement date for the postretirement benefit plan, which will change to coincide with our January 31 fiscal year-end date. As required by SFAS 158, we adopted the balance sheet recognition provision as of January 31, 2007. The measurement date provision is effective for the fiscal year beginning February 1, 2008. We are currently evaluating the impact of the adoption of the measurement date provision on our financial statements.
SFAS 159In February 2007, the FASB issued SFAS No. 159 (SFAS 159), "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115." SFAS 159 allows companies the choice to measure many financial instruments and certain other items at fair value. Application of SFAS 159 is required for our financial statements beginning February 1, 2008. We do not expect the adoption of SFAS 159 to have a material impact on our financial statements.
SFAS 141(R) & SFAS 160In December 2007, the FASB issued SFAS No. 141(R) (SFAS 141(R)), "Business Combinations," and SFAS No. 160 (SFAS 160), "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51". SFAS 141(R) requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed. Further, SFAS 141(R) also changes the accounting for acquired in-process research and development assets, contingent consideration, partial acquisitions and transaction costs. Under SFAS 160, all entities are required to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. In addition, transactions between an entity and noncontrolling interests will be treated as equity transactions. SFAS 141(R) and SFAS 160 will become effective for business combinations for which the acquisition date is on or after February 1, 2009. We are currently evaluating the impact of the adoption of these standards on our financial statements.
35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rate and interest rate fluctuations. A significant portion of our net sales are denominated in currencies from international markets outside the United States. As a result, our operating results could become subject to significant fluctuations based upon changes in the exchange rates of the foreign currencies in relation to the United States dollar.
The table below illustrates the hypothetical increase or decrease in fiscal 2008 net sales of a 10% change in the U.S. dollar against foreign currencies which impact our operations (in millions):
Euro | $ | 13.2 | |
Chinese yuan | 4.0 | ||
British pound | 3.4 | ||
Canadian dollar | 2.6 | ||
Japanese yen | 2.4 | ||
Other currencies (representing 7% of consolidated net sales) | 4.1 |
We enter into foreign currency forward exchange contracts to offset the impact of currency fluctuations on certain nonfunctional currency assets and liabilities. The principal currencies hedged are denominated in Japanese yen, Canadian dollars, Euros and British pounds. Our foreign currency forward exchange contracts have terms lasting up to six months, but generally less than one month. We do not enter into derivatives or other financial instruments for trading or speculative purposes. See Note 18 to the Consolidated Financial Statements (Item 8).
A majority of our products are manufactured using steel as a primary raw material and steel based components as purchased parts. As such, our cost of goods sold is sensitive to fluctuations in steel prices, either directly through the purchase of steel as raw material or indirectly through the purchase of steel based components.
Presuming that the full impact of commodity steel price increases is reflected in all steel and steel based component purchases, we estimate our gross profit percentage would decrease by approximately 0.3% for each 1.0% increase in commodity steel prices. Based on our statement of income for the year ended January 31, 2008, a 1.0% increase in commodity steel prices would have decreased consolidated gross profit by approximately $1.5 million.
During fiscal 2008, we continued to experience some increases in prices for steel and steel components, which comprise 35-40% of our total product cost. We have continued to move aggressively to offset these increases through a variety of means, including sales price increases, cost reduction activities and alternative sourcing arrangements. In general we were more successful in North America, China and Asia Pacific in realizing the full benefits of these mitigating measures. In Europe the measures have not been as successful, resulting in some erosion of gross profit for certain products. During fiscal 2009 we are expecting some additional material price increases and will continue to implement mitigating measures where needed.
36
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Cascade Corporation
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Cascade Corporation and its subsidiaries at January 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the appendix appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2, to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in fiscal 2006 and the manner in which it accounts for defined benefit pension and other post retirement plans effective January 31, 2007.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
37
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Portland, Oregon
April 4, 2008
38
Cascade Corporation
Consolidated Statements of Income
|
Year Ended January 31 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2008 |
2007 |
2006 |
|||||||
|
(In thousands, except per share amounts) |
|||||||||
Net sales | $ | 558,073 | $ | 478,850 | $ | 450,503 | ||||
Cost of goods sold | 386,899 | 328,870 | 307,774 | |||||||
Gross profit | 171,174 | 149,980 | 142,729 | |||||||
Selling and administrative expenses |
89,445 |
80,709 |
77,007 |
|||||||
Loss (gain) on disposition of assets, net | (1,121 | ) | (552 | ) | 385 | |||||
Amortization | 3,214 | 1,472 | 1,443 | |||||||
Insurance litigation recovery, net | (15,977 | ) | | | ||||||
Operating income |
95,613 |
68,351 |
63,894 |
|||||||
Interest expense | 4,094 | 2,294 | 2,741 | |||||||
Interest income | (779 | ) | (1,894 | ) | (979 | ) | ||||
Other (income) expense, net | 1,460 | (1,304 | ) | (95 | ) | |||||
Income before provision for income taxes |
90,838 |
69,255 |
62,227 |
|||||||
Provision for income taxes | 30,691 | 23,774 | 20,176 | |||||||
Net income | $ | 60,147 | $ | 45,481 | $ | 42,051 | ||||
Basic earnings per share |
$ |
5.08 |
$ |
3.64 |
$ |
3.40 |
||||
Diluted earnings per share | $ | 4.88 | $ | 3.48 | $ | 3.27 | ||||
Basic weighted average shares outstanding |
11,841 |
12,505 |
12,354 |
|||||||
Diluted weighted average shares outstanding | 12,333 | 13,071 | 12,850 |
The accompanying notes are an integral part of the consdolidated financial statements.
39
Cascade Corporation
Consolidated Balance Sheets
|
As of January 31 |
|||||||
---|---|---|---|---|---|---|---|---|
|
2008 |
2007 |
||||||
|
(In thousands, except per share amounts) |
|||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 21,223 | $ | 36,593 | ||||
Accounts receivable, less allowance for doubtful accounts of $1,623 and $1,515 | 93,117 | 74,992 | ||||||
Inventories | 85,049 | 58,280 | ||||||
Deferred income taxes | 6,213 | 4,481 | ||||||
Prepaid expenses and other | 10,887 | 8,609 | ||||||
Total current assets | 216,489 | 182,955 | ||||||
Property, plant and equipment, net | 98,350 | 84,151 | ||||||
Goodwill | 118,826 | 99,498 | ||||||
Deferred income taxes | 5,948 | 11,817 | ||||||
Intangible assets, net | 20,916 | 17,026 | ||||||
Other assets | 1,971 | 1,985 | ||||||
Total assets | $ | 462,500 | $ | 397,432 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||
Current liabilities: | ||||||||
Notes payable to banks | $ | 2,484 | $ | 4,546 | ||||
Current portion of long-term debt | 423 | 12,573 | ||||||
Accounts payable | 32,727 | 26,008 | ||||||
Accrued payroll and payroll taxes | 10,148 | 9,391 | ||||||
Other accrued expenses | 18,736 | 17,307 | ||||||
Total current liabilities | 64,518 | 69,825 | ||||||
Long-term debt, net of current portion | 107,809 | 34,000 | ||||||
Accrued environmental expenses | 4,314 | 5,838 | ||||||
Deferred income taxes | 5,710 | 2,798 | ||||||
Employee benefit obligations | 8,824 | 9,719 | ||||||
Other liabilities | 3,300 | 3,616 | ||||||
Total liabilities | 194,475 | 125,796 | ||||||
Commitments and contingencies (Note 11) |
||||||||
Shareholders' equity: |
||||||||
Common stock, $.50 par value, 20,000 authorized shares; 10,840 and 12,070 shares issued and outstanding | 5,420 | 6,035 | ||||||
Retained earnings | 226,932 | 253,307 | ||||||
Accumulated other comprehensive income | 35,673 | 12,294 | ||||||
Total shareholders' equity | 268,025 | 271,636 | ||||||
Total liabilities and shareholders' equity | $ | 462,500 | $ | 397,432 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
40
Cascade Corporation
Consolidated Statements of Changes in Shareholders' Equity
(In thousands, except per share amounts)
|
Common Stock |
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Additional Paid-In Capital |
Unamortized Deferred Compensation |
Retained Earnings |
Annual Comprehensive Income (Loss) |
|||||||||||||||||
|
Shares |
Amount |
|||||||||||||||||||
Balance at January 31, 2005 | 12,224 | $ | 6,112 | $ | 20,004 | $ | (4,506 | ) | $ | 188,507 | $ | 7,766 | |||||||||
Net income |
|
|
|
|
42,051 |
|
$ |
42,051 |
|||||||||||||
Dividends ($.54 per share) | | | | | (6,691 | ) | | | |||||||||||||
Common stock issued | 312 | 156 | 2,631 | | | | | ||||||||||||||
Tax benefit from exercise of stock options | | | 1,183 | | | | | ||||||||||||||
Deferred compensation from stock appreciation rights | | | (4,734 | ) | 4,734 | | | | |||||||||||||
Share-based compensation | | | 2,506 | (228 | ) | | | | |||||||||||||
Translation adjustment | | | | | | 592 | 592 | ||||||||||||||
Minimum pension liability adjustment, net of tax effect of $393 | | | | | | (677 | ) | (677 | ) | ||||||||||||
Balance at January 31, 2006 | 12,536 | 6,268 | 21,590 | | 223,867 | 7,681 | $ | 41,966 | |||||||||||||
Net income | | | | | 45,481 | | $ | 45,481 | |||||||||||||
Dividends ($.61 per share) | | | | | (7,603 | ) | | | |||||||||||||
Common stock issued | 291 | 145 | 3,296 | | | | | ||||||||||||||
Tax benefit from exercise of stock options | | | 1,083 | | | | | ||||||||||||||
Common stock repurchase | (757 | ) | (378 | ) | (30,002 | ) | | (8,438 | ) | | | ||||||||||
Share-based compensation | | | 4,033 | | | | | ||||||||||||||
Translation adjustment | | | | | | 4,008 | 4,008 | ||||||||||||||
Minimum pension/postretirement liability adjustment, net of tax effect of $360 | | | | | | 605 | 605 | ||||||||||||||
Balance at January 31, 2007 | 12,070 | 6,035 | | | 253,307 | 12,294 | $ | 50,094 | |||||||||||||
Net income |
|
|
|
|
60,147 |
|
$ |
60,147 |
|||||||||||||
Dividends ($.70 per share) | | | | | (8,243 | ) | | | |||||||||||||
Common stock issued | 430 | 215 | 3,628 | | | | | ||||||||||||||
Tax benefit from exercise of stock options | | | 3,084 | | | | | ||||||||||||||
Common stock repurchase | (1,660 | ) | (830 | ) | (11,163 | ) | | (78,279 | ) | | | ||||||||||
Share-based compensation | | | 4,451 | | | | | ||||||||||||||
Translation adjustment | | | | | | 22,817 | 22,817 | ||||||||||||||
Minimum pension/postretirement liability adjustment, net of tax effect of ($304) | | | | | | 562 | 562 | ||||||||||||||
Balance at January 31, 2008 | 10,840 | $ | 5,420 | $ | | $ | | $ | 226,932 | $ | 35,673 | $ | 83,526 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
41
Cascade Corporation
Consolidated Statements of Cash Flows
|
Year Ended January 31 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 |
2007 |
2006 |
|||||||||
|
(In thousands) |
|||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 60,147 | $ | 45,481 | $ | 42,051 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 13,898 | 13,753 | 14,562 | |||||||||
Amortization | 3,214 | 1,472 | 1,443 | |||||||||
Share-based compensation | 4,451 | 4,033 | 2,278 | |||||||||
Deferred income taxes | 2,560 | (1,132 | ) | (2,995 | ) | |||||||
Loss (gain) on disposition of assets | (1,121 | ) | (552 | ) | 385 | |||||||
Changes in operating assets and liabilities, net of effects of acquisitions | ||||||||||||
Accounts receivable | (9,843 | ) | (3,878 | ) | 2,023 | |||||||
Inventories | (19,514 | ) | 2,898 | (12,026 | ) | |||||||
Prepaid expenses and other | 1,237 | (2,667 | ) | (141 | ) | |||||||
Accounts payable and accrued expenses | 3,671 | 863 | 2,378 | |||||||||
Current income tax payable and receivable | (3,492 | ) | (3,159 | ) | 245 | |||||||
Other assets and liabilities | (1,882 | ) | (3 | ) | 222 | |||||||
Net cash provided by operating activities | 53,326 | 57,109 | 50,425 | |||||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures | (22,808 | ) | (18,078 | ) | (10,580 | ) | ||||||
Business acquisitions | (11,529 | ) | (40,255 | ) | | |||||||
Proceeds from sale of assets | 2,710 | 1,747 | 358 | |||||||||
Sale of marketable securities | | 36,604 | 71,549 | |||||||||
Purchase of marketable securities | | (13,600 | ) | (93,050 | ) | |||||||
Net cash used in investing activities | (31,627 | ) | (33,582 | ) | (31,723 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Payments on long-term debt and capital leases | (112,143 | ) | (38,033 | ) | (12,922 | ) | ||||||
Proceeds from long-term debt | 173,433 | 58,000 | | |||||||||
Notes payable to banks, net | (3,166 | ) | (2,501 | ) | 2,452 | |||||||
Cash dividends paid | (8,243 | ) | (7,603 | ) | (6,691 | ) | ||||||
Common stock repurchased | (90,240 | ) | (36,540 | ) | | |||||||
Common stock issued under share-based compensation plans | 3,843 | 3,441 | 2,787 | |||||||||
Excess tax benefit from exercise of share-based compensation awards | 3,084 | 1,083 | 1,183 | |||||||||
Net cash used in financing activities | (33,432 | ) | (22,153 | ) | (13,191 | ) | ||||||
Effect of exchange rate changes | (3,637 | ) | (274 | ) | (500 | ) | ||||||
Change in cash and cash equivalents | (15,370 | ) | 1,100 | 5,011 | ||||||||
Cash and cash equivalents at beginning of year | 36,593 | 35,493 | 30,482 | |||||||||
Cash and cash equivalents at end of period | $ | 21,223 | $ | 36,593 | $ | 35,493 | ||||||
Supplemental disclosure of noncash information: | ||||||||||||
See Note 12 to Consolidated Financial Statements |
The accompanying notes are an integral part of the consolidated financial statements.
42
Cascade Corporation
Notes to Consolidated Financial Statements
Note 1Description of Business
Cascade Corporation is an international company engaged in the manufacture of materials handling products that are widely used on industrial lift trucks and, to a lesser extent, on construction, mining and agricultural vehicles. Accordingly, our sales are largely dependent on the sales of lift trucks and on the sales of replacement parts. Our sales are made throughout the world. We are headquartered in Fairview, Oregon, employing approximately 2,400 people and maintaining operations in 15 countries outside the United States.
Note 2Summary of Significant Accounting Policies
Principles of Consolidation
Our consolidated financial statements include the accounts of Cascade Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit and highly liquid investments with maturities of three months or less at the date of purchase.
Allowances for Trade Accounts Receivable
Trade accounts receivable are stated net of allowances for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses on accounts receivable resulting from the inability of our customers to make required payments. Such allowances are based on evaluation of the credit worthiness of our customers, an ongoing review of customer payments against terms, historical trends and economic circumstances.
Inventories
Inventories are stated at the lower of average cost or market. Cost is computed on a standard basis, which approximates actual cost. We classify inventory into two categories: finished goods and raw materials and components. Finished goods inventory represents inventory that is readily available for sale without further manufacturing and spare parts. Raw materials and components include inventory to be used to build finished goods inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is generally provided using the straight-line method over the estimated useful lives of the assets. Tooling costs are capitalized as machinery and equipment. Useful lives range from thirty to forty years for buildings, fifteen years for land improvements and two to ten years for machinery and equipment. Maintenance and repairs are expensed as incurred and costs of improvements and renewals are capitalized. Upon disposal, cost and accumulated depreciation are removed from the accounts and the resulting gains or losses are reflected in operations.
Intangible Assets
Intangible assets represent items such as customer relationships, intellectual property, primarily patents and trade names, and non-compete agreements that are assigned a fair value at the date of
43
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 2Summary of Significant Accounting Policies (Continued)
acquisition. We amortize finite-lived assets on a straight-line basis over the periods that expected economic benefits will be provided. Useful lives range from six to ten years for customer relationships, four to ten years for intellectual property and one to five years for other intangible assets. At the end of the estimated economic life, the fully-amortized intangible asset cost and corresponding accumulated amortization are eliminated.
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the fair value of the net identifiable assets acquired. We perform an annual review for impairment for North America, Europe, Australia and our construction attachment business in North America. The tests are performed by determining the fair values using a discounted cash flow model and comparing those fair values to the carrying values, including goodwill. The factors considered in performing this assessment include current and projected future operating results and changes in the intended uses of the assets, as well as the effects of obsolescence, demand, competition, and other industry and economic trends. We have completed our annual review for impairment and determined there has been no impairment of goodwill.
Impairment of Long-Lived Assets
Long-lived assets, primarily property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the assets and eventual disposition in comparison with the carrying value. Measurement of an impairment loss for long-lived assets we expect to hold and use is based on the fair value of the asset.
Common Stock
We follow the practice of recording amounts received upon the exercise of awards by crediting common stock and additional paid-in capital. In addition, we credit additional paid-in-capital upon the recognition of share-based compensation expense. We realize an income tax benefit from the exercise or early disposition of certain stock awards. This benefit results in a decrease in current income taxes payable and an increase in additional paid-in capital.
During the third quarter of fiscal 2007, we initiated a program to repurchase common stock. As of January 31, 2008 we had repurchased 2,417,000 shares for $129.1 million. The repurchase of shares of common stock is recorded as a reduction in additional paid-in capital until the account balance is zero, then future repurchases are recorded as a reduction in retained earnings.
Minimum Pension/Postretirement Liability Adjustment
We record a minimum pension/postretirement liability adjustment to the extent that the accumulated benefit obligation exceeds the fair value of plan assets and accrued pension/postretirement liabilities. This adjustment is reflected as a reduction in shareholders' equity, net of income tax benefits.
44
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 2Summary of Significant Accounting Policies (Continued)
Share-Based Compensation
In the second quarter of fiscal 2006, we adopted SFAS No. 123 (revised 2004), "Share-Based Payment" (123R). This standard is a revision of SFAS 123, "Accounting for Stock-Based Compensation" and supersedes APB 25 and FIN 28. SFAS 123R addresses the accounting for share-based compensation in which we receive employee services in exchange for our equity instruments. Under SFAS 123R, we recognized compensation cost for share-based compensation issued to or purchased by employees, net of estimated forfeitures, under share-based compensation plans using a fair value method. We adopted SFAS 123R using the modified prospective method as of May 1, 2005. Accordingly, no prior periods were restated. Under this method, we record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remained outstanding as of the beginning of the period of adoption.
Prior to May 1, 2005 we accounted for our stock options under Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," which permitted the use of intrinsic value accounting. No stock-based compensation cost was reflected in net income for stock options, as all options granted had an exercise price equal to the market price of the underlying common stock on the date of grant. We had adopted disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure-an Amendment of FASB Statement No. 123."
We also granted awards under a stock appreciation rights (SARS) plan. Under Financial Interpretation No. (FIN) 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans," SARS were accounted for under variable plan accounting. Accordingly, we recorded deferred compensation as a reduction of shareholders' equity, equal to the excess of the market value of our common stock on the balance sheet date or date of exercise over the base price at the date of grant. The deferred compensation was recognized as an expense over the vesting period based on the periods in which the executives and directors performed services.
The following table illustrates the pro forma effect on net income and earnings per share for fiscal 2006 if we had recorded compensation expense based on the fair value method for all share-based compensation awards (in thousands, except per share amount):
|
Year Ended January 31 |
|||
---|---|---|---|---|
|
2006 |
|||
Net incomeas reported | $ | 42,051 | ||
Add: SARS amortization, net of income taxes of $80 in 2006 | (148 | ) | ||
Net income excluding SARS amortization | 41,903 | |||
Deduct: total stock-based compensation, net of income taxes of $140 in 2006, determined under fair value based method | (297 | ) | ||
Net income applicable to common shareholderspro forma | $ | 41,606 | ||
Basic earnings per shareas reported | $ | 3.40 | ||
Basic earnings per sharepro forma | $ | 3.37 | ||
Diluted earnings per shareas reported | $ | 3.27 | ||
Diluted earnings per sharepro forma | $ | 3.24 |
45
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 2Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation
We translate the balance sheets of our foreign subsidiaries using fiscal year-end exchange rates. The cumulative effect on such translations is included in shareholders' equity. The consolidated statements of income and cash flows are translated using the average exchange rates for the period.
Environmental Remediation
We accrue environmental costs if it is probable a liability has been incurred at the financial statement date and the amount can be reasonably estimated. Recorded liabilities have not been discounted. Environmental compliance and legal costs are expensed as incurred. Assets related to the reimbursement of amounts expended for environmental expenses are recognized only when realization is probable.
Foreign Currency Forward Exchange Contracts
Gains and losses on foreign currency forward exchange contracts, which generally mature in six months or less, are recognized in other income (expense) and measured over the period of the contract by reference to the forward rate for a contract to be consummated on the same future date as the original contract.
Revenue Recognition
We recognize revenue when the following criteria are met:
Persuasive evidence of an arrangement existsSales arrangements are supported by written or electronic documentation or evidence from a customer.
Delivery has occurred or services have been renderedRevenue is recognized when title transfers and risk and rewards of ownership have passed to the customer. This generally occurs upon shipment of our product with "FOB Shipping Point" terms. Shipments with "FOB Destination" terms are recorded as revenue when products are delivered to the customer. Customers are responsible for payment even if the product is not sold to their end customer. Once shipping terms are met we have no continuing obligations or performance criteria requirements.
Fixed or determinable sales priceSales are at fixed or established sales prices determined prior to the time the products are shipped with no customer cancellation, price protection or termination clauses.
Collectibility is reasonably assuredBased on our credit management policies, we generally believe collectibility is reasonably assured when product is shipped to a customer. Provisions for uncollectible accounts and return allowances are recorded at the time revenue is recognized based on our historical experience.
Shipping and Handling Costs
We incur shipping, handling and other related costs for the shipment of goods to customers. These costs are recognized in the period in which the expenses occur and are classified as cost of goods sold. Amounts billed to customers for shipping, handling and related costs are reported as a component of net sales.
46
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 2Summary of Significant Accounting Policies (Continued)
Warranty Obligations
We record a liability on our consolidated balance sheet for costs related to certain warranties we provide with the sales of our products. This liability is estimated through historical customer claims, product failure rates, material usage and service delivery costs incurred in correcting a product failure.
Income Taxes
Deferred income tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and the amounts reported in the consolidated financial statements. The provision for income taxes is the tax payable for the period and the change during the period in net deferred income tax assets and liabilities. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized.
Research and Development Costs
Research and development costs are expensed as incurred and are related to developing new products and to improving existing products or processes. These costs primarily include salaries, consulting, supplies, legal costs related to patents and design costs. We incurred research and development costs of $3.8 million, $3.8 million, and $3.3 million for the years ended January 31, 2008, 2007 and 2006, respectively.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable and foreign currency forward exchange contracts. We place our cash and cash equivalents in major financial institutions. Deposits held with the financial institutions may exceed the Federal Deposit Insurance Corporation limit.
Accounts receivable are with a large number of customers, primarily equipment manufacturers and dealers, dispersed across a wide geographic base. No single customer accounts for more than 10% of our consolidated net sales. Our consolidated net sales to all original equipment manufacturers (OEM) are approximately 45% of total net sales. This percentage is consistent with recent years. We perform on-going credit evaluations and do not require collateral. Allowances are maintained for potential credit losses when deemed necessary.
See Note 18 "Derivative Instruments and Hedging Activities" for discussion of foreign currency forward exchange contracts.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on our historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Significant estimates and judgments made by our management include matters such as the collectibility of accounts receivable, obsolete inventory reserves, realizability of deferred income tax
47
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 2Summary of Significant Accounting Policies (Continued)
assets, realizability of goodwill and long-lived assets, warranty liabilities, share based compensation and benefit plan assumptions and future costs of environmental matters.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects potential dilution that could occur if stock options and SARS were exercised or converted into common stock using the treasury stock method.
Recent Accounting Pronouncements
SFAS 157In September 2006, the FASB issued SFAS No. 157 (SFAS 157), "Fair Value Measurements." SFAS 157 provides a common definition of fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. In February 2008, the FASB issued final staff positions that will (1) defer the effective date of this statement for one year for certain nonfinancial assets and nonfinancial liabilities and (2) remove certain leasing transactions from the scope of the statement. We will apply this new accounting standard to all other fair value measurements effective February 1, 2008. We are currently evaluating the impact of the adoption of this statement on our financial statements.
SFAS 158In September 2006, the FASB issued SFAS No. 158 (SFAS 158), "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R)." This statement requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in other comprehensive income, net of tax effects, until they are amortized as a component of net periodic benefit cost. In addition, the measurement date, the date at which plan assets and the benefit obligation are measured, is required to be the company's fiscal year end. Presently, we use a December 31 measurement date for the postretirement benefit plan, which will change to coincide with our January 31 fiscal year-end date. As required by SFAS 158, we adopted the balance sheet recognition provision as of January 31, 2007. The measurement date provision is effective for the fiscal year beginning February 1, 2008. We are currently evaluating the impact of the adoption of the measurement date provision on our financial statements.
SFAS 159In February 2007, the FASB issued SFAS No. 159 (SFAS 159), "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115." SFAS 159 allows companies the choice to measure many financial instruments and certain other items at fair value. Application of SFAS 159 is required for our financial statements beginning February 1, 2008. We do not expect the adoption of SFAS 159 to have a material impact on our financial statements.
SFAS 141(R) & SFAS 160In December 2007, the FASB issued SFAS No. 141(R) (SFAS 141(R)), "Business Combinations," and SFAS No. 160 (SFAS 160), "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51". SFAS 141(R) requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed. Further, SFAS 141(R) also changes the accounting for acquired in-process research and development assets, contingent
48
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 2Summary of Significant Accounting Policies (Continued)
consideration, partial acquisitions and transaction costs. Under SFAS 160, all entities are required to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. In addition, transactions between an entity and noncontrolling interests will be treated as equity transactions. SFAS 141(R) and SFAS 160 will become effective for business combinations for which the acquisition date is on or after February 1, 2009. We are currently evaluating the impact of the adoption of these standards on our financial statements.
Note 3Segment Information
Our operating units have several economic characteristics and attributes, including similar products, distribution patterns and classes of customers. As a result, we aggregate our operating units into four geographic operating segments related to the manufacturing, distribution and servicing of material handling load engagement products. We evaluate the performance of each of our operating segments based on income before interest, miscellaneous income/expense and income taxes. The accounting policies of the operating segments are the same as those described in the summary of accounting policies.
Revenues and operating results are classified according to the country of origin. Transfers represent sales between our geographic operating segments. The costs of our corporate office are included in North America. Identifiable assets are attributed to the geographic location in which they are located. Net sales and transfers, operating results and identifiable assets by geographic operating segment were as follows (in thousands):
|
Year Ended January 31 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
North America |
Europe |
Asia Pacific |
China |
Eliminations |
Consolidation |
|||||||||||||
2008 | |||||||||||||||||||
Net sales | $ | 286,832 | $ | 171,435 | $ | 59,776 | $ | 40,030 | $ | 558,073 | |||||||||
Transfers between areas | 33,118 | 1,497 | 179 | 17,410 | (52,204 | ) | | ||||||||||||
Net sales and transfers | $ | 319,950 | $ | 172,932 | $ | 59,955 | $ | 57,440 | $ | (52,204 | ) | $ | 558,073 | ||||||
Gross profit | $ | 109,832 | $ | 27,644 | $ | 15,063 | $ | 18,635 | $ | 171,174 | |||||||||
Selling and administrative | 51,020 | 26,201 | 8,297 | 3,927 | 89,445 | ||||||||||||||
Loss (gain) on disposition of assets, net | (1,135 | ) | | (34 | ) | 48 | (1,121 | ) | |||||||||||
Amortization | 2,482 | 732 | | | 3,214 | ||||||||||||||
Insurance litigation recovery, net | (15,977 | ) | | | | (15,977 | ) | ||||||||||||
Operating income | $ | 73,442 | $ | 711 | $ | 6,800 | $ | 14,660 | $ | 95,613 | |||||||||
Total assets | $ | 236,022 | $ | 135,171 | $ | 43,471 | $ | 47,836 | $ | 462,500 | |||||||||
Property, plant and equipment, net | $ | 35,026 | $ | 38,815 | $ | 6,745 | $ | 17,764 | $ | 98,350 | |||||||||
Capital expenditures | $ | 7,986 | $ | 4,439 | $ | 5,302 | $ | 5,081 | $ | 22,808 | |||||||||
Depreciation expense | $ | 7,066 | $ | 5,091 | $ | 385 | $ | 1,356 | $ | 13,898 |
49
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 3Segment Information (Continued)
|
Year Ended January 31 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
North America |
Europe |
Asia Pacific |
China |
Eliminations |
Consolidation |
|||||||||||||
2007 | |||||||||||||||||||
Net sales | $ | 263,312 | $ | 137,755 | $ | 48,256 | $ | 29,527 | $ | | $ | 478,850 | |||||||
Transfers between areas | 25,367 | 1,468 | 220 | 7,853 | (34,908 | ) | | ||||||||||||
Net sales and transfers | $ | 288,679 | $ | 139,223 | $ | 48,476 | $ | 37,380 | $ | (34,908 | ) | $ | 478,850 | ||||||
Gross profit | $ | 102,810 | $ | 22,641 | $ | 12,093 | $ | 12,436 | $ | 149,980 | |||||||||
Selling and administrative | 46,750 | 22,921 | 7,996 | 3,042 | 80,709 | ||||||||||||||
Loss (gain) on disposition of assets, net | 16 | (588 | ) | (17 | ) | 37 | (552 | ) | |||||||||||
Amortization | 598 | 851 | 19 | 4 | 1,472 | ||||||||||||||
Operating income (loss) | $ | 55,446 | $ | (543 | ) | $ | 4,095 | $ | 9,353 | $ | 68,351 | ||||||||
Total assets | $ | 213,451 | $ | 114,660 | $ | 31,323 | $ | 37,998 | $ | 397,432 | |||||||||
Property, plant and equipment, net | $ | 34,378 | $ | 35,300 | $ | 1,642 | $ | 12,831 | $ | 84,151 | |||||||||
Capital expenditures | $ | 6,174 | $ | 2,469 | $ | 481 | $ | 8,954 | $ | 18,078 | |||||||||
Depreciation expense | $ | 7,899 | $ | 4,968 | $ | 387 | $ | 499 | $ | 13,753 |
|
Year Ended January 31 |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
North America |
Europe |
Asia Pacific |
China |
Eliminations |
Consolidation |
||||||||||||
2006 | ||||||||||||||||||
Net sales | $ | 250,576 | $ | 132,213 | $ | 45,471 | $ | 22,243 | $ | | $ | 450,503 | ||||||
Transfers between areas | 22,461 | 2,616 | 177 | 5,652 | (30,906 | ) | | |||||||||||
Net sales and transfers | $ | 273,037 | $ | 134,829 | $ | 45,648 | $ | 27,895 | $ | (30,906 | ) | $ | 450,503 | |||||
Gross profit | $ | 97,869 | $ | 23,746 | $ | 12,394 | $ | 8,720 | $ | 142,729 | ||||||||
Selling and administrative | 45,083 | 21,799 | 7,657 | 2,468 | 77,007 | |||||||||||||
Loss (gain) on disposition of assets, net | 4 | 441 | (65 | ) | 5 | 385 | ||||||||||||
Amortization | 151 | 1,264 | | 28 | 1,443 | |||||||||||||
Operating income | $ | 52,631 | $ | 242 | $ | 4,802 | $ | 6,219 | $ | 63,894 | ||||||||
Total assets | $ | 196,078 | $ | 110,785 | $ | 30,751 | $ | 23,669 | $ | 361,283 | ||||||||
Property, plant and equipment, net | $ | 34,302 | $ | 35,336 | $ | 1,567 | $ | 4,169 | $ | 75,374 | ||||||||
Capital expenditures | $ | 5,923 | $ | 3,189 | $ | 336 | $ | 1,132 | $ | 10,580 | ||||||||
Depreciation expense | $ | 8,032 | $ | 5,752 | $ | 412 | $ | 366 | $ | 14,562 |
50
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 3Segment Information (Continued)
The following table represents sales by place of destination:
|
Year Ended January 31 |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2008 |
2007 |
2006 |
||||||
|
(In thousands) |
||||||||
United States | $ | 256,149 | $ | 229,438 | $ | 215,815 | |||
Europe, excluding United Kingdom | 128,017 | 102,329 | 102,265 | ||||||
China | 36,471 | 27,703 | 20,414 | ||||||
United Kingdom | 32,819 | 27,955 | 27,113 | ||||||
Canada | 24,941 | 25,605 | 26,694 | ||||||
Other countries (less than 5% of total sales individually) | 79,676 | 65,820 | 58,202 | ||||||
$ | 558,073 | $ | 478,850 | $ | 450,503 | ||||
The following table represents the value of long-lived assets including property, plant and equipment (net), goodwill, intangible assets (net) and other long-term assets by the country in which they are located:
|
Year Ended January 31 |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2008 |
2007 |
2006 |
||||||
|
(In thousands) |
||||||||
United States | $ | 82,308 | $ | 70,571 | $ | 31,523 | |||
Canada | 80,475 | 69,131 | 72,589 | ||||||
China | 17,766 | 12,834 | 4,176 | ||||||
The Netherlands | 17,730 | 16,286 | 16,468 | ||||||
Italy | 11,930 | 10,981 | 11,311 | ||||||
Germany | 8,935 | 8,859 | 9,143 | ||||||
Other countries (less than 5% of total long-lived assets individually) | 20,919 | 13,998 | 13,104 | ||||||
$ | 240,063 | $ | 202,660 | $ | 158,314 | ||||
Note 4Inventories
|
January 31 |
|||||
---|---|---|---|---|---|---|
|
2008 |
2007 |
||||
|
(In thousands) |
|||||
Finished goods | $ | 35,303 | $ | 24,609 | ||
Raw materials and components | 49,746 | 33,671 | ||||
$ | 85,049 | $ | 58,280 | |||
51
Notes to Consolidated Financial Statements (Continued)
Note 5Property, Plant and Equipment
|
January 31 |
||||||
---|---|---|---|---|---|---|---|
|
2008 |
2007 |
|||||
|
(In thousands) |
||||||
Land | $ | 8,862 | $ | 6,069 | |||
Buildings | 54,889 | 48,201 | |||||
Machinery and equipment | 188,124 | 164,481 | |||||
251,875 | 218,751 | ||||||
Accumulated depreciation | (153,525 | ) | (134,600 | ) | |||
$ | 98,350 | $ | 84,151 | ||||
Note 6Goodwill
During Fiscal 2008, goodwill increased $12.2 million due to fluctuations in foreign currencies. The remaining increase relates to acquisitions. We have no goodwill in China. The following table provides a breakdown of goodwill by geographic region:
|
January 31 |
|||||
---|---|---|---|---|---|---|
|
2008 |
2007 |
||||
|
(In thousands) |
|||||
North America | $ | 103,965 | $ | 85,903 | ||
Europe | 11,893 | 10,598 | ||||
Asia Pacific | 2,968 | 2,997 | ||||
$ | 118,826 | $ | 99,498 | |||
Note 7Intangible Assets
|
January 31 |
||||||
---|---|---|---|---|---|---|---|
|
2008 |
2007 |
|||||
|
(In thousands) |
||||||
Customer relationships | $ | 19,014 | $ | 13,390 | |||
Intellectual property | 5,100 | 4,617 | |||||
Other | 503 | 1,938 | |||||
24,617 | 19,945 | ||||||
Accumulated amortization | (3,701 | ) | (2,919 | ) | |||
$ | 20,916 | $ | 17,026 | ||||
During fiscal 2008, intangible assets increased $7.3 million due to acquisitions, which included a $600,000 indefinite-lived asset for a trademark.
52
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 7Intangible Assets (Continued)
The following table represents future amortization expense as of January 31, 2008 (in thousands):
Year ended January 31 |
|
||
---|---|---|---|
2009 | $ | 2,649 | |
2010 | 2,575 | ||
2011 | 2,310 | ||
2012 | 2,278 | ||
2013 | 2,132 | ||
Thereafter | 8,372 | ||
$ | 20,316 | ||
Note 8Warranty Obligations
Our warranty obligations, which are recorded in other accrued expenses on the consolidated balance sheet, are as follows:
|
January 31 |
||||||
---|---|---|---|---|---|---|---|
|
2008 |
2007 |
|||||
|
(In thousands) |
||||||
Beginning obligation | $ | 1,755 | $ | 1,665 | |||
Accruals for warranties issued during the period | 2,663 | 2,583 | |||||
Accruals for pre-existing warranties | | (12 | ) | ||||
Settlements during the year | (2,518 | ) | (2,481 | ) | |||
Ending obligation | $ | 1,900 | $ | 1,755 | |||
Note 9Debt
|
January 31 |
||||||
---|---|---|---|---|---|---|---|
|
2008 |
2007 |
|||||
|
(In thousands) |
||||||
$150 million revolving line of credit with available principal decreasing $1.25 million quarterly beginning April 1, 2008; variable interest rate payable of 3.91% and 6.05% at January 31, 2008 and 2007, respectively; principal payable in fiscal 2012 | $ | 104,000 | $ | 34,000 | |||
Note payable, interest at 1.35% at January 31, 2008 adjusting to 2.39% at July 31, 2008; principal payable monthly through fiscal 2018 | 4,232 | | |||||
Senior notes, interest at 6.92% | | 12,500 | |||||
Other debt | | 73 | |||||
108,232 | 46,573 | ||||||
Less current portion | (423 | ) | (12,573 | ) | |||
Long-term debt | $ | 107,809 | $ | 34,000 | |||
Borrowing arrangements currently in place with commercial banks provide available lines of credit totaling $150 million, of which $3.6 million were being used at January 31, 2008 through the issuance of
53
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 9Debt (Continued)
letters of credit. Amounts under the lines of credit bear interest at LIBOR plus a margin between 0.75% and 1.25%, based on certain Company financial ratios. As of January 31, 2008, the interest rate was LIBOR plus a margin of 0.75% and commitment fees on unused amounts are 0.225%. This line of credit contains covenants relating to net worth and leverage ratios. We were in compliance with these covenants at January 31, 2008.
During fiscal 2009 we initiated a note payable in Japan for $4.2 million for the purchase of a new sales/distribution facility. This land and building is used as collateral against the note.
Future maturities of long-term debt are as follows (in thousands):
Year ended January 31 |
|
||
---|---|---|---|
2009 | $ | 423 | |
2010 | 423 | ||
2011 | 423 | ||
2012 | 104,423 | ||
2013 | 423 | ||
Thereafter | 2,117 | ||
$ | 108,232 | ||
Borrowings under notes payable to banks, which includes bank overdrafts and short-term lines of credit, were $2.5 million and $4.5 million at January 31, 2008 and 2007, respectively. The average interest rate on these notes was 4.3% and 4.9% at January 31, 2008 and 2007, respectively.
54
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 10Income Taxes
|
Year Ended January 31 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 |
2007 |
2006 |
||||||||
|
(In thousands) |
||||||||||
Provision (benefit) for income taxes consisted of: | |||||||||||
Current: | |||||||||||
Federal | $ | 14,225 | $ | 11,056 | $ | 12,397 | |||||
State | 1,861 | 1,582 | 1,459 | ||||||||
Foreign | 12,070 | 12,268 | 9,789 | ||||||||
28,156 | 24,906 | 23,645 | |||||||||
Deferred: |
|||||||||||
Federal | 2,433 | (593 | ) | (1,160 | ) | ||||||
State | (4 | ) | (91 | ) | 13 | ||||||
Foreign | 106 | (448 | ) | (2,322 | ) | ||||||
2,535 | (1,132 | ) | (3,469 | ) | |||||||
Total provision for income taxes | $ | 30,691 | $ | 23,774 | $ | 20,176 | |||||
Income before provision for income taxes was as follows: |
|||||||||||
United States | $ | 52,462 | $ | 36,443 | $ | 36,139 | |||||
Foreign | 38,376 | 32,812 | 26,088 | ||||||||
$ | 90,838 | $ | 69,255 | $ | 62,227 | ||||||
Reconciliation of the federal statutory rate to the effective tax rate is as follows: |
|||||||||||
Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||||
State income taxes, net of federal tax benefit | 1.3 | 1.3 | 1.5 | ||||||||
Tax on foreign earnings | (3.4 | ) | 0.5 | (1.1 | ) | ||||||
Net change in valuation allowance | 1.9 | (2.0 | ) | (1.6 | ) | ||||||
U.S. export sales | | (0.3 | ) | (0.7 | ) | ||||||
International financing | (0.2 | ) | (0.5 | ) | (0.9 | ) | |||||
Stock options | 0.1 | 0.5 | 0.6 | ||||||||
U.S. Manufacturing deduction | (0.5 | ) | (0.2 | ) | (0.4 | ) | |||||
Other | (0.4 | ) | | | |||||||
Effective income tax rate | 33.8 | % | 34.3 | % | 32.4 | % | |||||
55
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 10Income Taxes (Continued)
The components of deferred income tax assets and liabilities recorded on the consolidated balance sheet are as follows (in thousands):
Deferred Taxes
|
January 31 |
|||||||
---|---|---|---|---|---|---|---|---|
|
2008 |
2007 |
||||||
Deferred tax assets: | ||||||||
Accruals | $ | 3,997 | $ | 3,555 | ||||
Environmental | 2,109 | 2,556 | ||||||
Employee benefits | 6,501 | 6,230 | ||||||
Foreign tax credits | 3,269 | 6,270 | ||||||
Foreign net operating losses | 12,704 | 9,867 | ||||||
Foreign capital losses | | 1,041 | ||||||
Other | 1,917 | 1,033 | ||||||
30,497 | 30,552 | |||||||
Less: Valuation allowance | (11,672 | ) | (8,752 | ) | ||||
18,825 | 21,800 | |||||||
Deferred tax liabilities: | ||||||||
Depreciation | (4,238 | ) | (4,596 | ) | ||||
Cumulative translation adjustment | (3,808 | ) | (1,865 | ) | ||||
Other | (4,328 | ) | (1,839 | ) | ||||
(12,374 | ) | (8,300 | ) | |||||
Total net deferred tax asset | $ | 6,451 | $ | 13,500 | ||||
The net deferred tax asset is presented in our consolidated balance sheets as follows (in thousands):
|
January 31 |
||||||
---|---|---|---|---|---|---|---|
|
2008 |
2007 |
|||||
Deferred income taxescurrent asset | $ | 6,213 | $ | 4,481 | |||
Deferred income taxeslong-term asset | 5,948 | 11,817 | |||||
Deferred income taxeslong-term liability | (5,710 | ) | (2,798 | ) | |||
$ | 6,451 | $ | 13,500 | ||||
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. We consider taxable income in prior carryback years to the extent permitted under the tax law, scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. We believe we will be able to generate sufficient taxable income to realize our deferred tax assets, net of valuation allowances, but changes in our operations due to market conditions could require the recording of additional valuation allowances in the future. It is reasonably possible that a change to the valuation allowance in the next year could be material.
56
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 10Income Taxes (Continued)
We recorded a valuation allowance for the year ended January 31, 2008 and January 31, 2007 of approximately $11.7 million and $8.8 million, respectively. The valuation allowance increased $2.9 million during the year ended January 31, 2008. The net change primarily relates to the realizability of current year foreign net operating losses. Management determined that for certain foreign jurisdictions, it was more likely than not, we would not realize the deferred tax asset resulting from current net operating losses and an additional valuation allowance of $1.7 million was recorded against these losses. The remaining $1.2 million increase in the valuation allowance is due to changes in foreign currencies.
During the year ended January 31, 2007, the valuation allowance decreased $851,000. The net change primarily relates to the realizability of foreign tax credits, net of current year foreign net operating losses. During the fourth quarter of fiscal 2007, management determined that it was more likely than not we would realize certain foreign tax credits and a valuation allowance of $2.1 million against those credits was no longer necessary. Management determined that for certain foreign jurisdictions, it was more likely than not, we would not realize current foreign net operating loss and an additional valuation allowance of $1.6 million was recorded against these losses. The valuation allowance for net operating losses in The Netherlands was also reduced by $837,000 due to a reduction in the statutory rate. This change coincided with a reduction in the related deferred tax asset and had no effect on the provision for income taxes for fiscal 2007.
As of January 31, 2008, we have foreign net operating loss carryforwards in Europe and Australia of approximately $46.8 million. These foreign net operating loss carryforwards are available to offset future taxable income. Net operating loss carry forwards in The Netherlands totaling $28.8 million expire beginning in 2012 through 2017. The remaining net operating loss carryforwards have no future expiration dates.
A deferred tax asset of $3.3 million at January 31, 2008 has been recognized for U.S. foreign tax credits attributed to repatriated foreign earnings. Realization of this deferred tax asset is dependent on generating sufficient foreign-sourced U.S. taxable income over a ten year period ending in fiscal 2017.
Deferred taxes have not been provided on the excess book basis in the shares of certain foreign subsidiaries in the amount of $9.6 million at January 31, 2008 because these basis differences are not expected to reverse in the foreseeable future. These basis differences could reverse through a sale of the subsidiaries, the receipt of dividends from the subsidiaries, as well as various other events.
Effective February 1, 2007, we adopted the provisions of FASB Interpretation No. 48 ("FIN 48") which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.
57
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 10Income Taxes (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Unrecognized tax benefits balance at February 1, 2007 | $ | 325 | ||
Gross increases for tax positions related to the current year | 13 | |||
Gross increases for tax positions of prior years | 66 | |||
Gross decreases for tax positions of prior years | (170 | ) | ||
Unrecognized tax benefits balance at January 31, 2008 | $ | 234 | ||
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of January 31, 2008, we had approximately $83,000 of accrued interest and penalties related to uncertain tax positions.
We are subject to taxation primarily in the U.S., Canada, China and various European countries, as well as other various state and foreign jurisdictions. The Internal Revenue Service is currently reviewing our U.S. income tax return for fiscal years 2004 - 2007. As of January 31, 2008, we remain subject to examination in various state and foreign jurisdictions for the 1997-2006 tax years.
Note 11Commitments and Contingencies
Environmental Matters
We are subject to environmental laws and regulations, which include obligations to remove or mitigate environmental effects of past disposal and release of certain wastes and substances at various sites. We record liabilities for affected sites when environmental assessments indicate probable cleanup and the costs can be reasonably estimated. Other than for costs of assessments themselves, the timing and amount of these liabilities is determined based on the estimated costs of remediation activities and our commitment to a formal plan of action, such as an approved remediation plan. The reliability and precision of the loss estimates are affected by numerous factors, such as different stages of site evaluation and reevaluation of the degree of remediation required. We adjust our liabilities as new remediation requirements are defined, as information becomes available permitting reasonable estimates to be made and to reflect new and changing facts.
It is reasonably possible that changes in estimates will occur in the near term and the related adjustments to environmental liabilities may have a material impact on our net income. Unasserted claims are not currently reflected in our environmental remediation liabilities. It is also reasonably possible that these claims may also have a material impact on our net income if asserted. We cannot estimate at this time the amount of any additional loss or range of loss that is reasonably possible.
Our specific environmental matters consist of the following:
Fairview, Oregon
In 1996, the Oregon Department of Environmental Quality issued two Records of Decision impacting our Fairview, Oregon manufacturing facility. The records of decision required us to initiate remedial activities related to the cleanup of groundwater contamination at and near the facility. Remediation activities have been conducted at or near the facility since 1996 and current estimates provide for some level of activity to continue through 2019. Costs of certain remediation activities at
58
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 11Commitments and Contingencies (Continued)
the facility are shared with The Boeing Company, with Cascade paying 70% of these costs. The recorded liability for the ongoing remediation activities at our Fairview facility was $4.8 million and $5.9 million at January 31, 2008 and 2007, respectively.
Springfield, Ohio
In 1994, we entered into a consent order with the Ohio Environmental Protection Agency, which required the installation of remediation systems for the cleanup of groundwater contamination at our Springfield, Ohio facility. The current estimate is that the remediation activities will continue through 2013. The recorded liability for ongoing remediation activities in Springfield was $900,000 and $1.0 million at January 31, 2008 and 2007, respectively.
Presented below is a roll forward of our environmental liabilities and expenses for the three years ended January 31, 2008 (in thousands):
|
Fairview |
Springfield |
Other |
Total |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at January 31, 2005 | $ | 7,461 | $ | 1,086 | $ | 146 | $ | 8,693 | |||||
Accrued | (259 | ) | 259 | | | ||||||||
Cash payments | (541 | ) | (207 | ) | (10 | ) | (758 | ) | |||||
Balance at January 31, 2006 |
$ |
6,661 |
$ |
1,138 |
$ |
136 |
$ |
7,935 |
|||||
Accrued | | | (136 | ) | (136 | ) | |||||||
Cash payments | (786 | ) | (151 | ) | | (937 | ) | ||||||
Balance at January 31, 2007 |
$ |
5,875 |
$ |
987 |
$ |
|
$ |
6,862 |
|||||
Accrued | (75 | ) | 75 | | | ||||||||
Cash payments | (952 | ) | (173 | ) | | (1,125 | ) | ||||||
Balance at January 31, 2008 |
$ |
4,848 |
$ |
889 |
$ |
|
$ |
5,737 |
|||||
Lease Commitments
We lease certain facilities and equipment under noncancelable operating leases. Rent expense for the years ended January 31, 2008, 2007, and 2006 totaled $3.4 million, $2.5 million and $2.4 million, respectively. Future minimum rental commitments under these leases as of January 31, 2008 are as follows (in thousands):
2009 | $ | 3,440 | |
2010 | 2,498 | ||
2011 | 1,579 | ||
2012 | 757 | ||
2013 | 121 | ||
$ | 8,395 | ||
59
Notes to Consolidated Financial Statements (Continued)
Note 11Commitments and Contingencies (Continued)
Legal Proceedings
We are subject to legal proceedings, claims and litigation, in addition to the environmental matters previously discussed, arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, result of operations, or cash flows.
Insurance Litigation
On April 9, 2007, we entered into a settlement agreement with Employers Reinsurance Corporation with respect to litigation to recover various expenses incurred in connection with environmental and related proceedings. The recovery from the settlement, recorded during the first quarter of fiscal 2008, was $16.0 million, net of expenses. In connection with the settlement, we released all rights we might have under insurance policies issued by Employers Reinsurance Corporation and certain related entities. This concluded all litigation against our insurance companies with regard to environmental matters.
Note 12Supplemental Cash Flow Information
|
Year Ended January 31 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 |
2007 |
2006 |
|||||||||
|
(In thousands) |
|||||||||||
Cash paid during period for: | ||||||||||||
Interest | $ | 3,970 | $ | 2,403 | $ | 2,858 | ||||||
Income taxes | $ | 27,786 | $ | 25,776 | $ | 22,079 | ||||||
Business acquisitions: | ||||||||||||
Accounts receivable and other assets | $ | 935 | $ | 2,845 | $ | | ||||||
Inventories | 818 | 2,389 | | |||||||||
Property, plant and equipment | 296 | 2,179 | | |||||||||
Goodwill | 6,423 | 22,025 | | |||||||||
Intangible assetcustomer relationships | 5,400 | 11,800 | | |||||||||
Intangible assetintellectual property and other | 1,900 | 4,300 | | |||||||||
Accounts payable and other liabilities assumed | (708 | ) | (1,677 | ) | | |||||||
Notes payable assumed | (931 | ) | (3,606 | ) | | |||||||
Deferred income tax | (2,604 | ) | | | ||||||||
Net cash paid for acquisitions | $ | 11,529 | $ | 40,255 | $ | | ||||||
Supplemental disclosure of noncash information: |
||||||||||||
Minimum pension liability adjustment, net of tax | $ | (562 | ) | $ | (605 | ) | $ | 677 | ||||
Deferred compensation from stock appreciation rights | $ | | $ | | $ | (4,734 | ) | |||||
Liability for common stock repurchase | $ | 2,310 | $ | 2,278 | $ | |
Note 13Share-Based Compensation Plans
We have granted three types of share-based awards, stock appreciation rights (SARS), restricted stock and stock options under our share-based compensation plans to officers, key managers and
60
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 13Share-Based Compensation Plans (Continued)
directors. The grant prices are established by our Board of Directors' Compensation Committee at the time the awards are granted. We issue new common shares upon the exercise of all awards.
SARS provide the holder the right to receive an amount, payable in our common shares, equal to the excess of the market value of our common shares on the date of exercise ("intrinsic value") over the base price at the time the right was granted. The base price may not be less than the market price of our common shares on the date of grant. All SARS vest ratably over a four year period and have a term of ten years.
During the second quarter of fiscal 2008, our shareholders approved a proposal to amend the SARS plan to permit the issuance of restricted shares of common stock. Upon the granting of restricted stock, common shares are issued to the recipient, but the shares may not be sold, assigned, transferred, pledged, or disposed of by the recipient until vested. Regardless of vesting, restricted shares have full voting rights and any dividends declared will be paid to the restricted stock recipient. Restricted shares vest ratably over a period of three years for officers and four years for directors. The number of restricted shares issued to directors is based on the market value of our shares on the date of grant.
The amended SARS plan provides for the issuance of a maximum of 750,000 shares of common stock upon the exercise of SARS or issuance of restricted stock. As of January 31, 2008, a total of 223,000 shares of common stock have been issued under the SARS plan, which includes 42,000 shares of restricted stock with a grant date fair market value of $73.73 per share.
Stock options provide the holder the right to receive our common shares at an established price. We have reserved 1,400,000 shares of common stock under our stock option plan. As of January 31, 2008, a total of 1,083,000 shares have been issued upon the exercise of stock options. No additional stock options can be granted under the terms of the plan. All outstanding stock options vest ratably over a four year period and have a term of ten years.
We calculate share-based compensation cost using the Black-Scholes option pricing model. The range of assumptions used to compute share-based compensation is as follows:
|
Year Ended January 31 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2008 |
2007 |
2006 |
|||||||
Risk-free interest rate | 5.1 | % | 5.0 | % | 4.1 | % | ||||
Expected volatility | 41 | % | 41 | % | 40 | % | ||||
Expected dividend yield | 1.0 | % | 1.6 | % | 1.1 | % | ||||
Expected life (in years) | 7 | 6 | 6 | |||||||
Weighted average fair value at date of grant | $ | 33.31 | $ | 15.24 | $ | 17.86 |
Expected volatility is based on the historical volatility of the price of our common shares over the past six years. We use historical information to estimate award exercise and forfeitures within the valuation model. The expected term of awards is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation cost is recognized using a straight-line method over the vesting or service period and is net of estimated forfeitures.
61
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 13Share-Based Compensation Plans (Continued)
A summary of award grants under the plans at January 31, 2008, 2007, and 2006, excluding restricted stock, together with changes during the periods then ended are presented in the following table (in thousands, except per share amounts):
|
Stock Options |
Stock Appreciation Rights |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Outstanding Awards |
Weighted Average Exercise Price Per Share |
Outstanding Awards |
Weighted Average Exercise Price Per Share |
||||||
Balance at January 31, 2005 | 1,185 | $ | 13.96 | 448 | $ | 21.15 | ||||
Granted | | | 612 | 35.60 | ||||||
Exercised | (325 | ) | 13.64 | (41 | ) | 21.15 | ||||
Forfeited | (19 | ) | 13.22 | | | |||||
Balance at January 31, 2006 |
841 |
14.10 |
1,019 |
29.83 |
||||||
Granted | | | 255 | 37.05 | ||||||
Exercised | (246 | ) | 14.47 | (126 | ) | 28.65 | ||||
Forfeited | (25 | ) | 17.76 | (117 | ) | 31.57 | ||||
Balance at January 31, 2007 |
570 |
13.79 |
1,031 |
31.56 |
||||||
Granted | | | 66 | 73.73 | ||||||
Exercised | (276 | ) | 14.02 | (195 | ) | 30.60 | ||||
Forfeited | (8 | ) | 20.14 | (87 | ) | 35.00 | ||||
Balance at January 31, 2008 |
286 |
$ |
13.39 |
815 |
$ |
34.84 |
||||
A summary of award activity under the Plans as of January 31, 2008, is presented below:
|
Awards |
Weighted- Average Exercise Price |
Aggregate Intrinsic Value |
Weighted Average Contractural Life |
||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(In thousands) |
|
(In thousands) |
|
||||||
Outstanding at January 31, 2008 | 1,101 | $ | 29.34 | $ | 25,958 | 7 | ||||
Outstanding at January 31, 2008 and expected to vest | 457 | $ | 37.98 | $ | 7,498 | 8 | ||||
Exercisable at January 31, 2008 | 561 | $ | 21.19 | $ | 17,072 | 6 | ||||
Aggregate intrinsic value excludes 64,000 SARs with an exercise price in excess of the market value of our common stock as of January 31, 2008.
The total intrinsic value of options exercised during the years ended January 31, 2008, 2007and 2006 was $15.4 million, $8.4 million and $10.3 million, respectively. The total intrinsic value of SARS exercised during the years ended January 31, 2008, 2007 and 2006 was $8.7 million, $2.2 million, and $1.0 million, respectively.
The tax benefit recognized from share-based awards exercised during the years ended January 31, 2008, 2007, and 2006 was $3.1 million, $1.1 million, and $582,000, respectively.
62
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 13Share-Based Compensation Plans (Continued)
A summary of the status of the Plans' nonvested awards as of January 31, 2008 is presented below (in thousands, except per share amounts):
|
Stock Options |
Stock Appreciation Rights |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Nonvested Awards |
Weighted Average Grant-Date Fair Value Per Award |
Nonvested Awards |
Weighted Average Grant-Date Fair Value Per Award |
||||||
Nonvested at January 31, 2005 | 526 | $ | 5.00 | 448 | $ | 7.45 | ||||
Granted | | | 612 | 16.18 | ||||||
Vested | (227 | ) | 4.69 | (112 | ) | 7.45 | ||||
Forfeited | | | | | ||||||
Nonvested at January 31, 2006 |
299 |
5.23 |
948 |
13.09 |
||||||
Granted | | | 255 | 15.24 | ||||||
Vested | (159 | ) | 4.91 | (265 | ) | 12.49 | ||||
Forfeited | (25 | ) | 5.86 | (115 | ) | 13.65 | ||||
Nonvested at January 31, 2007 |
115 |
5.53 |
823 |
13.87 |
||||||
Granted | | 66 | 33.31 | |||||||
Vested | (89 | ) | 4.99 | (280 | ) | 13.00 | ||||
Forfeited | (7 | ) | 6.98 | (88 | ) | 15.04 | ||||
Nonvested at January 31, 2008 |
19 |
$ |
7.45 |
521 |
$ |
16.60 |
||||
As of January 31, 2008, there was $8.9 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the Plans. That cost is expected to be recognized over a weighted average period of 2.3 years. The following table represents as of January 31, 2008 the share-based compensation costs to be recognized in future periods (in thousands) for awards granted to date:
Fiscal Year |
Amount |
||
---|---|---|---|
2009 | $ | 4,529 | |
2010 | 3,037 | ||
2011 | 1,154 | ||
2012 | 198 | ||
$ | 8,918 | ||
Note 14Employee Benefit Plans
We sponsor various defined benefit pension and postretirement benefit plans. The following table presents the changes in benefit obligations, changes in plan assets and funded status of these plans. Benefit obligation balances presented in the table reflect the projected benefit obligation (PBO) for our defined benefit pension plans and accumulated postretirement benefit obligations (APBO) for the postretirement benefit plan. Both the PBO and APBO include the estimated present value of future benefits that will be paid to plan participants, based on expected future salary growth and employee
63
Cascade Corporation
Notes to Consolidated Financial Statements (Continued)
Note 14Employee Benefit Plans (Continued)
services rendered through the measurement date. We use a measurement date of January 31 for all defined benefit pension plans and December 31 for the postretirement plan.
|
Year Ended January 31 |
Year ended January 31 |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Defined Benefit |
Postretirement Benefit |
|||||||||||||||||||
|
2008 |
2007 |
2006 |
2008 |
2007 |
2006 |
|||||||||||||||
|
(In thousands) |
||||||||||||||||||||
Change in benefit obligation | |||||||||||||||||||||
Benefit obligation at beginning of year | $ | 9,899 | $ | 10,713 | $ | 9,138 | $ | 7,513 | $ | 8,490 | $ | 8,082 | |||||||||
Service cost | 34 | 59 | 199 | 121 | 137 | 127 | |||||||||||||||
Interest cost | 524 | 480 | 465 | 421 | 456 | 433 | |||||||||||||||
Participant contributions | | | 62 | 324 | 325 | 323 | |||||||||||||||
Plan amendments | | | (48 | ) | | | (613 | ) | |||||||||||||
Benefits paid | (313 | ) | (1,114 | ) | (239 | ) | (505 | ) | (544 | ) | (756 | ) | |||||||||
Actuarial (gain) or loss | (116 | ) | (1,300 | ) | 1,558 | (787 | ) | (1,351 | ) | 894 | |||||||||||
Settlements | 83 | 84 | | | | | |||||||||||||||
Exchange rate changes | 174 | 977 |