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 |
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For the fiscal year ended January 31, 2006
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to
Commission file number 1-12557
CASCADE CORPORATION
(Exact name of registrant as specified in its charter)
Oregon |
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93-0136592 |
(State or other jurisdiction of |
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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2201 N.E. 201st Ave. Fairview, Oregon 97024-9718
(Address of principal executive office) (Zip Code)
Registrants 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 x
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 x
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 x 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 registrants 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, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o No x
The aggregate market value of common stock held by non-affiliates of the registrant as of July 31, 2005 was $546,848,250, 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 registrants common stock as of March 17, 2006 was 12,541,204.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be filed within 120 days after the registrants fiscal year end of January 31, 2006, to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held June 6, 2006 are incorporated by reference into Part III.
TABLE OF CONTENTS
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
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Security Ownership of Certain Beneficial Owners and Management and related Stockholder Matters |
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NOTE: All references to fiscal years are defined as year ended January 31, 2006 (fiscal 2006), year ended January 31, 2005 (fiscal 2005) and year ended January 31, 2004 (fiscal 2004).
This Annual Report on Form 10-K, including Managements 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 margin, 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:
· Competitive factors in, and the cyclical nature of, the materials handling industry;
· Fluctuations in lift truck orders or deliveries;
· Availability and cost of raw materials;
· General business and economic conditions in North America, Europe, Asia and China;
· Actions by foreign governments;
· Assumptions relating to pension and other postretirement costs;
· Foreign currency fluctuations;
· Pending litigation;
· Environmental matters;
· Effectiveness of our capital expenditures and cost reduction initiatives.
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.
3
Cascade Corporation (Cascade) was organized in 1943 under the laws of the State of Oregon. The terms Cascade, we, and our includes Cascade Corporation and its subsidiaries. Our headquarters are located in Fairview, Oregon, a suburb of Portland, Oregon. We are one of the worlds leading manufacturers of materials handling load engagement devices and related replacement parts, primarily for the lift truck industry.
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 and Cascade-Kenhar names and symbols, for which we have secured trademark protection. The primary function of these 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. 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.
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 ambient 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. A portion of our bar steel purchases are obtained under annual pricing arrangements, which do not require minimum quantity purchases. 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 one of our primary suppliers could affect operating results. We are not currently experiencing any shortages in obtaining raw materials, purchased parts, or other steel products.
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.
4
In the 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 as both a maintenance and productivity enhancing investment. Historically, this has somewhat cushioned the negative impact of downward trends in the lift truck market on our net sales.
In the 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 lift truck markets in these countries generally less susceptible to downward trends in capital goods spending. Our relatively limited experience in these emerging markets supports this observation.
We are one of the leading domestic and foreign independent suppliers of load engagement products for industrial lift trucks. We compete with a number of companies in different parts of the world. The majority of these 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 that 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 margins throughout the world vary by geographic region due to the different competitive environments we face in each of these regions. 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 has been achieved within the last ten years through an acquisition which complemented our existing product lines and a continued focus on providing high quality products and outstanding customer service.
EuropeWhile we are also a leading manufacturer in Europe, we compete with several privately-owned companies with a strong presence in local and regional markets. In contrast to North America, competition in this region is principally on price, resulting in lower gross margins.
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 have established a strong presence throughout the region.
ChinaWe have operated in China for 20 years. During that time we have established a strong presence in the lift truck market. Our competition consists primarily of smaller China-based companies. In the past two years we have seen an increase in the number of competitors in the Chinese market, which has
5
included foreign manufacturers, primarily from Europe. The increased competition is due to the continued growth in Chinas economy and the expanded use of lift trucks for various industrial purposes.
Fluctuations in gross margins 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 permit greater fixed cost absorption resulting in increased gross margins.
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 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 40-45% of our consolidated net sales.
Our products are manufactured with short lead times of generally less than one month. Accordingly, we do not believe the level of backlog orders is a significant factor in evaluating our overall level of business activity.
Most 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 do not consider patents to be important to our business.
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), Note 13 to the Consolidated Financial Statements (Item 8), Legal Proceedings (Item 3) and Managements Discussion and Analysis of Financial Conditions and Results of Operations (Item 7) contain additional information concerning our environmental matters.
At January 31, 2006, we had approximately 1,900 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.
We have substantial operations outside the United States. There are additional business risks attendant to our foreign operations such as 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), Managements Discussion and Analysis of Financial Condition and Results of Operations (Item 7) and Notes to Consolidated Financial Statements (Item 8).
6
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) website - www.sec.gov. Once filed with the SEC, such documents may be read and/or copied at the SECs Public Reference Room at 450 Fifth Street, N.W. 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 risk factors should be considered carefully in evaluating Cascades business. Our business, financial condition, cash flows or results of operations could be materially adversely affected by any of these risks. Please note that 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 expensive upgrades, during industry or general economic downturns. Past downturns have been characterized by diminished product demand, excess manufacturing capacity and erosion of gross margins. Therefore, a significant downturn in the markets of our customers, including lift truck manufacturers, or in general economic conditions is likely to result in a reduction in demand for our products and could harm our business.
Our products do not depend upon proprietary technology to any significant degree, and therefore can be subject to intense competition. The principal methods of competition in our markets are product performance and ease of use, product quality, safety, customer service and support, product 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 development, manufacturing, marketing, customer service and support and our distribution networks.
Future acquisitions may not prove to be successful
We have at times expanded our business through acquisitions and expect that 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 advantages and cost savings that we anticipate 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:
· Use of available cash, new borrowings, or borrowings under our credit facility to consummate the acquisition;
7
· Potential dilution of shareholders equity;
· Demands on management related to the increase in our size after an acquisition;
· Diversion of managements attention from existing operations due to the integration of acquired businesses;
· Difficulties in systems integration;
· Difficulties in the assimilation and retention of employees; and
· Potential adverse effects on our operating results.
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 many 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:
· Imposition of foreign exchange controls;
· Changes in a specific countrys or regions political or economic conditions, particularly in emerging markets such as China;
· Foreign currency exchange risks;
· Seizure of our property or assets by a foreign government without our consent;
· Civil unrest in any of the countries in which we operate;
· Tariffs, other trade protection measures and import or export licensing requirements;
· Potentially negative consequences from changes in tax laws;
· Difficulty in staffing and managing widespread operations;
· Differing labor regulations;
· Requirements relating to withholding taxes on remittances and other payments by subsidiaries;
· Restrictions on our ability to own or operate or repatriate dividends from our subsidiaries, make investments or acquire new businesses in foreign jurisdictions;
· Difficulty in enforcement of contractual obligations governed by non-U.S. law;
· Unexpected transportation delays or interruptions;
· Unexpected changes in regulatory requirements; and
· The burden of complying with multiple and potentially conflicting laws.
Changes in economic or political conditions 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
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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 euros and other 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.
In addition, fluctuations in currencies relative to currencies in which our earnings are generated may 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 that we will be able to effectively manage our currency transaction and/or translation risks. Volatility in currency exchange rates may have a material adverse 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 a negative impact on earnings as a result of foreign currency exchange rate fluctuations.
The success of our business is largely dependent on our senior managers, as well as on our ability to attract and retain other qualified personnel. Eight members of our senior management team have been with us for over 20 years, including our President and Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, who have each been with us for over 33 years. We may not be able to attract and retain the management personnel necessary for the development of our business. The loss of the services of key management personnel or the failure to attract additional personnel as required could have a material adverse effect on our business, financial condition 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 clean up 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
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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.
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 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. 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 that we may not be able to mitigate by changing the selling prices of our products or other means.
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.
Our obligations under certain postretirement health benefit and 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, 2006, our projected benefit obligations under our defined benefit pension plans exceeded the fair value of plan assets by $3.5 million. As of January 31, 2006 our accumulated postretirement benefit obligation under our postretirement benefit plan was $8.5 million. The underfunding is due in part to fluctuations in the financial markets that have caused the valuation of the assets in our defined benefit pension plans to decrease. We expect that any future obligations under our plans that are not currently funded will be funded from future cash flows from operations. If our contributions are insufficient to adequately fund the plans to cover our future obligations, the performance of the assets in our plans does 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. In addition, changes in generally accepted accounting principles in the United States could require the recording of additional liabilities and costs related to these plans.
Reliance on lift truck dealers
Approximately 55-60% of our products are sold to the end-user customer through retail lift truck dealers. 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 have a material adverse effect on our business, financial condition, cash flows and results of operations.
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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 |
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Primary |
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Approximate |
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Status |
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NORTH AMERICA |
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Springfield, Ohio |
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Manufacturing |
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200,000 |
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Owned |
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Fairview, Oregon |
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Manufacturing/Headquarters |
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155,000 |
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Owned |
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Guelph, Ontario Canada |
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Manufacturing |
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125,000 |
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Owned |
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Toronto, Ontario Canada |
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Manufacturing |
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73,000 |
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Leased |
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Warner Robins, Georgia |
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Manufacturing |
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65,000 |
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Owned |
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Findlay, Ohio |
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Manufacturing |
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52,000 |
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Owned |
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EUROPE |
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Almere, The Netherlands |
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Manufacturing |
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162,000 |
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Owned |
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Schalksmuhle, Germany |
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Manufacturing |
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81,000 |
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Owned |
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Verona, Italy |
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Manufacturing |
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74,000 |
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Leased |
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Manchester, England |
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Manufacturing |
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44,000 |
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Owned |
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La Machine, France |
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Manufacturing |
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37,000 |
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Owned |
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Brescia, Italy |
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Manufacturing |
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19,000 |
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Owned |
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Sheffield, England |
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Sales |
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10,000 |
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Leased |
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Vaggeryd, Sweden |
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Sales |
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2,000 |
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Leased |
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Epignay, France |
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Sales |
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2,000 |
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Leased |
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Barcelona, Spain |
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Sales |
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1,000 |
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Leased |
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Vantaa, Finland |
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Sales |
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500 |
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Leased |
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ASIA PACIFIC |
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Brisbane, Australia |
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Manufacturing |
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46,000 |
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Leased |
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Osaka, Japan |
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Sales/Distribution |
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16,000 |
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Leased |
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Inchon, Korea |
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Manufacturing |
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12,000 |
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Owned |
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Auckland, New Zealand |
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Sales/Distribution |
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9,000 |
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Leased |
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Johannesburg, South Africa |
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Sales/Distribution |
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9,000 |
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Leased |
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CHINA |
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Xiamen, China |
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Manufacturing |
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72,000 |
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Leased |
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Hebei, China |
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Manufacturing |
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65,000 |
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Leased |
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Neither Cascade nor any of our subsidiaries are involved in any material pending legal proceedings other than litigation related to environmental matters discussed below. We are insured against product liability, personal injury and property damage claims, which may occasionally arise.
On April 22, 2002, the Circuit Court of the State of Oregon for Multnomah County entered judgment in our favor in an action originally brought in 1992 against several insurers to recover various expenses incurred in connection with environmental litigation and related proceedings. The judgment was against two non-settling insurers. We subsequently reached a settlement of all claims with one of the insurers in return for a payment of $1.3 million, which we received October 22, 2004. The judgment against the remaining insurer is in the amount of approximately $800,000. The judgment also requires the insurer to defend us in suits alleging liability because of groundwater contamination emanating from our Fairview, Oregon plant and requires the insurer to pay approximately 3.1% of any liability imposed against us by judgment or settlement on or after March 1, 1997 on account of such contamination. We appealed the
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judgment, contending that the remaining insurer should be required to pay a larger share of our past and future expenses and liabilities, additional interest, and increased attorneys fees. The insurer has cross-appealed. This matter is currently pending before the Oregon Court of Appeals. We have not recorded any amounts that may be recovered from the insurer in our consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 4A. Officers of the Registrant
Robert C. Warren, Jr.Chief Executive Officer and President(1)Mr. Warren, 57, 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, 57, has served in his current position since 2002. He joined Cascade in 1984, and has served as Vice PresidentHuman Resources since 1991.
Richard S. AndersonSenior Vice President and Chief Financial Officer(1)Mr. Anderson, 58, 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.
Terry H. CatheySenior Vice President and Chief Operating Officer(1)Mr. Cathey, 58, has served as Chief Operating Officer since 2000. He has been employed by Cascade since 1973 and has held several positions, including his appointments as Vice PresidentMaterial Handling Operations in 1996 and Vice PresidentManufacturing in 1993.
Herre Y. Hoekstra, Vice President and Managing Director, Europe(1)Mr. Hoekstra, 44, joined Cascade in 2005. Prior to joining Cascade in 2005, Mr. Hoekstra held various management positions with Royal Ten Cate, REMU and Royal Dutch Shell, in The Netherlands.
Michael E. Kern, Vice PresidentSales and Marketing(1)Mr. Kern, 59, has served as Vice PresidentMarketing since 2003. He has been employed by Cascade since 1966 and has held several positions, including his appointments as Director of Dealer Marketing and Sales in 2001 and Aftermarket Sales Manager in 1999.
Jeffrey K. Nickoloff, Vice PresidentCorporate Manufacturing(1)Mr. Nickoloff, 50, 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, 45, has served as Vice PresidentFinance since 2000. Prior to joining Cascade in 2000, Mr. Pointer was a partner at PricewaterhouseCoopers LLP in Portland, Oregon.
Robert C. Schuster, Vice PresidentAsia Pacific(1)Mr. Schuster, 43, was appointed to his current position in July 2005. He previously served as the Managing Director overseeing the Companys operations in Australia and New Zealand. Since joining Cascade in 1984 he has held various other positions including Design Engineer, Product Manager and Parts Depot Manager.
12
Anthony F. Spinelli, Vice PresidentOEM Products(1)Mr. Spinelli, 63, has served as Vice PresidentOEM Products, since 2001. Prior to 2001, he was Managing Director, Canadian Operations. Mr. Spinelli joined Cascade in 1997 when we purchased Kenhar Corporation where he had served as President, Kenhar Americas.
John A. CushingTreasurerMr. Cushing, 45, 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.
13
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of March 17, 2006, there were 202 shareholders of record of Cascades 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 1,500.
The high and low sales prices of Cascades common stock based on intra-day prices on the New York Stock Exchange were as follows:
|
|
Year ended January 31 |
|
||||||||||
|
|
2006 |
|
2005 |
|
||||||||
|
|
High |
|
Low |
|
High |
|
Low |
|
||||
Market price range: |
|
|
|
|
|
|
|
|
|
||||
First quarter |
|
$ |
37.95 |
|
$ |
30.61 |
|
$ |
24.15 |
|
$ |
19.41 |
|
Second quarter |
|
45.90 |
|
31.00 |
|
31.66 |
|
20.50 |
|
||||
Third quarter |
|
50.58 |
|
39.80 |
|
31.50 |
|
23.60 |
|
||||
Fourth quarter |
|
53.80 |
|
46.03 |
|
42.00 |
|
29.00 |
|
||||
The common stock dividends declared were as follows:
|
|
Year ended |
|
||||
|
|
2006 |
|
2005 |
|
||
First quarter |
|
$ |
0.12 |
|
$ |
0.11 |
|
Second quarter |
|
0.12 |
|
0.11 |
|
||
Third quarter |
|
0.15 |
|
0.11 |
|
||
Fourth quarter |
|
0.15 |
|
0.12 |
|
||
Total |
|
$ |
0.54 |
|
$ |
0.45 |
|
Stock Exchange Listing and Transfer Agent
Cascades stock is traded on the New York Stock Exchange under the symbol CAE.
Cascades 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.
14
Item 6. Selected Financial Data
|
|
Year Ended January 31 |
|
|||||||||||||
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|||||
|
|
(In thousands, except per share amounts and employees) |
|
|||||||||||||
Income statement data(1): |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net sales |
|
$ |
450,503 |
|
$ |
385,719 |
|
$ |
297,756 |
|
$ |
258,829 |
|
$ |
252,715 |
|
Operating income |
|
$ |
63,894 |
|
$ |
47,777 |
|
$ |
32,025 |
|
$ |
32,744 |
|
$ |
13,433 |
|
Income from continuing operations |
|
$ |
42,051 |
|
$ |
28,490 |
|
$ |
18,506 |
|
$ |
17,707 |
|
$ |
5,302 |
|
Net income |
|
$ |
42,051 |
|
$ |
28,490 |
|
$ |
18,506 |
|
$ |
17,707 |
|
$ |
4,127 |
|
Cash flow data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash flows from operating activities |
|
$ |
50,425 |
|
$ |
37,808 |
|
$ |
26,241 |
|
$ |
23,941 |
|
$ |
34,836 |
|
Cash flows from investing activities(2) |
|
$ |
(31,723 |
) |
$ |
(14,857 |
) |
$ |
(19,612 |
) |
$ |
(7,718 |
) |
$ |
(3,201 |
) |
Cash flows from financing activities |
|
$ |
(13,191 |
) |
$ |
(16,892 |
) |
$ |
(14,715 |
) |
$ |
(18,056 |
) |
$ |
(16,405 |
) |
Stock information: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income from continuing operations |
|
$ |
3.40 |
|
$ |
2.34 |
|
$ |
1.55 |
|
$ |
1.55 |
|
$ |
0.47 |
|
Net income |
|
$ |
3.40 |
|
$ |
2.34 |
|
$ |
1.55 |
|
$ |
1.55 |
|
$ |
0.36 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income from continuing operations |
|
$ |
3.27 |
|
$ |
2.24 |
|
$ |
1.49 |
|
$ |
1.45 |
|
$ |
0.44 |
|
Net income |
|
$ |
3.27 |
|
$ |
2.24 |
|
$ |
1.49 |
|
$ |
1.45 |
|
$ |
0.34 |
|
Book value per common share(3) |
|
$ |
20.69 |
|
$ |
17.82 |
|
$ |
15.18 |
|
$ |
12.70 |
|
$ |
10.03 |
|
Dividends declared |
|
$ |
0.54 |
|
$ |
0.45 |
|
$ |
0.41 |
|
$ |
0.10 |
|
$ |
|
|
Balance sheet information: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and marketable securities |
|
$ |
58,497 |
|
$ |
31,985 |
|
$ |
31,586 |
|
$ |
29,501 |
|
$ |
25,611 |
|
Working capital(4) |
|
$ |
124,962 |
|
$ |
94,154 |
|
$ |
81,720 |
|
$ |
71,201 |
|
$ |
66,011 |
|
Property, plant and equipment, net |
|
$ |
75,374 |
|
$ |
82,027 |
|
$ |
75,244 |
|
$ |
65,863 |
|
$ |
61,412 |
|
Total assets |
|
$ |
361,283 |
|
$ |
328,092 |
|
$ |
292,819 |
|
$ |
262,317 |
|
$ |
247,286 |
|
Total debt |
|
$ |
29,922 |
|
$ |
40,564 |
|
$ |
53,934 |
|
$ |
63,851 |
|
$ |
79,668 |
|
Shareholders equity |
|
$ |
259,406 |
|
$ |
217,883 |
|
$ |
183,688 |
|
$ |
144,748 |
|
$ |
113,267 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Capital expenditures(1)(5) |
|
$ |
10,580 |
|
$ |
13,581 |
|
$ |
11,403 |
|
$ |
10,665 |
|
$ |
7,303 |
|
Depreciation(1) |
|
$ |
14,562 |
|
$ |
13,912 |
|
$ |
12,152 |
|
$ |
10,532 |
|
$ |
10,349 |
|
Amortization(1) |
|
$ |
1,443 |
|
$ |
658 |
|
$ |
512 |
|
$ |
261 |
|
$ |
4,399 |
|
Share-based compensation expense(6) |
|
$ |
2,278 |
|
$ |
2,493 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Interest expense, net of interest income |
|
$ |
1,762 |
|
$ |
3,008 |
|
$ |
3,554 |
|
$ |
4,228 |
|
$ |
5,322 |
|
Diluted weighted average shares outstanding |
|
12,850 |
|
12,796 |
|
12,409 |
|
12,194 |
|
12,233 |
|
|||||
Number of employees |
|
1,900 |
|
1,800 |
|
1,700 |
|
1,500 |
|
1,400 |
|
(1) Except net income, excludes for all periods the data for the Companys hydraulic cylinder division, which was sold in January 2002.
(2) Includes $6.2 million and $11.7 million in fiscal 2005 and 2004, respectively, for business acquisitions.
(3) Defined as equity divided by number of common shares outstanding at year end.
(4) Defined as current assets less current liabilities.
(5) Excludes $5.4 million and $5.8 million in fiscal 2005 and 2004, respectively, of additions to property, plant, and equipment from business acquisitions.
(6) See Notes 2 and 10 to the Consolidated Financial Statements for additional information on share-based compensation.
15
Item 7. Managements 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, 2006, and the results of operations and cash flows for the fiscal years ended January 31, 2006, 2005 and 2004. 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. 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
Development of European Business
The level of profitability in our European businesses in recent years has been well below the returns realized in our other geographic segments. As previously noted, we compete in Europe with several privately-owned companies with a strong presence in local and regional markets. This high level of competition has resulted in a market where price is the primary competitive factor, which results in our lower gross margins. In recent years we completed several acquisitions in Germany and Italy to improve our competitive position and market share. Fiscal 2006 was the first full year with these acquisitions integrated into our operations and we did see modest improvement in profitability.
During fiscal 2006 we initiated several additional steps to continue the development of our European business:
· We appointed a Vice President with responsibility for all European operations.
· We closed a manufacturing facility in Hoorn, The Netherlands. Production was moved to manufacturing facilities in Almere, The Netherlands and Verona, Italy. This closure allowed us to eliminate excess capacity for attachment products and will result in lower overall production costs.
· We began the process for realigning our European sales force.
· We initiated efforts to improve product quality, on-time delivery, consolidate purchasing efforts and streamline administrative functions.
Europe is the worlds largest forklift truck market and improving our market and financial performance still remains our highest priority. We will be working on these initiatives throughout fiscal 2007 and into early 2008. We believe these initiatives will allow us to increase sales and lower production and selling and administrative costs. While we do not expect to achieve the returns we are currently realizing outside of Europe, we believe we will see improvement in our overall profitability in the region.
16
Use of Available Cash
Since fiscal 2001 our focus has been to use cash flows from operating activities to reduce our outstanding debt levels. At January 31, 2006 our balance of cash and marketable securities of $58.5 million exceeds our balance of notes payable and long-term debt of $29.9 million. In evaluating our current liquidity situation there are several options we have considered:
· DividendsThe quarterly dividend was increased from $0.12 per share to $0.15 per share in fiscal 2006. We anticipate the Board of Directors will continue to regularly evaluate the adequacy of the current quarterly dividend policy.
· China expansionAs previously noted we anticipate over the next eighteen months to make additional investments in China. This is discussed further below.
· Acquisition strategyWe have developed our business in North America through the continued leverage of our core strengths in manufacturing. In evaluating growth and acquisition opportunities we have noted a high correlation between the manufacturing of materials handling products for lift trucks and a broader range of attachments for use on construction vehicles. This includes channels of distribution through a dealer network, engineering requirements and use of high variability manufacturing. We believe the overall market for construction attachments is significantly larger than the market for lift truck attachments. We are currently pursuing opportunities to expand through acquisitions in the construction attachment sector.
Expansion in China
During fiscal 2006 we announced plans for a major expansion of our operations in China. At the present time we estimate this investment over the next 18 months will be approximately $15 million. We expect the investment will include equipment and process upgrades at existing facilities, construction of new facilities and possibly acquisitions. We are currently moving forward with this initiative and expect to begin realizing the benefits from this investment in the second half of fiscal 2007. This investment will lower our overall production costs and allow us to manufacture locally certain components currently manufactured in the United States.
Share-based Compensation Expense
We have granted awards in the form of both stock options and stock appreciation rights under share-based compensation plans to management and directors. These awards are a key component in our compensation structure. During the years ended January 31, 2006 and 2005, we incurred stock-based compensation expense related to these awards of $2.3 million and $2.5 million, respectively. Under the current accounting rules for share-based compensation expense and assuming a level of stock awards consistent with recent years, we expect stock-based compensation expense for fiscal 2007 to exceed $5 million. The expense in years after fiscal 2007 could continue to increase absent significant modifications to our current plans and the number and types of awards. We are currently evaluating alternatives available to us to address the needs for a competitive compensation structure for management and directors and the cost of these plans to Cascade.
Continued Focus on Cost Structure
We have experienced strong revenue growth in the past year due to generally strong economic conditions around the world and the integration of acquired operations. However, in most geographic regions in which we operate our current business is relatively mature with future growth of revenues expected to be relatively modest and in line with general economic growth. Maintaining our current levels
17
of profitability will depend considerably on our ability to reduce our overall cost structure. This focus includes the following areas:
· Global sourcing of raw materials
· Consolidation and streamlining of administrative functions
· Consolidation of information systems
· Development of global engineering systems
· Continued development of lean manufacturing techniques
· Reassessment of management compensation programs
· Restructuring of our European business
COMPARISON OF FISCAL 2006 AND FISCAL 2005
Net income for fiscal 2006 increased to $42.1 million ($3.27 per diluted share) from $28.5 million ($2.24 per diluted share) in fiscal 2005. This increase is primarily due to net sales growth of 17%. Foreign currency fluctuations were not material in fiscal 2006. We experienced strong sales growth in all regions. Our net sales for fiscal 2006 were at a record level. The net sales increase was due to higher sales volumes and the full years effect of sales price increases made throughout fiscal 2005. Forklift truck shipments globally were up 10% in fiscal 2006 over 2005. Our consolidated gross margin percentage of 32% was consistent between fiscal 2006 and 2005. While we did not experience the same level of material cost increases in fiscal 2006 as 2005, we did experience cost increases reflected in certain components and purchased parts. These increases as well as general cost increases were offset by the combination of price increases and cost reductions. Operating income as a percentage of net sales increased from 12% to 14%, due primarily to higher sales levels, operating efficiencies and only a 5% increase in selling and administrative and other costs in fiscal 2006. Prior year results also include income of $1.3 million from an insurance litigation settlement.
Selling and administrative costs include share-based compensation expense of $2.3 million and $2.5 million for fiscal 2006 and 2005, respectively. In fiscal 2006 and 2005 we issued stock appreciation rights (SARS) to key management employees and directors under the Cascade Stock Appreciation Rights Plan approved by shareholders in May 2004. Share-based compensation expense for fiscal 2005 was calculated on a mark to market basis with costs allocated over the four year vesting period. The compensation expense in fiscal 2005 was due to the increase in the price of our common stock from May 2004, the date of grant, to January 31, 2005.
In the first quarter of fiscal 2006 we continued to account for SARS on a mark to market basis. We adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (123R) effective May 1, 2005. We applied the standard using a modified prospective method with no restatement of prior periods. Under SFAS 123R we are accounting for share based-compensation expense for SARS and stock options issued in prior years on a fair value method. Our accounting under SFAS 123R will eliminate the market related expense volatility we experienced when SARS were accounted for on a mark-to-market basis. See Note 10 to our Consolidated Financial Statements (Item 8) for further discussions about our share-based compensation plans and the awards.
18
|
|
Year Ended January 31 |
|
|
|
|
|
|||||||||||
|
|
2006 |
|
% |
|
2005 |
|
% |
|
Change |
|
Change % |
|
|||||
|
|
(In thousands) |
|
|
|
|
|
|||||||||||
Net sales |
|
$ |
250,576 |
|
100 |
% |
$ |
208,553 |
|
100 |
% |
$ |
42,023 |
|
|
20 |
% |
|
Cost of goods sold |
|
152,707 |
|
61 |
% |
128,175 |
|
61 |
% |
24,532 |
|
|
19 |
% |
|
|||
Gross profit |
|
97,869 |
|
39 |
% |
80,378 |
|
39 |
% |
17,491 |
|
|
22 |
% |
|
|||
Selling and administrative |
|
44,676 |
|
18 |
% |
43,731 |
|
21 |
% |
945 |
|
|
2 |
% |
|
|||
Amortization |
|
151 |
|
|
|
145 |
|
|
|
6 |
|
|
|
|
|
|||
Insurance litigation recovery |
|
|
|
|
|
(1,300 |
) |
|
|
1,300 |
|
|
|
|
|
|||
Environmental expense |
|
|
|
|
|
155 |
|
|
|
(155 |
) |
|
|
|
|
|||
Operating income |
|
$ |
53,042 |
|
21 |
% |
$ |
37,647 |
|
18 |
% |
$ |
15,395 |
|
|
41 |
% |
|
We experienced a net sales increase of $42 million or 20% in North America for fiscal 2006. The increase was due to higher volumes of shipments and the full years benefit of price increases made in fiscal 2005. Foreign currency fluctuations between the U.S. and Canadian dollar accounted for 1% of the increase in net sales.
Historically, we have found that changes in the level of our net sales do not correspond directly to the percentage changes in lift truck industry shipments, but industry statistics do provide an indication of the direction of business activity. North American lift truck industry shipments from 2005 to 2006 increased 11%. We believe we have maintained or increased our overall existing market share in North America during fiscal 2006.
Gross margin percentages in North America were 39% for both fiscal 2006 and 2005. We were essentially able to offset any general cost or material price increases with either cost reductions or sales price increases. We were affected by higher raw material costs and the sale in the United States of certain products manufactured in Canada. Sales of these products are in U.S. dollars but a significant portion of the costs are in Canadian dollars. The value of the U.S. dollar against the Canadian dollar decreased 9% in fiscal 2006.
Selling and administrative costs for fiscal 2006 increased 2% or $945,000 over fiscal 2005. Excluding the effects of currency changes, these costs increased 1% or $491,000, due to miscellaneous general cost increases.
Fiscal 2005 results include income of $1.3 million related to the settlement of insurance litigation. See Legal Proceedings (Item 3) in this report for further details.
|
|
Year Ended January 31 |
|
|
|
|
|
|||||||||||
|
|
2006 |
|
% |
|
2005 |
|
% |
|
Change |
|
Change % |
|
|||||
|
|
(In thousands) |
|
|
|
|
|
|||||||||||
Net sales |
|
$ |
132,213 |
|
100 |
% |
$ |
118,723 |
|
100 |
% |
$ |
13,490 |
|
|
11 |
% |
|
Cost of goods sold |
|
108,467 |
|
82 |
% |
95,094 |
|
80 |
% |
13,373 |
|
|
14 |
% |
|
|||
Gross profit |
|
23,746 |
|
18 |
% |
23,629 |
|
20 |
% |
117 |
|
|
|
|
|
|||
Selling and administrative |
|
22,474 |
|
17 |
% |
23,503 |
|
20 |
% |
(1,029 |
) |
|
(4 |
)% |
|
|||
Amortization |
|
1,264 |
|
1 |
% |
485 |
|
|
|
779 |
|
|
161 |
% |
|
|||
Operating income (loss) |
|
$ |
8 |
|
|
|
$ |
(359 |
) |
|
|
$ |
367 |
|
|
|
|
|
Net sales in Europe for fiscal 2006 increased 11% to $132.2 million. Absent changes in foreign currency rates our net sales increased 13% in fiscal 2006. This increase was primarily the result of
19
increased shipments and to a lesser extent sales price increases. Our sales in Europe for fiscal 2006 benefited from consistent demand in the lift truck market and additional production capacity from acquisitions, in particular from the purchase of a major German competitor in late fiscal 2005. European lift truck industry shipments in fiscal 2006 increased 3% over fiscal 2005.
The current market in Europe continues to be very competitive. Our European competitors are generally smaller privately-held companies, some of which have a global presence. We believe our acquisitions in Italy and Germany over the last two years provide a solid operating base to build market share and compete more effectively in key European markets. We previously only had a limited presence in these markets.
The gross margin percentage in Europe fell from 20% in fiscal 2005 to 18% in fiscal 2006. The decrease is due primarily to $2.0 million of costs related to the closure of a manufacturing facility in The Netherlands as discussed below. The remainder of the decrease is due to additional maintenance and temporary labor costs in Germany.
During the third quarter of fiscal 2006, we closed our manufacturing facility in Hoorn, The Netherlands. At January 31, 2006 all production operations in Hoorn have been integrated into other manufacturing facilities in Almere, The Netherlands and Verona, Italy. This closure allowed us to eliminate excess capacity for attachment products and will result in lower overall production costs. The total direct costs for the plant closure of $2.0 million consisted of $1.0 million of employee termination costs and $1.0 million of costs to move production equipment. These costs are recorded in cost of goods sold. The liability recorded on the January 31, 2006 consolidated balance sheet related to the plant closure is not material. The consolidated balance sheet at January 31, 2006 includes current assets of $730,000 which represent property and equipment held for sale from the closure of the Hoorn facility. We expect to begin realizing the full benefit of these changes in Europe in fiscal 2007.
European selling and administrative costs decreased 4% in fiscal 2006. Foreign currency fluctuations contributed to 1% of the decrease. The remaining decrease is due to several factors, including lower warranty costs, reduced spending on information technology consulting and other general cost reductions. Fiscal 2006 costs also include $415,000 of costs related to employee terminations and closure of a German sales office.
Amortization costs increased in fiscal 2006 due to additional amortization of intangible assets in Italy.
Asia Pacific (Excluding China)
|
|
Year Ended January 31 |
|
|
|
|
|
|||||||||||
|
|
2006 |
|
% |
|
2005 |
|
% |
|
Change |
|
Change % |
|
|||||
|
|
(In thousands) |
|
|
|
|
|
|||||||||||
Net sales |
|
$ |
45,471 |
|
100 |
% |
$ |
39,095 |
|
100 |
% |
$ |
6,376 |
|
|
16 |
% |
|
Cost of goods sold |
|
33,077 |
|
73 |
% |
27,900 |
|
71 |
% |
5,177 |
|
|
19 |
% |
|
|||
Gross profit |
|
12,394 |
|
27 |
% |
11,195 |
|
29 |
% |
1,199 |
|
|
11 |
% |
|
|||
Selling and administrative |
|
7,738 |
|
17 |
% |
6,811 |
|
18 |
% |
927 |
|
|
14 |
% |
|
|||
Operating income |
|
$ |
4,656 |
|
10 |
% |
$ |
4,384 |
|
11 |
% |
$ |
272 |
|
|
6 |
% |
|
Asia Pacific net sales grew 16% to $45.5 million in fiscal 2006. Excluding currency changes, net sales increased 14%. The increase is due primarily to higher sales in Japan and Australia. Lift truck industry shipments in Asia Pacific increased 10% in fiscal 2006 over fiscal 2005.
The gross margin percentage dropped from 29% in fiscal 2005 to 27% in fiscal 2006. The decrease is due primarily to lower margins in Japan resulting from higher material costs and a change in product mix. We expect lower margins to continue until additional production capacity is added in China.
20
Selling and administrative costs in Asia Pacific for fiscal 2006 increased 14% over fiscal 2005. Excluding the effect of foreign currency changes, the increase was 13% from fiscal 2005. The increase is due to additional bad debt expenses, employee benefit costs and other general cost increases.
|
|
Year Ended January 31 |
|
|
|
|
|
|||||||||||
|
|
2006 |
|
% |
|
2005 |
|
% |
|
Change |
|
Change % |
|
|||||
|
|
(In thousands) |
|
|
|
|
|
|||||||||||
Net sales |
|
$ |
22,243 |
|
100 |
% |
$ |
19,348 |
|
100 |
% |
$ |
2,895 |
|
|
15 |
% |
|
Cost of goods sold |
|
13,523 |
|
61 |
% |
11,368 |
|
59 |
% |
2,155 |
|
|
19 |
% |
|
|||
Gross profit |
|
8,720 |
|
39 |
% |
7,980 |
|
41 |
% |
740 |
|
|
9 |
% |
|
|||
Selling and administrative |
|
2,504 |
|
11 |
% |
1,847 |
|
10 |
% |
657 |
|
|
36 |
% |
|
|||
Amortization |
|
28 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|||
Operating income |
|
$ |
6,188 |
|
28 |
% |
$ |
6,105 |
|
31 |
% |
$ |
83 |
|
|
1 |
% |
|
Net sales in China increased 15% to $22.2 million in fiscal 2006. We have continued to experience net sales growth consistent with the expansion of the Chinese economy. Lift truck industry shipments in China increased 11% in fiscal 2006.
Our gross margin percentage in China decreased to 39% in fiscal 2006. We are seeing more competition in our efforts to maintain and expand our market share in China. We expect this to continue in the coming years. We also had a higher percentage of OEM product sales in fiscal 2006, which have lower gross margins.
As a part of our overall capital expansion plan in China, we are currently taking steps to upgrade equipment and further develop our manufacturing processes at our facility in Xiamen, China. This investment will lower our overall product costs and allow us to manufacture locally certain components currently manufactured in the U.S. On a long-term basis we anticipate exporting these components to our other facilities outside of China.
Selling and administrative costs in China have increased 36% in fiscal 2006. These increases are due to additional employee benefit costs, professional fees and bad debt expenses. While we expect a higher rate of selling and administrative costs in the future as we expand our operations, we expect ongoing increases to be at a lower level.
Our interest expense in fiscal 2006 decreased 23% in comparison with fiscal 2005. The reduction reflects our scheduled paydown of long-term debt in November 2005. See Financial Condition and Liquidity for additional discussion of our debt levels and payments.
Consolidated interest income increased $417,000 through increased investing activity in fiscal 2006.
Our effective tax rate for fiscal 2006 decreased to 32% in comparison to 37% in fiscal 2005. This decrease was due to the release of valuation allowances on certain deferred tax assets related to foreign capital loss carryforwards, net operating loss carryforwards, and liabilities for employee benefit obligations. These benefits were reduced by the recording of additional valuation allowances for subsidiaries in Europe which incurred net operating losses.
21
|
|
Three Months Ended January 31 |
|
|
|
|
|
|||||||||||
|
|
2006 |
|
% |
|
2005 |
|
% |
|
Change |
|
Change % |
|
|||||
|
|
(In thousands) |
|
|||||||||||||||
Net sales |
|
$ |
108,423 |
|
100 |
% |
$ |
103,472 |
|
100 |
% |
$ |
4,951 |
|
|
5 |
% |
|
Cost of goods sold |
|
76,576 |
|
71 |
% |
71,901 |
|
69 |
% |
4,675 |
|
|
7 |
% |
|
|||
Gross profit |
|
31,847 |
|
29 |
% |
31,571 |
|
31 |
% |
276 |
|
|
1 |
% |
|
|||
Selling and administrative |
|
21,061 |
|
19 |
% |
21,756 |
|
22 |
% |
(695 |
) |
|
(3 |
)% |
|
|||
Amortization |
|
248 |
|
|
|
189 |
|
|
|
59 |
|
|
31 |
% |
|
|||
Operating income |
|
10,538 |
|
10 |
% |
9,626 |
|
9 |
% |
912 |
|
|
9 |
% |
|
|||
Interest expense (net) |
|
160 |
|
|
|
613 |
|
1 |
% |
(453 |
) |
|
(74 |
)% |
|
|||
Other expense (income) |
|
(118 |
) |
|
|
253 |
|
|
|
(371 |
) |
|
(147 |
)% |
|
|||
Income before taxes |
|
10,496 |
|
10 |
% |
8,760 |
|
8 |
% |
1,736 |
|
|
20 |
% |
|
|||
Provision for taxes |
|
2,231 |
|
2 |
% |
3,673 |
|
3 |
% |
(1,442 |
) |
|
(39 |
)% |
|
|||
Net income |
|
$ |
8,265 |
|
8 |
% |
$ |
5,087 |
|
5 |
% |
$ |
3,178 |
|
|
62 |
% |
|
Diluted earnings per share |
|
$ |
0.63 |
|
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
Operating income (loss) by region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
North America |
|
$ |
11,384 |
|
|
|
$ |
8,244 |
|
|
|
$ |
3,140 |
|
|
38 |
% |
|
Europe |
|
(2,291 |
) |
|
|
(781 |
) |
|
|
(1,510 |
) |
|
193 |
% |
|
|||
Asia Pacific |
|
497 |
|
|
|
943 |
|
|
|
(446 |
) |
|
(47 |
)% |
|
|||
China |
|
948 |
|
|
|
1,220 |
|
|
|
(272 |
) |
|
(22 |
)% |
|
|||
|
|
$ |
10,538 |
|
|
|
$ |
9,626 |
|
|
|
$ |
912 |
|
|
9 |
% |
|
Net income for the fourth quarter of fiscal 2006 increased to $8.3 million ($0.63 per diluted share) from $5.1 million ($0.39 per diluted share) in the fourth quarter of the prior year. The increase is due to a slight increase in overall gross profit, lower selling and administrative and net interest costs and a lower overall effective tax rate for the current year fourth quarter.
The following are financial highlights from the fourth quarter of fiscal 2006:
· Sales growth was strong in all markets except for Europe, which experienced an 11% decrease in sales. Excluding the effect of currency changes Europes sales decreased 2%. The European market continues to be highly competitive. We believe the small reduction in sales levels in the fourth quarter reflects the short-term effects of our ongoing restructuring efforts in Europe as previously described.
· Gross margin percentages in the fourth quarter of fiscal 2006 in North America of 38% increased slightly from the prior year.
· Our overall fourth quarter gross margins in Europe dropped from 19% in the prior year to 14%. This decrease is primarily due to $600,000 of facility closure costs and additional labor and maintenance costs in Germany.
· Asia Pacifics drop in operating income was due to higher material costs which we were unable to pass on to customers in the region.
· Although the level of gross profit increased due to a 22% increase in sales, the gross margin percentage in China decreased from 39% in the fourth quarter of the prior year to 34% in the current year. This decrease reflects a more competitive market than we have experienced in prior years.
22
· Consolidated selling and administrative costs were lower primarily due to foreign currency changes and lower marketing and warranty costs in Europe.
· Net interest costs decreased due primarily to higher levels of interest income from marketable securities. The continued reduction in our debt levels also contributed positively to the decrease in net interest costs.
· Our effective tax rate decreased to 21% in the fourth quarter of fiscal 2006 from 42% in the prior year. In the current year additional valuation allowances were recorded for subsidiaries in Europe which incurred net operating losses. We have determined it is more likely than not the related deferred tax assets would not be realized. These additional valuation allowances were offset by unrelated reversals of valuation allowances on certain deferred tax assets related to foreign capital loss carryforwards, net operating loss carryforwards and liabilities for employee benefit obligations. We determined during the fourth quarter it was more likely than not these deferred tax assets would be realized. In the fourth quarter of fiscal 2005 the effective rate included additional valuation allowances against deferred tax assets, primarily net operating loss carryforwards in Europe.
COMPARISON OF FISCAL 2005 AND FISCAL 2004
Net income for fiscal 2005 increased to $28.5 million ($2.24 per diluted share) from $18.5 million ($1.49 per diluted share) in fiscal 2004. This increase is primarily due to net sales growth of 21%, excluding currency gains. Additional net sales from acquired companies contributed almost 4%, while foreign currency fluctuations added nearly 5% to net sales. North America, Europe and China all experienced net sales growth of at least 20% during fiscal 2005 as compared to fiscal 2004, due to higher volumes of shipments and sales price increases. Worldwide lift truck industry shipments increased 16% in fiscal 2005. Gross margin slipped slightly in fiscal 2005 due primarily to increases in raw material costs offsetting sales increases. Operating income as a percentage of net sales increased from 11% to 12%, aided in part by income of $1.3 million from an insurance litigation settlement. Lower debt levels in fiscal 2005 resulted in lower interest charges than in fiscal 2004.
|
|
Year Ended January 31 |
|
|
|
|
|
|||||||||||
|
|
2005 |
|
% |
|
2004 |
|
% |
|
Change |
|
Change % |
|
|||||
|
|
(In thousands) |
|
|||||||||||||||
Net sales |
|
$ |
208,553 |
|
100 |
% |
$ |
171,709 |
|
100 |
% |
$ |
36,844 |
|
|
21 |
% |
|
Cost of goods sold |
|
128,175 |
|
61 |
% |
108,524 |
|
63 |
% |
19,651 |
|
|
18 |
% |
|
|||
Gross profit |
|
80,378 |
|
39 |
% |
63,185 |
|
37 |
% |
17,193 |
|
|
27 |
% |
|
|||
Selling and administrative |
|
43,731 |
|
21 |
% |
38,000 |
|
22 |
% |
5,731 |
|
|
15 |
% |
|
|||
Amortization |
|
145 |
|
|
|
234 |
|
|
|
(89 |
) |
|
(38 |
)% |
|
|||
Insurance litigation recovery |
|
(1,300 |
) |
|
|
|
|
|
|
(1,300 |
) |
|
|
|
|
|||
Environmental expense |
|
155 |
|
|
|
|
|
|
|
155 |
|
|
|
|
|
|||
Operating income |
|
$ |
37,647 |
|
18 |
% |
$ |
24,951 |
|
15 |
% |
$ |
12,696 |
|
|
51 |
% |
|
Net sales in North America increased $37 million or 21% in fiscal 2005 to $209 million. Increased volume of shipments from North American facilities as well as price increases accounted for $35.4 million of the increase. The remaining increase is due to the change in foreign currency rates between the U.S. and Canadian dollar.
23
Historically, we have found that changes in the level of our net sales do not correspond directly to the percentage changes in lift truck industry shipments, but industry statistics do provide an indication of the direction of business activity. North American lift truck industry shipments from 2004 to 2005 increased 16%. We have maintained or increased our overall existing market share in North America during fiscal 2005.
North Americas gross margin increased to 39% in fiscal 2005 as compared to 37% in fiscal 2004. This increase is due primarily to increased shipments and better absorption of fixed costs and price increases in fiscal 2005. This benefit is somewhat offset by higher raw material costs and the sale in the United States of certain products manufactured in Canada. Sales of these products are in U.S. dollars but a significant portion of the costs are in Canadian dollars. During 2005, the value of the U.S. dollar against the Canadian dollar decreased 7%.
Selling and administrative costs for fiscal 2005 increased 15% or $5.7 million over fiscal 2004. Excluding the effects of currency changes, these costs increased 14% or $5.3 million, driven primarily by higher levels of incentive pay, professional fees, sales commissions and share-based compensation.
The increase in share-based compensation is exclusively due to awards of stock appreciation rights (SARS). We issued 453,000 SARS, which vest over four years, to key executives and directors under the Cascade Stock Appreciation Rights Plan approved by shareholders in May 2004. See Note 10 to our Consolidated Financial Statements for further discussions about the plan. Share-based compensation is influenced by two factors, the market price of our common stock at the end of the reporting period relative to the market price at the date of grant and the method for recognizing the related compensation cost.
During the period from the date of grant, May 26, 2004 to January 31, 2005 the market price of our common stock increased $15.45 per share, from $21.15 per share to $36.60 per share. This resulted in deferred compensation of $7.0 million recorded as additional paid-in-capital. We incurred $2.5 million of share-based compensation during the year ended January 31, 2005. See COMPARISON OF FISCAL 2006 AND FISCAL 2005 for further discussion regarding the new accounting principles on accounting for share-based awards.
|
|
Year Ended January 31 |
|
|
|
|
|
|||||||||||
|
|
2005 |
|
% |
|
2004 |
|
% |
|
Change |
|
Change % |
|
|||||
|
|
(In thousands) |
|
|||||||||||||||
Net sales |
|
$ |
118,723 |
|
100 |
% |
$ |
81,114 |
|
100 |
% |
$ |
37,609 |
|
|
46 |
% |
|
Cost of goods sold |
|
95,094 |
|
80 |
% |
63,456 |
|
78 |
% |
31,638 |
|
|
50 |
% |
|
|||
Gross profit |
|
23,629 |
|
20 |
% |
17,658 |
|
22 |
% |
5,971 |
|
|
34 |
% |
|
|||
Selling and administrative |
|
23,503 |
|
20 |
% |
17,853 |
|
22 |
% |
5,650 |
|
|
32 |
% |
|
|||
Amortization |
|
485 |
|
|
|
255 |
|
|
|
230 |
|
|
90 |
% |
|
|||
Operating loss |
|
$ |
(359 |
) |
|
|
$ |
(450 |
) |
|
|
$ |
91 |
|
|
|
|
|
Europes fiscal 2005 net sales increased 46% or $37.6 million in comparison with fiscal 2004. Increased product shipments and price increases contributed $16.6 million to this increase. Changes in foreign currency rates, related primarily to the Euro, accounted for 12% or $10.1 million of the increase. Acquisitions in Germany and Italy over the last two years added $10.9 million to fiscal 2005 sales or 13% of the increase.
The overall European lift truck market improved in fiscal 2005 with year-to-date orders and shipments increasing approximately 12%. Our increase in sales for certain OEM products exceeded the market increase in lift truck orders and shipments, while the increase in other products fell below the industry trends.
24
Gross margins in Europe were 20% for fiscal 2005, down slightly from the fiscal 2004 gross margin of 22%. This 2% decrease is due primarily to increases in the cost of steel. We were not able to sufficiently offset the cost increases with customer price increases across all product lines.
Selling and administrative costs for fiscal 2005 increased 32% or $5.7 million over fiscal 2004. Acquisitions added $2.1 million of selling and administrative costs. Higher warranty costs and information technology costs to integrate acquired locations and implement Sarbanes-Oxley accounted for $1.8 million or 10% of the increase. The remaining increase relates to currency changes.
Asia Pacific (Excluding China)
|
|
Year Ended January 31 |
|
|
|
|
|
|||||||||||
|
|
2005 |
|
% |
|
2004 |
|
% |
|
Change |
|
Change % |
|
|||||
|
|
(In thousands) |
|
|||||||||||||||
Net sales |
|
$ |
39,095 |
|
100 |
% |
$ |
32,763 |
|
100 |
% |
$ |
6,332 |
|
|
19 |
% |
|
Cost of goods sold |
|
27,900 |
|
71 |
% |
23,660 |
|
72 |
% |
4,240 |
|
|
18 |
% |
|
|||
Gross profit |
|
11,195 |
|
29 |
% |
9,103 |
|
28 |
% |
2,092 |
|
|
23 |
% |
|
|||
Selling and administrative |
|
6,811 |
|
18 |
% |
5,945 |
|
18 |
% |
866 |
|
|
15 |
% |
|
|||
Operating income |
|
$ |
4,384 |
|
11 |
% |
$ |
3,158 |
|
10 |
% |
$ |
1,226 |
|
|
39 |
% |
|
Asia Pacific net sales grew by 19% or $6.3 million in fiscal 2005 over fiscal 2004. Excluding currency changes, net sales increased 10% or $3.3 million. A significant portion of this increase relates to sales in Japan, Korea and Australia. Lift truck industry shipments increased 12% for Asia Pacific in fiscal 2005.
Gross margins increased to 29% in fiscal 2005, up slightly from 28% in fiscal 2004.
Selling and administrative costs in Asia Pacific for fiscal 2005 increased 15% over fiscal 2004. Excluding the effect of foreign currency changes, the increase was 5% from fiscal 2004, primarily due to employee benefit costs, bad debt expenses and other general cost increases.
|
|
Year Ended January 31 |
|
|
|
|
|
|||||||||||
|
|
2005 |
|
% |
|
2004 |
|
% |
|
Change |
|
Change % |
|
|||||
|
|
(In thousands) |
|
|||||||||||||||
Net sales |
|
$ |
19,348 |
|
100 |
% |
$ |
12,170 |
|
100 |
% |
$ |
7,178 |
|
|
59 |
% |
|
Cost of goods sold |
|
11,368 |
|
59 |
% |
6,480 |
|
53 |
% |
4,888 |
|
|
75 |
% |
|
|||
Gross profit |
|
7,980 |
|
41 |
% |
5,690 |
|
47 |
% |
2,290 |
|
|
40 |
% |
|
|||
Selling and administrative |
|
1,847 |
|
10 |
% |
1,301 |
|
11 |
% |
546 |
|
|
42 |
% |
|
|||
Amortization |
|
28 |
|
|
|
23 |
|
|
|
5 |
|
|
|
|
|
|||
Operating income |
|
$ |
6,105 |
|
31 |
% |
$ |
4,366 |
|
36 |
% |
$ |
1,739 |
|
|
40 |
% |
|
Net sales in China increased 59% in fiscal 2005. Lift truck industry shipments increased 38% in fiscal 2005. The increase is due to an increase in product shipments, particularly related to additional sales from the expansion of our fork manufacturing operations in Hebei, China. The expanded facility became fully operational in the second quarter of fiscal 2005.
Gross margins decreased from 47% in fiscal 2004 to 41% in fiscal 2005 due to both increased competition and pricing pressure and a higher percentage of OEM product sales which carry lower margins.
Selling and administrative costs increased 42% in fiscal 2005 as we are continuing to expand our sales and service capabilities in China. These costs relate to additional employee benefits, engineering and marketing costs.
25
Our interest expense in fiscal 2005 decreased 22% in comparison with fiscal 2004. The decrease is due to lower overall debt levels. See Financial Condition and Liquidity for additional discussion of Company debt levels and payments.
Consolidated interest income decreased by $454,000 in fiscal 2005 as compared to fiscal 2004 due to the receipt of payment in full of notes receivable related to the sale of our hydraulic cylinder division during late fiscal 2004.
Our effective tax rate for fiscal 2005 increased to 37% in comparison to 35% in fiscal 2004. The increase is due to a reduction in the benefit received from international financing.
|
|
Three Months Ended January 31 |
|
|
|
|
|
|||||||||||
|
|
2005 |
|
% |
|
2004 |
|
% |
|
Change |
|
Change % |
|
|||||
|
|
(In thousands) |
|
|||||||||||||||
Net sales |
|
$ |
103,472 |
|
100 |
% |
$ |
77,417 |
|
100 |
% |
$ |
26,055 |
|
|
34 |
% |
|
Cost of goods sold |
|
71,901 |
|
69 |
% |
54,303 |
|
70 |
% |
17,598 |
|
|
32 |
% |
|
|||
Gross profit |
|
31,571 |
|
31 |
% |
23,114 |
|
30 |
% |
8,457 |
|
|
37 |
% |
|
|||
Selling and administrative |
|
21,756 |
|
22 |
% |
17,525 |
|
23 |
% |
4,231 |
|
|
24 |
% |
|
|||
Amortization |
|
189 |
|
|
|
199 |
|
|
|
(10 |
) |
|
(5 |
)% |
|
|||
Operating income |
|
9,626 |
|
9 |
% |
5,390 |
|
7 |
% |
4,236 |
|
|
79 |
% |
|
|||
Interest expense (net) |
|
613 |
|
1 |
% |
837 |
|
1 |
% |
(224 |
) |
|
(27 |
)% |
|
|||
Other expense (income) |
|
253 |
|
|
|
312 |
|
|
|
(59 |
) |
|
(19 |
)% |
|
|||
Income before taxes |
|
8,760 |
|
8 |
% |
4,241 |
|
6 |
% |
4,519 |
|
|
107 |
% |
|
|||
Provision for taxes |
|
3,673 |
|
3 |
% |
1,942 |
|
3 |
% |
1,731 |
|
|
89 |
% |
|
|||
Net income |
|
$ |
5,087 |
|
5 |
% |
$ |
2,299 |
|
3 |
% |
$ |
2,788 |
|
|
121 |
% |
|
Diluted earnings per share |
|
$ |
0.39 |
|
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
Operating income (loss) by region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
North America |
|
$ |
8,244 |
|
|
|
$ |
3,997 |
|
|
|
$ |
4,247 |
|
|
106 |
% |
|
Europe |
|
(781 |
) |
|
|
(470 |
) |
|
|
(311 |
) |
|
66 |
% |
|
|||
Asia Pacific |
|
943 |
|
|
|
872 |
|
|
|
71 |
|
|
8 |
% |
|
|||
China |
|
1,220 |
|
|
|
991 |
|
|
|
229 |
|
|
23 |
% |
|
|||
|
|
$ |
9,626 |
|
|
|
$ |
5,390 |
|
|
|
$ |
4,236 |
|
|
79 |
% |
|
Net income for the fourth quarter of fiscal 2005 increased to $5.1 million ($0.39 per diluted share) from $2.3 million ($0.18 per diluted share) in the fourth quarter of the prior year. The increase is due to higher sales and gross profit, although our consolidated gross margin percentage only increased slightly from 30% in the prior year to 31% in the current year.
The following are financial highlights from the fourth quarter of fiscal 2005:
· Higher sales in the fourth quarter of fiscal 2005 were due to strong lift truck markets throughout the world. Currency changes made up 5% of the 34% increase in sales.
· Gross margin percentages by segments were relatively consistent with the prior year. We did experience increasing material costs throughout the year. We were able to offset most of these cost increases with sales price increases, surcharges and better fixed cost absorption resulting from
26
higher volume. We were more successful in offsetting the cost increases in North America. All remaining markets experienced slight declines in margins in the current year.
· Consolidated selling and administrative costs increased primarily due to share-based compensation expenses related to stock appreciation rights, warranty costs, professional fees, incentive pay, sales commissions and the strengthening of foreign currencies against the U.S. dollar.
· The effective tax rate decreased from 46% in the fourth quarter of the prior year to 42% in fiscal 2005. The fiscal 2004 rate was higher due to additional valuation allowances against deferred tax assets, primarily net operating loss carryforwards in Europe.
The statements of cash flows reflect the changes in cash and cash equivalents for the three years ended January 31, 2006 by classifying transactions into three major categories of activities: operating, investing and financing.
Our main source of liquidity is cash generated from operating activities. This consists of net income adjusted for noncash operating items such as depreciation and amortization, share-based compensation, losses on disposition of assets and deferred income taxes, as well as changes in operating assets and liabilities.
Net cash provided by operating activities was $50.4 million in fiscal 2006 as compared to $37.8 million in fiscal 2005. The increase in fiscal 2006 was due to higher levels of net income, depreciation and amortization and a decrease in accounts receivable. These improvements were offset by an increase in inventories and a decrease in accounts payable and accrued expenses. The increase in inventory was due primarily to higher sales volumes, sourcing of certain raw materials from foreign vendors in markets outside of where our facilities operate and larger quantity purchases to take advantage of volume discounts.
Our net cash provided by operating activities increased to $37.8 million in fiscal 2005 from $26.2 million in fiscal 2004. The increase in fiscal 2005 was due to higher levels of net income and depreciation and amortization and an increase in accounts payable and accrued expenses. These improvements were offset with changes in other operating accounts, primarily accounts receivable and inventory.
The principal recurring investing activities are capital expenditures. These 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 |
|
|||||||
|
|
2006 |
|
2005 |
|
2004 |
|
|||
North America |
|
$ |
5,923 |
|
$ |
8,101 |
|
$ |
5,925 |
|
Europe |
|
3,189 |
|
4,640 |
|
4,411 |
|
|||
Asia Pacific |
|
336 |
|
301 |
|
314 |
|
|||
China |
|
1,132 |
|
539 |
|
753 |
|
|||
|
|
$ |
10,580 |
|
$ |
13,581 |
|
$ |
11,403 |
|
We believe the level of capital expenditures is sufficient to meet operational requirements. We expect capital expenditures in fiscal 2007 to approximate fiscal 2006 depreciation expense, excluding the capital
27
expansion activities in China. We expect over the next 18 months to make additional investments in China of approximately $15 million.
We held marketable securities of $23.0 million and $1.5 million at January 31, 2006 and 2005, respectively. These securities consisted of auction rate and variable rate demand notes issued by various state agencies throughout the United States. We classify these securities as available-for-sale securities. These securities are insured either through third party agencies, reinsured through the U.S. federal government or secured by a letter of credit from a bank. There were no realized or unrealized gains or losses related to these marketable securities during the fiscal years ended January 31, 2006, 2005 and 2004. The securities held at January 31, 2006 are long-term instruments maturing through 2039; however, the interest rates and maturities are reset approximately every month, at which time we can sell the securities. Accordingly, we have classified the securities as short-term in the consolidated balance sheets. Interest rates on the securities range from 3.0% to 4.3% per annum.
On October 14, 2004, we completed the acquisition of the assets of Falkenroth Foerdertechnik, GmbH in Schalksmuhle, Germany. The aggregate purchase price paid in cash for Falkenroth, net of assumed liabilities, was $6.2 million.
During fiscal 2004, we completed the acquisition of two materials handling equipment manufacturers, FEMA Forks GmbH (FEMA), located in Germany, and Roncari S.r.l. (Roncari), located in Italy. The FEMA acquisition was completed on March 31, 2003, and the Roncari acquisition was completed on October 21, 2003. The aggregate purchase prices paid in cash for FEMA and Roncari, net of assumed liabilities, were $3.6 million and $8.1 million, respectively.
Proceeds from the sale of securities received as a reversion from a pension plan terminated in 1997 were $1.0 million during fiscal 2005.
During fiscal 2004, we received $9.6 million from Precision Hydraulic Cylinders, Inc. as payment in full of all amounts due from the sale of our hydraulic cylinder division in fiscal 2002.
We continued with our planned reduction of debt balances in each of the three years ended January 31, 2006. As of January 31, 2006, we had made all scheduled debt payments. Any additional payments to prepay scheduled amounts are subject to penalties. We are continually evaluating our option to make additional debt payments and incur the penalties in light of our current cash position.
The increase in notes payable to banks in fiscal 2006 reflects short-term borrowings of foreign subsidiaries to meet cash flow needs. We expect to reduce the balance of notes payable to banks through additional equity investments or intercompany borrowings.
We declared dividends of $0.54, $0.45 and $0.41 per share in fiscal 2006, 2005, and 2004, respectively.
The issuance of common stock related to the exercise of share-based awards generated $2.8 million, $1.6 million and $1.3 million of cash in fiscal 2006, 2005 and 2004, respectively.
FINANCIAL CONDITION AND LIQUIDITY
Working capital, defined as current assets less current liabilities at January 31, 2006 was $125.0 million as compared to $94.2 million of working capital at January 31, 2005. Our current ratio at January 31, 2006 was 2.9 to 1 in comparison to 2.5 to 1 at January 31, 2005.
Total outstanding debt, including notes payable to banks, at January 31, 2006 was $29.9 million in comparison with $40.6 million at January 31, 2005. Our debt agreements contain covenants relating to net worth and leverage ratios. We are in compliance with debt covenants at January 31, 2006. Borrowing
28
arrangements currently in place with commercial banks provide available lines of credit totaling $25 million, of which $2.1 million were being used through the issuance of letters of credit at January 31, 2006. The lines of credit expire on September 1, 2010. Average interest rates on notes payable to banks were 3.0% at January 31, 2006 and 3.7% at January 31, 2005.
We believe our cash and cash equivalents, marketable securities, 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 2007.
We maintain defined benefit pension plans in England, Canada and France covering certain employees. We calculate the net periodic pension costs related to our defined benefit plans on an annual basis. Our costs for these plans have increased in recent years due to changes in assumptions in the discount rate to reflect market conditions and actual rates of return on plan assets. We have recorded a minimum pension liability, net of tax, of $2.3 million at January 31, 2006 to reflect the extent our pension liability exceeds the fair value of plan assets. We recently modified certain provisions of our plan in England. These provisions terminate the accrual of future benefits under the plan after November 1, 2005 and commit us to make contributions to the plan of approximately $350,000 for each of the next five years. The termination of the accrual of future benefits qualifies as a curtailment under Statement of Financial Accounting Standards (SFAS) No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. The effect of this curtailment of benefits had no effect on our results of operations. The unrecognized loss for all defined benefit plans of $3.4 million at January 31, 2006 will continue to be recognized over the remaining service period of the employees. The accumulated benefit obligation and unfunded benefit obligation for all three of our defined benefit plans at January 31, 2006 is $10.6 million and $3.4 million, respectively. We have recorded the unfunded benefit obligation, the minimum pension liability, as a liability and reduction in shareholders equity on the consolidated balance sheet at January 31, 2006.
We maintain a postretirement health care benefit plan in the United States consisting of health care coverage for approximately 210 eligible retirees and qualifying dependents. Another 124 current employees, all over 52 years of age, will be eligible to participate upon retirement. No additional employees will be eligible to participate in the plan. The postretirement plan is currently unfunded with an accumulated postretirement benefit obligation of $8.5 million at January 31, 2006. The postretirement liability on our consolidated balance sheet at January 31, 2006 is $5.7 million. The reconciliation of funded status for our postretirement plan at January 31, 2006 includes an unrecognized loss of $3.5 million. This loss will be recognized in future years. The unrecognized loss amortization component in fiscal 2006 is $361,000 of the $906,000 net periodic postretirement benefit cost. The unrecognized loss amortization component in fiscal 2007 will be $443,000 of the $959,000 net periodic postretirement benefit costs. Our cost for this plan has continued to increase due to changes in the discount rate and increasing health care costs. The actual increases in health care costs in recent years have been in excess of our assumed trend rates. We have implemented significant increases in the level of contributions required from eligible retirees and qualifying dependents to mitigate the overall cost of the plan. In addition, recent changes in Medicare laws have reduced overall plan costs. Due to the continued trend of increasing health care costs the overall cost of the plan may continue to rise in future years. We will be continuing to investigate various options with this plan and our defined benefit plans to mitigate future cost increases. We currently fund our postretirement plan on a pay-as-you-go basis.
We are currently engaged in ongoing environmental remediation efforts at both of our Fairview, Oregon and Springfield, Ohio manufacturing facilities. Current estimates provide for some level of remediation activities in Fairview through 2021 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
29
remediation costs. Based on the progress of our remediation efforts to date and expected future remediation plans based on discussions with the Oregon Department of Environmental Quality, we lowered the total estimated cost of remediation activities in fiscal 2006 for the Fairview facility by $259,000 and changed the estimated completion date for remediation at the site from 2027 to 2021. We have expanded the remediation work and scope of our testing at our Springfield facility which increased the total estimated cost of remediation and extended our estimated timeline for remediation work to 2013. These changes reflect managements current estimated plans based on the results of remediation work to date. We have limited remediation activities ongoing in Germany related to an acquisition in fiscal 2005. The liability for all ongoing remediation efforts is $7.9 million and $8.7 million at January 31, 2006 and 2005, respectively. The accrued environmental expenses recorded as a current liability of $1.0 million on the consolidated balance sheet at January 31, 2006 represent our estimated cash expenditure for ongoing remediation activities for the fiscal year ending January 31, 2007.
The following summarizes our contractual obligations and commitments as of January 31, 2006:
|
|
Payment due by period |
|
|||||||||||||||||
|
|
Total |
|
Less than |
|
2-3 |
|
4-5 |
|
Greater than |
|
|||||||||
|
|
(in thousands) |
|
|||||||||||||||||
Notes payable to banks |
|
$ |
4,741 |
|
|
$ |
4,741 |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|
|
Long-term debts, including capital leases |
|
25,181 |
|
|
12,681 |
|
|
12,500 |
|
|
|
|
|
|
|
|||||
Estimated interest payments |
|
2,669 |
|
|
1,804 |
|
|
865 |
|
|
|
|
|
|
|
|||||
Operating leases |
|
6,672 |
|
|
2,150 |
|
|
3,034 |
|
1,072 |
|
|
416 |
|
|
|||||
Defined benefit pension obligations(1) |
|
10,713 |
|
|
656 |
|
|
1,293 |
|
1,312 |
|
|
7,452 |
|
|
|||||
Postretirement benefit obligation(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total |
|
$ |
49,976 |
|
|
$ |
22,032 |
|
|
$ |
17,692 |
|
$ |
2,384 |
|
|
$ |
7,868 |
|
|
(1) Represents current minimum funding requirements for all plans except our plan in England. We have committed to fund this plan with additional contributions of $350,000 a year for five years. The total payments due in the future may vary from these estimates based on actual returns on plan assets, changes in assumptions, plan modifications and actuarial gains and losses. See additional discussion of these key assumptions and estimates in Critical Accounting Policies and Estimates below and Note 9 to Consolidated Financial Statements (Item 8).
(2) Our postretirement benefit obligation related to health care coverage for certain retired employees is funded on a pay-as-you go basis. Payments under the plan are not included herein. See Critical Accounting Policies and Estimates below and Note 9 to Consolidated Financial Statements (Item 8).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements 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.
30
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 the three reporting units in which we have recorded goodwill, North America, Europe and Australia. 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 margins, 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 assets fair value. If actual results are not consistent with our assumptions and judgments, we could be exposed to a material impairment charge.
During the past year, we have undertaken a number of initiatives in Europe to restructure our European business. Our goodwill impairment test for Europe assumes the future operating results will reflect the benefits of our efforts. While these results are not inconsistent with our past operating results, they do reflect improvements over fiscal 2005 and 2004 results. 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.
31
Environmental Liabilities
We accrue environmental remediation 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 which 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 was reduced from 7.0% in fiscal 2005 and 2004 to 6.5% in fiscal 2006. 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 lowered our discount rate assumption to determine the January 31, 2006 liability to 4.7% in fiscal 2006 due to the market declines 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 of 5.5% to determine the liability for our postretirement plan at January 31, 2006 remained consistent with the discount rate at January 31, 2005. We determine our discount rate using a yield curve expected benefit payment methodology. This methodology uses high-quality fixed-income rates to discount each future years 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 2007 will increase by 11% and future increases will decline by 1% per year until 5% is reached in 2012. 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 |
|
|
$ |
151 |
|
|
Effect on postretirement benefit obligation |
|
|
$ |
1,079 |
|
|
The following presents the sensitivity of a 1% increase in the health care cost trend: |
|
|
|
|
|
|
Effect on net periodic benefit cost |
|
|
$ |
246 |
|
|
Effect on postretirement benefit obligation |
|
|
$ |
1,025 |
|
|
32
Share-based Compensation
Effective May 1, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (123R). SFAS 123R addresses the accounting for stock-based compensation in which we receive employee services in exchange for our equity instruments. Stock-based compensation is calculated using a fair value method. Under the fair value recognition provisions of SFAS 123R, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service period the award is expected to vest. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term of stock options, 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 an adjustment in the period estimates are revised. See Note 10 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 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.
OFF BALANCE SHEET ARRANGEMENTS
At January 31, 2006 and 2005, 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
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4. This statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously
33
stated that ...under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require treatment as current period charges... SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, this statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS 151 shall be applied prospectively and are effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted for inventory costs incurred during fiscal years beginning after the date this Statement was issued. The adoption of SFAS 151 at the beginning of fiscal 2007 is not expected to have a material impact on our financial position and results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 requires the application of a change in accounting principle be applied to prior accounting periods presented as if that principle had always been used. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 at the beginning of fiscal 2007 is not expected to have a material effect on our results of operations or financial position.
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 2006 net sales of a 10% change in the U.S. dollar against foreign currencies which impact our operations (in millions):
Euro |
|
$ |
10.1 |
|
Canadian dollar |
|
$ |
2.5 |
|
British pound |
|
$ |
2.7 |
|
Other currencies (representing 11% of consolidated net sales) |
|
$ |
4.9 |
|
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 12 to 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.
34
Presuming that the full impact of commodity steel price increases is reflected in all steel and steel based component purchases, we estimate our gross margin 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, 2006, a 1.0% increase in commodity steel prices would have decreased consolidated gross profit by approximately $1.2 million.
During fiscal 2006, we experienced increases in certain prices for steel and steel components. These increases were less significant than the cost increases we experienced in fiscal 2005. We have continued to move aggressively to offset these increases through a variety of means, including sales price increases, surcharges and alternative sourcing arrangements. We were more successful in North America and Asia Pacific in realizing the full benefits of these mitigating measures. In Europe the measures were not as successful, resulting in some erosion of gross margins for certain products. During fiscal 2007 we are expecting some additional steel price increases and will continue to implement mitigating measures where needed.
Substantially all of our debt at January 31, 2006 has a fixed interest rate. Any additional payments to prepay scheduled amounts of debt are subject to penalties. At January 31, 2006, the penalties to retire all of our long-term debt were $510,000. A hypothetical immediate increase in interest rates by 1% would decrease the fair value of our long-term debt outstanding at January 31, 2006 by $316,000.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Cascade Corporation
We have completed integrated audits of Cascade Corporations January 31, 2006 and 2005 consolidated financial statements and of its internal control over financial reporting as of January 31, 2006, and an audit of its January 31, 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
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, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2006 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 index appearing under Item 15(a)(12) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes 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. We believe that our audits provide a reasonable basis for our opinion.
35
Internal control over financial reporting
Also, in our opinion, managements assessment, included in Managements Report on Internal Control Over Financial Reporting appearing in Item 9A, that the Company maintained effective internal control over financial reporting as of January 31, 2006 based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the COSO. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A companys 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 companys 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 companys assets that could have a material effect on the financial statements.
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 13, 2006
36
Cascade Corporation
Consolidated Statements of Income
|
|
Year Ended January 31 |
|
|||||||
|
|
2006 |
|
2005 |
|
2004 |
|
|||
|
|
(In thousands, except per share amounts) |
|
|||||||
Net sales |
|
$ |
450,503 |
|
$ |
385,719 |
|
$ |
297,756 |
|
Cost of goods sold |
|
307,774 |
|
262,537 |
|
202,120 |
|
|||
Gross profit |
|
142,729 |
|
123,182 |
|
95,636 |
|
|||
Selling and administrative expenses |
|
77,392 |
|
75,892 |
|
63,099 |
|
|||
Amortization |
|
1,443 |
|
658 |
|
512 |
|
|||
Insurance litigation recovery |
|
|
|
(1,300 |
) |
|
|
|||
Environmental expenses |
|
|
|
155 |
|
|
|
|||
Operating income |
|
63,894 |
|
47,777 |
|
32,025 |
|
|||
Interest expense |
|
2,741 |
|
3,570 |
|
4,570 |
|
|||
Interest income |
|
(979 |
) |
(562 |
) |
(1,016 |
) |
|||
Other (income) expense, net |
|
(95 |
) |
(218 |
) |
40 |
|
|||
Income before provision for income taxes |
|
62,227 |
|
44,987 |
|
28,431 |
|
|||
Provision for income taxes |
|
20,176 |
|
16,497 |
|
9,925 |
|
|||
Net income |
|
42,051 |
|
28,490 |
|
18,506 |
|
|||
Dividends paid on preferred shares of subsidiary |
|
|
|
|
|
(30 |
) |
|||
Net income applicable to common shareholders |
|
$ |
42,051 |
|
$ |
28,490 |
|
$ |
18,476 |
|
Basic earnings per share |
|
$ |
3.40 |
|
$ |
2.34 |
|
$ |
1.55 |
|
Diluted earnings per share |
|
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