UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

For the transition period from         to
Commission file number 1-12557

CASCADE CORPORATION
(Exact name of registrant as specified in its charter)

 

2201 N.E. 201st Ave. Fairview, Oregon 97024-9718
(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code: 503-669-6300

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $.50 per share

Name of exchange on which registered: New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No 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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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):

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act. Yes o  No x

The aggregate market value of common stock held by non-affiliates of the registrant as of July 31, 2006 was $466,182,462, based on the closing sale price of the common stock on the New York Stock Exchange on that date.

The number of shares outstanding of the registrant’s common stock as of March 15, 2007 was 11,984,653.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be filed within 120 days after the registrant’s fiscal year end of January 31, 2007, to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held June 5, 2007 are incorporated by reference into Part III.

TABLE OF CONTENTS

 

NOTE: All references to fiscal years are defined as year ended January 31, 2007 (fiscal 2007), year ended January 31, 2006 (fiscal 2006) and year ended January 31, 2005 (fiscal 2005).

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Forward-looking Statements

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Item 7) contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, gross profit, expenses, earnings or losses from operations, synergies or other financial items; any statements of plans, strategies, and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties, and assumptions referred to above include, but are not limited to:

·       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 Pacific and China;

·       Actions by foreign governments;

·       Assumptions relating to pension and other postretirement costs;

·       Foreign currency fluctuations;

·       Pending litigation;

·       Environmental matters;

·       Levels of public and non-residential construction;

·       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.

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PART I

Item 1.                        Business

General

Cascade Corporation (Cascade) was organized in 1943 under the laws of the state of Oregon. The terms “Cascade”, “we”, and “our” include Cascade Corporation and its subsidiaries. Our headquarters are located in Fairview, Oregon, a suburb of Portland, Oregon. We are one of the world’s leading manufacturers of materials handling load engagement devices and related replacement parts, primarily for the lift truck industry and to a lesser extent the construction industry. We also recently began manufacturing construction attachments following our purchase of the assets of Pacific Services & Manufacturing, Inc. (PSM). See “Construction Attachments” in Item 1 for a description of this business.

Products

We manufacture an extensive range of materials handling load engagement products that are widely used on lift trucks and, to a lesser extent, on construction and agricultural vehicles.

Our products are primarily manufactured with the Cascade name and symbol, for which we have secured trademark protection. The primary function of 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. Certain purchased parts are provided worldwide by a limited number of suppliers. Difficulties in obtaining alternative sources of rolled bar, plate and extruded steel products and other materials from a limited number of suppliers could affect operating results. We are not currently experiencing any shortages in obtaining raw materials, purchased parts, or other steel products.

Markets

We market our products throughout the world. Our primary customers are companies and industries that use lift trucks for materials handling. Examples of these industries include pulp and paper, grocery products, textiles, recycling and general consumer goods. Our products are sold to the end-user customer through the retail lift truck dealer distribution channel and to lift truck manufacturers as original equipment manufacturer (OEM) equipment.

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In 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 a productivity enhancing investment. Historically, this has somewhat cushioned the negative impact of downward trends in the lift truck market on our net sales.

In 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 the lift truck markets in these countries generally less susceptible to downward trends in overall capital goods spending.

Competition

We are one of the leading 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 profit throughout the world vary by geographic region due to the different competitive environments we face in each of these regions. Fluctuations in gross profit within a geographic region over time are generally due to a change in the competitive environment such as new competitors entering a market or existing entities merging or otherwise leaving the market. Additionally, cyclical variations in product demand directly affect margins as higher manufacturing volumes generally result in greater fixed cost absorption and increased gross profit.

A further discussion of the competition in each geographic region follows:

North America—We 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 primarily as the result of an acquisition which complemented our existing product lines, as well as through our continued focus on providing high quality products and outstanding customer service.

Europe—While we are also a leading manufacturer in Europe, we compete with one Italian public company and several privately-owned companies with a strong presence in local and regional markets. Competition in this region is based principally on price, resulting in lower gross profit.

Asia Pacific—This 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.

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China—We have operated in China for over 20 years and have established a strong presence in the lift truck market. Our competition consists primarily of smaller China-based companies. As a result of the continued growth in China’s economy and the expanded use of lift trucks for various industrial purposes, we have seen in recent years an increase in the number of competitors in the Chinese market, including foreign manufacturers from Europe.

Customers

Our products are marketed and sold primarily to lift truck OEDs, OEMs and distributors globally. Our primary markets are North America, Europe, China and Asia Pacific. In addition to sales to the lift truck market, we 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.

Backlog

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.

Research and Development

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 generally do not consider patents to be important to our business.

Environmental Matters

From time to time, we are the subject of investigations, conferences, discussions and negotiations with various federal, state, local and foreign agencies with respect to cleanup of hazardous waste and compliance with environmental laws and regulations. “Risk Factors” (Item 1A), Notes to Consolidated Financial Statements (Item 8), “Legal Proceedings” (Item 3) and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” (Item 7) contain additional information concerning our environmental matters.

Employees

At January 31, 2007, we had approximately 2,100 full-time employees throughout the world. The majority of these employees are not subject to collective bargaining agreements. We believe our relations with our employees are excellent.

Construction Attachments

In December 2006, we acquired the assets of PSM, a manufacturer of construction attachments in Woodinville, Washington. The construction attachments are used on medium and heavy duty construction vehicles used in the infrastructure, demolition, recycling, forestry, utility and general construction markets. The prevailing levels of commercial, infrastructure and general construction activity influence sales of these products. Housing construction has less of an overall influence. These products are sold through construction equipment dealers and major equipment manufacturers throughout the Western United States. We have approximately 100 employees working to design, manufacture and market these products.

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Foreign Operations

We have substantial operations outside the United States. There are additional business risks attendant to our foreign operations 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), “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Item 7) and Notes to Consolidated Financial Statements (Item 8).

Available Information

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on or through our website at www.cascorp.com when such reports are available on the Securities and Exchange Commission (SEC) website—www.sec.gov. Once filed with the SEC, such documents may be read and/or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

Item 1A.                Risk Factors

In addition to the other information contained in this Form 10-K, the following are certain risks that we believe should be considered carefully in evaluating Cascade’s business. Our business, financial condition, cash flows or results of operations could be materially adversely affected by any of these risks. The risks summarized below do not represent an exclusive list, and additional risks not presently known to the Company or that the Company currently deems immaterial may also impair its business and operations.

Economic or industry downturns

Our business has historically experienced periodic cyclical downturns generally consistent with economic cycles in the markets in which we operate. The level of sales of our products reflects to a significant extent the capital investment decisions of the customers who buy our products and the lift trucks and other vehicles, on which our products are used. These customers have had a tendency to delay capital projects, including the purchase of new equipment or expensive upgrades, during industry or general economic downturns. Past downturns have been characterized by diminished product demand, excess manufacturing capacity and erosion of gross profit. Therefore, a significant downturn in the markets of our customers, including lift truck manufacturers and to a lesser extent construction equipment manufacturers, or in general economic conditions is likely to result in a reduction in demand for our products and could harm our business.

Competition

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.

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Impact of acquisitions

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 results 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:

·       Difficulties in matching the business culture of the acquired business with our culture;

·       Assumption of unexpected liabilities;

·       Demands on management related to the increase in our size after an acquisition;

·       Diversion of management’s attention from existing operations due to the integration of acquired businesses;

·       Difficulties in integrating operations and systems;

·       Difficulties in the assimilation and retention of employees; and

·       Difficulties in retaining customers and integrating customer bases.

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 country’s or region’s 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 or war in any of the countries in which we operate;

·       Tariffs, quotas, 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 profits 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.

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Foreign currency fluctuations

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 currencies into U.S. dollars can result in a significant increase or decrease in the amount of those sales or earnings. In addition, our debt service requirements are primarily in U.S. dollars, even though a portion of our cash flow is generated in foreign currencies. Significant changes in the value of these foreign currencies relative to the U.S. dollar could have a material adverse effect on our financial condition and our ability to meet interest and principal payments on U.S. dollar-denominated debt.

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.

Loss of senior management

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. Seven 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 34 years. Our current Chief Operating Officer, Terry Cathey, will be retiring in June 2007. 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

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operations, and the installation of costly pollution control equipment or operational changes to limit pollution emissions and/or decrease the likelihood of accidental hazardous substance releases. We must conform our operations and properties to these laws and adapt to regulatory requirements in all jurisdictions as these requirements change.

We routinely deal with natural gas, oil and other petroleum products. As a result of our operations, we generate, manage and dispose of or recycle hazardous wastes and substances such as solvents, thinner, waste paint, waste oil, wash-down wastes and sandblast material. Hydrocarbons or other hazardous substances or wastes may have been disposed or released on, under or from properties owned, leased or operated by us or on, under or from other locations where such substances or wastes have been taken for disposal. These properties may be subject to investigatory, clean-up and monitoring requirements under U.S. and foreign, federal, state and local environmental laws and regulations.

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.

Underfunded benefit plans

Our obligations under our postretirement benefit plan and certain foreign subsidiaries’ defined benefit pension plans are currently underfunded. At some time in the future we may have to make significant cash payments to fund these plans, which would reduce the cash available for our business.

As of January 31, 2007, our projected benefit obligations under our defined benefit pension plans exceed the fair value of assets by $2.2 million. As of January 31, 2007 our accumulated postretirement benefit obligation under our postretirement benefit plan, which is not funded, was $7.5 million. The underfunding in our defined benefit pension plans is due in part to fluctuations in the financial markets that have caused the valuation of the assets to decrease. We expect that any required cash payments to our plans that are not fully funded will be made from future cash flows from operations. If our cash contributions are insufficient to adequately fund the plans to cover our future obligations, the performance of the 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. During the year ended January 31, 2007, a change to generally accepted accounting principles in the United States required the recording of the full postretirement benefit plan liability on our consolidated balance sheet. In the future, additional changes could require the recording of additional costs related to these plans.

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Reliance on lift truck dealers

Approximately 55-60% of our products are sold to the end-user customer through retail 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.

Original equipment manufacturers sourcing practices

We sell 40-45% of our products directly to OEMs, who carry inventories of finished products as part of ongoing operations and adjust those inventories based on their assessments of future needs. Such adjustments can have an impact on our quarterly results.

Item 1B.               Unresolved Staff Comments

None.

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Item 2.         Properties

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:

(1)          Facility is under construction and should be operational in fiscal 2008.

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Item 3.                        Legal Proceedings

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 9, 2007, we entered into a settlement agreement with Employers Reinsurance Corporation with respect to litigation to recover various expenses incurred in connection with environmental and related proceedings. The recovery from the settlement, which is expected to approximate $15.5 million, net of expenses, will be recorded in our consolidated financial statements for the first quarter of fiscal 2008. This concludes all litigation against our insurance companies with regards to environmental matters.

Item 4.                        Submission of Matters to a Vote of Security Holders

None.

Officers of the Registrant

Robert C. Warren, Jr.—Chief Executive Officer and President(1)—Mr. Warren, 58, 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 President—Marketing. Mr. Warren joined Cascade in 1972.

Gregory S. Anderson—Senior Vice President—Human Resources(1)—Mr. Anderson, 58, has served in his current position since 2002. He joined Cascade in 1984, and has served as Vice President—Human Resources since 1991.

Richard S. Anderson—Senior Vice President and Chief Financial Officer(1)—Mr. Anderson, 59, 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 President—Material Handling Product Group in 1996 and Senior Vice President—International in 1999.

Terry H. Cathey—Senior Vice President and Chief Operating Officer(1)—Mr. Cathey, 59, 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 President—Material Handling Operations in 1996 and Vice President—Manufacturing in 1993.

Herre Y. Hoekstra, Vice President and Managing Director, Europe(1)—Mr. Hoekstra, 45, joined Cascade in 2005. Prior to joining Cascade, Mr. Hoekstra held various management positions with Royal Ten Cate, REMU and Royal Dutch Shell, in The Netherlands.

Michael E. Kern, Vice President—Sales and Marketing(1)—Mr. Kern, 60, has served as Vice President—Sales and Marketing 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.

Kevin B. Kreiter, Vice President—Engineering(1)—Mr. Kreiter, 53, has served in his current position since 2006. He has been employed by Cascade since 1979 and has held several positions within the engineering group.

Jeffrey K. Nickoloff, Vice President—Corporate Manufacturing(1)—Mr. Nickoloff, 51, 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.

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Joseph G. Pointer, Vice President—Finance(1)—Mr. Pointer, 46, has served as Vice President—Finance since 2000. Prior to joining Cascade in 2000, Mr. Pointer was a partner at PricewaterhouseCoopers LLP in Portland, Oregon.

John A. Cushing—Treasurer—Mr. Cushing, 46, has served as Treasurer since 2001. He previously was Assistant Treasurer from 1999 until 2001. Prior to joining Cascade in 1999, Mr. Cushing was Assistant Treasurer for Fred Meyer, Inc., a retail company in Portland, Oregon.

(1)          These individuals are considered executive officers of Cascade Corporation.

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PART II

Item 5.                        Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

As of March 15, 2007, there were 181 shareholders of record of Cascade’s common stock including blocks of shares held by various depositories. It is our belief that when the shares held by the depositories are attributed to the beneficial owners, the total exceeds 2,000.

Performance Graph

The following graph compares the annual percentage change in the cumulative shareholder return on our common stock with the cumulative total return of the Russell 2000 Index and an industry group of peer companies, in each case assuming investment of $100 on January 31, 2002, and reinvestment of dividends. The stock price performance shown in the graph below is not necessarily indicative of future stock price performance. Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, the stock performance graph shall not be incorporated by reference into any such filings and shall not otherwise be deemed filed under such acts.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Cascade Corporation, The Russell 2000 Index
And A Peer Group

*                    $100 invested on 1/31/02 in stock or index—including reinvestment of dividends. Fiscal year ending January 31.

The peer group comprises the following companies: Actuant Corporation., Alamo Group Inc., Ampco-Pittsburgh Corporation, Astec Industries, Inc., Columbus-McKinnon Corporation, Gehl Company, Gulf Island Fabrication, Inc., IDEX Corporation, Lindsay Manufacturing Company, Nordson Corporation.

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Market Information

The high and low sales prices of Cascade’s common stock based on intra-day prices on the New York Stock Exchange for each quarter during the last two fiscal years were as follows:

 

 

Common Stock Repurchase

On September 7, 2006 we announced that our Board of Directors had authorized a share repurchase program of up to $80 million over a two-year period. The table below summarizes information about our purchases of our common shares during the three months and year ended January 31, 2007.

 

Common Stock Dividends

The common stock dividends declared during each quarter of the last two fiscal years were as follows:

 

Stock Exchange Listing and Transfer Agent

Cascade’s stock is traded on the New York Stock Exchange under the symbol CAE.

Cascade’s registrar and transfer agent is Mellon Shareholder Services, L.L.C., Shareholder Relations, P.O. Box 3315, South Hackensack, N.J., 07606, (800) 522-6645.

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Item 6.         Selected Financial Data

The following selected financial data should be read in conjunction with Cascade’s consolidated financial statements and accompanying notes contained in Item 8 of this Form 10-K.

(1)          Defined as equity divided by number of common shares outstanding at year end.

(2)          Defined as current assets less current liabilities.

(3)          Includes notes payable to banks and current and long-term portion of debt.

 

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Item 7.                        Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of certain significant factors that have affected our financial condition as of January 31, 2007, and the results of operations and cash flows for the fiscal years ended January 31, 2007, 2006 and 2005. 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.

OVERVIEW

Our businesses globally manufacture and distribute material handling load engagement products primarily for the lift truck industry and to a lesser extent the construction industry. We operate our business in four geographic segments: North America, Europe, Asia Pacific and China. A further discussion of the nature of our business is contained in Item 1, “Business” of this report.

RECENT TRENDS AND DEVELOPMENTS AFFECTING OUR RESULTS

Expansion in China

We have moved forward with a major expansion of our operations in China. The objectives of this expansion are to keep pace with the rapidly expanding Chinese lift truck market, expand our business in the Asia Pacific region and provide production capacity to begin exporting Chinese-made products to other parts of the world. During fiscal 2007 we invested $9 million and plan to invest another $5 million by the end of fiscal 2008. Our expansion to date has included the following:

·       Equipment and production process upgrades at our existing facility in Xiamen—This will allow us to produce a wider selection of products for sale both within China and to the Asia Pacific region. Along with these upgrades we are also increasing our efforts to source more materials and components from within China.

·       Construction of a fork manufacturing facility in Xiamen—Fork products manufactured at this facility will be exported to Europe to supplement our existing manufacturing capabilities in that region. We expect to begin production of forks at this location by the second quarter of fiscal 2008.

·       Construction of a fork manufacturing facility in Hebei—Fork products manufactured at this facility and the existing fork facility in Hebei will be sold within China and the Asia Pacific region. The new facility is expected to begin production by the second quarter of fiscal 2008.

In addition to the capital investment in China, we are taking other steps to build the infrastructure to support the expanded operations. This includes administrative and engineering staff and information systems.

Use of Available Cash and Liquidity Position

During fiscal 2007 we initiated several steps which impact the utilization of available cash and our current liquidity situation:

·       During the third quarter of fiscal 2007 we began a share repurchase program of up to $80 million. Through March 19, 2007 we have purchased 1,063,000 shares of common stock for $56 million. Total shares purchased through January 31, 2007 are disclosed in Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

·       The acquisition of the assets of PSM for approximately $40 million was the first step in our expansion into the construction attachment industry.

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·       As previously discussed, our China expansion has required an investment of $9 million in fiscal 2007 and is expected to require an additional $5 million in fiscal 2008.

These steps have reduced our overall net cash (cash/investments less long-term debt) in the short-term. However, if cash generated from operations continues at its present level, we will consider other ways to utilize available cash over the long-term.

Acquisition Strategy

The first step in our strategy to expand our North American business into attachments for construction vehicles was the acquisition of the assets of PSM in December 2006. We are also currently investigating opportunities to expand the business through additional acquisitions. Given the regional nature of these businesses, we would anticipate these acquisitions would be in areas of the United States outside of the Pacific Northwest. Our long-term plans are to develop this business in China as well.

European Business

After several years of marginal or no growth, the overall lift truck industry in Europe was strong in fiscal 2007, with shipments increasing 15% over fiscal 2006. Although industry growth was strong, our overall financial results in Europe for the year were disappointing in terms of sales growth and overall profitability. We continue to believe that improving our operational performance and increasing our market share in Europe, the world’s largest lift truck market, is our highest priority. We are planning and continuing to evaluate additional changes to our European business. These include efforts to realign our European sales force and expand resources available to focus on the growing Eastern European market, import fork products from China and efforts to focus on purchasing improvements and streamlining manufacturing operations and administrative functions.

Global Product Sourcing

Recent changes in the lift truck industry in Europe, including the sale of a lift truck division by one of Europe’s largest lift truck manufacturers and the continued globalization of business, are affecting the dynamics and business model previously used by global lift truck manufacturers. Whereas the previous practice was to source products locally or regionally, the current trend is to look more towards global sourcing. As previously noted a portion of our expansion in China is to produce forks for export into the European market. We believe this is the first step to address what will be a growing trend in the coming years. We believe we are well positioned to take advantage of this trend.

COMPARISON OF FISCAL 2007 AND FISCAL 2006

Executive Summary

 

During fiscal 2007 we posted record levels of consolidated net sales, operating income and net income. This reflects the strength of lift truck markets throughout the world, where shipments were up 12%. Financial results in both North America and China were very strong. Asia Pacific’s operating income fell short of the prior year. Europe had record net sales but incurred an operating loss.

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North America

		Year Ended January 31
		2007			%		2006			%		Change			Change %
		(In thousands)
Net sales		$	263,312		100	%	$	250,576		100	%	$	12,736			5	%
Cost of goods sold		160,502			61	%	152,707			61	%	7,795				5	%
Gross profit		102,810			39	%	97,869			39	%	4,941				5	%
Selling and administrative		46,015			18	%	44,672			18	%	1,343				3	%
Loss on disposition of assets		16					4					12
Amortization		598					151					447
Operating income		$	56,181		21	%	$	53,042		21	%	$	3,139			6	%

 

The following are financial highlights for North America in fiscal 2007 as compared to the prior year:

·       Higher sales are the result of increased volumes of shipments. Foreign currency changes accounted for less than 1% of the increase.

·       North America lift truck industry shipments from 2006 to 2007 increased 4%. We have found that lift truck industry statistics provide an indication of the direction of our business activity. However, changes in our net sales do not correspond directly to the percentage changes in lift truck industry shipments. We believe we have maintained our overall existing market share in North America during fiscal 2007.

·       Gross profit percentages remained consistent during fiscal 2007 and 2006. We have been able to offset the effect of general and material cost increases through either cost reduction activities or sales price increases.

·       Selling and administrative costs increased primarily due to additional share-based compensation costs.

·       Higher amortization costs in fiscal 2007 relate to amortization of intangible assets related to our acquisition of assets of PSM in December 2006.

Europe

		Year Ended January 31
		2007			%		2006			%		Change			Change %
		(In thousands)
Net sales		$	137,755		100	%	$	132,213		100	%	$	5,542			4	%
Cost of goods sold		115,114			84	%	108,467			82	%	6,647				6	%
Gross profit		22,641			16	%	23,746			18	%	(1,105		)		(5	%)
Selling and administrative		23,371			17	%	22,033			17	%	1,338				6	%
Loss (gain) on disposition of assets		(588		)			441					(1,029		)
Amortization		851					1,264			1	%	(413		)
Operating income (loss)		$	(993	)	(1	%)	$	8				$	(1,001	)

 

The following are financial highlights for Europe in fiscal 2007 as compared to the prior year:

·       Sales increased 2% due to increased shipment volumes, excluding currency changes. European lift truck industry shipments increased 15% in fiscal 2007. In comparing our sales growth to the current industry statistics, we believe we lost market share in Europe in fiscal 2007.

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·       Our gross profit percentage in fiscal 2006 included restructuring costs of $2.0 million related to the closure of a manufacturing facility in The Netherlands. Excluding these costs our fiscal 2006 gross profit percentage was 19%. The decrease in our fiscal 2007 gross profit is due to additional costs, including production inefficiencies at multiple manufacturing facilities and general cost increases.

·       Excluding currency changes, selling and administrative costs increased 2% primarily due to additional sales and marketing costs. Fiscal 2006 costs also included $415,000 of restructuring costs.

·       Gain on the disposition of assets in fiscal 2007 relates to the sale of a manufacturing facility in The Netherlands.

·       Amortization costs decreased due to additional amortization of intangible assets in Italy during fiscal 2006.

European Initiatives

Our performance in Europe continues to fall below our expectations, especially in light of a strong European lift truck market. This being said we still feel our initiatives, which were commenced in the prior year, will over the long-term allow us to achieve improved financial results. We have provided below an overview of these initiatives, our progress to date and additional changes planned in the upcoming year:

·       The developing focus by lift truck manufacturers on global low cost sourcing and our expanded manufacturing capabilities in China will allow us to begin importing Chinese-made products into Europe in fiscal 2008. This will require additional rationalization of our existing European fork production facilities and expansion of our distribution capabilities. We believe we are well positioned in comparison with other European competitors to meet the demands of the currently changing market.

·       We are continuing with efforts to realign the European sales force and modifying our marketing strategy. This includes expanding resources into the Eastern European market, which includes Poland, Czech Republic and Turkey. In addition, we are expanding the management team to strengthen our capabilities in our European production operations.

·       We are continuing our efforts to focus on operational excellence, which includes product quality, on-time deliveries, review of procurement policies and practices and development of products specific to the European market. This includes the utilization of external consultants as needed.

Asia Pacific

		Year Ended January 31
		2007			%		2006			%		Change			Change %
		(In thousands)
Net sales		$	48,256		100	%	$	45,471		100	%	$	2,785			6	%
Cost of goods sold		36,163			75	%	33,077			73	%	3,086				9	%
Gross profit		12,093			25	%	12,394			27	%	(301		)		(2	%)
Selling and administrative		8,225			17	%	7,803			17	%	422				5	%
Gain on disposition of assets		(17		)			(65		)			48
Amortization		19					—					19
Operating income		$	3,866		8	%	$	4,656		10	%	$	(790	)		(17	%)

 

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The following are financial highlights for Asia Pacific in fiscal 2007 as compared to the prior year:

·       Strong lift truck markets in Korea and Japan supported our higher sales levels in fiscal 2007. Excluding currency changes, net sales increased 7%. Lift truck industry shipments in Asia Pacific increased 7% in fiscal 2007.

·       Gross profits were down 2% over the prior year due primarily to higher material costs.

·       Selling and administrative costs increased, excluding currency changes. This increase is due to additional personnel, marketing and employee benefit expenses.

China

		Year Ended January 31
		2007			%		2006			%		Change			Change %
		(In thousands)
Net sales		$	29,527		100	%	$	22,243		100	%	$	7,284			33	%
Cost of goods sold		17,091			58	%	13,523			61	%	3,568				26	%
Gross profit		12,436			42	%	8,720			39	%	3,716				43	%
Selling and administrative		3,098			11	%	2,499			11	%	599				24	%
Loss on disposition of assets		37					5					32
Amortization		4					28					(24		)
Operating income		$	9,297		31	%	$	6,188		28	%	$	3,109			50	%

 

The following are financial highlights for China in fiscal 2007 as compared to the prior year:

·       Net sales increased consistent with the continued growth of the Chinese economy. Lift truck shipments in China increased 33% in fiscal 2007.

·       Gross profit percentages increased 3% in fiscal 2007. These increasing margins reflect the benefits from certain production process improvements implemented in Xiamen in fiscal 2007 and the additional sourcing of certain raw materials and components from within China.

·       Selling and administrative costs have increased due to additional costs, primarily professional fees and other general costs, to support our expanding operations in China. As a percentage of net sales these costs are consistent with the prior year.

Non-Operating Items

Our interest expense in fiscal 2007 decreased 16% in comparison with fiscal 2006. The reduction reflects our scheduled paydown of long-term debt in November 2006. See “Financial Condition and Liquidity” for additional discussion of Company debt levels and payments. We anticipate an increase in interest expense as we borrow against our credit facility for various initiatives.

Consolidated interest income increased $915,000 through increased investing activity and higher interest rates in fiscal 2007.

Our effective tax rate for fiscal 2007 increased to 34% in comparison to 32% in fiscal 2006. This increase is due to the reduced tax benefits from international financing and the discontinued special deduction for U.S. export sales, combined with the utilization of previously recorded foreign tax credits.

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Lift Truck Market Outlook

Based on our review of industry statistics and data we believe the general lift truck market outlook for fiscal 2008 is as follows:

·       The North American market in fiscal 2008 will be at the business levels experienced in fiscal 2007.

·       Europe’s lift truck industry is expected to grow at a modest rate for fiscal 2008.

·       The market in Asia Pacific is expected to remain at the current levels through the remainder of fiscal 2008.

·       The market in China is expected to continue to experience strong growth through the remainder of fiscal 2008.

Fourth Quarter Results (2007/2006)

		Three Months Ended January 31
		2007			%		2006			%		Change			Change %
		(In thousands)
Net sales		$	118,891		100	%	$	108,423		100	%	$	10,468			10	%
Cost of goods sold		83,406			70	%	76,577			71	%	6,829				9	%
Gross profit		35,485			30	%	31,846			29	%	3,639				11	%
Selling and administrative expenses		21,130			18	%	20,674			19	%	456				2	%
Loss on disposition of assets		20			—		292			—		(272		)		—
Amortization		497			—		248			—		249				100	%
Operating income		13,838			12	%	10,632			10	%	3,206				30	%
Interest expense, net		338			—		161			—		177				110	%
Other income, net		(864		)	—		(26		)	—		(838		)		—
Income before taxes		14,364			12	%	10,497			10	%	3,867				37	%
Provision for taxes		4,123			3	%	2,232			2	%	1,891				85	%
Net income		$	10,241		9	%	$	8,265		8	%	$	1,976			24	%
Diluted earnings per share		$	0.80				$	0.63
Operating income (loss) by region:
North America		$	11,235				$	11,384				$	(149	)		(1	%)
Europe		(1,017		)			(2,144		)			1,127				53	%
Asia Pacific		1,231					445					786				177	%
China		2,389					947					1,442				152	%
		$	13,838				$	10,632				$	3,206			30	%

 

The following are financial highlights from the fourth quarter of fiscal 2007:

·       Sales growth, excluding currency changes, was 10% in Europe, 13% in Asia Pacific and 44% in China. North America’s net sales, excluding $2 million of sales related to the PSM acquisition, decreased 2%. Prior year fourth quarter sales in North America were very strong. We do not believe the decrease in sales in North America is an indication of any loss of market share in the region.

·       Our overall gross profit in Europe was consistent with the prior year after excluding the restructuring costs from the closure of a facility in The Netherlands incurred in the prior year.

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·       Selling and administrative costs decreased 2% after excluding currency changes. This decrease is due to lower consulting and general costs in Europe and lower personnel and warranty costs in North America.

·       The decrease in Europe’s operating loss is primarily due to $781,000 of additional restructuring costs incurred in fiscal 2006.

·       Increases in operating income in the Asia Pacific and China regions are a result of strong lift truck markets and higher gross profits. The improved results reflect the benefits of our China expansion, both in terms of lower production costs and the distribution of Chinese-made products to the Asia Pacific region.

·       The effective tax rate in the fourth quarter of fiscal 2007 was 29% as compared to 21% in the prior year. The current quarter rate reflects the benefit of an income tax refund received in China related to the recapitalization of our Chinese subsidiary. The prior quarter rate reflected the release of certain valuation allowances.

COMPARISON OF FISCAL 2006 AND FISCAL 2005

Executive Summary

		Year Ended January 31
		2006			2005			Change			Change %
		(In thousands except per share amounts)
Net sales		$	450,503		$	385,719		$	64,784			17	%
Operating income		$	63,894		$	47,777		$	16,117			34	%
Net income		$	42,051		$	28,490		$	13,561			48	%
Diluted earnings per share		$	3.27		$	2.24		$	1.03			46	%

 

We experienced strong sales growth in all regions in fiscal 2006. Globally forklift truck shipments were up 10%. The net sales increase is due to higher sales volumes and the full year’s effect of price increases made throughout fiscal 2005. The increase in operating income is primarily due to higher sales levels as gross profit remained consistent with the prior year. A lower effective tax rate in fiscal 2006 contributed to a higher level of net income.

North America

		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		44,672			18	%	43,661			21	%	1,011				2	%
Loss on disposition of assets		4					70					(66		)
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 is due to higher volumes of shipments and the full year’s benefit of price increases made in fiscal

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2005. Foreign currency fluctuations between the U.S. and Canadian dollar accounted for 1% of the increase in net sales. North American lift truck industry shipments from 2005 to 2006 increased 11%. We believe we maintained or increased our market share in North America during fiscal 2006.

Gross profit 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 $1.0 million 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.

Europe

		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				0	%
Selling and administrative		22,033			17	%	23,574			20	%	(1,541		)		(7	%)
Loss (gain) on disposition of assets		441					(71		)			512
Amortization		1,264			1	%	485			0	%	779
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 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 shipments in fiscal 2006 increased 3% over fiscal 2005.

The gross profit 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 were integrated into other manufacturing facilities in Almere, The Netherlands and Verona, Italy. This closure allowed us to eliminate excess capacity for attachment products. 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.

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European selling and administrative costs decreased 7% in fiscal 2006. Foreign currency fluctuations made up 1% of the decrease. The 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

		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		7,803			17	%	6,813			18	%	990				15	%
Gain on disposition of assets		(65		)			(2		)			(63		)
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 shipments in Asia Pacific increased 10% in fiscal 2006 over fiscal 2005.

The gross profit 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.

Selling and administrative costs in Asia Pacific for fiscal 2006 increased 15% 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.

China

		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		2,499			11	%	1,841			10	%	658				36	%
Loss on disposition of assets		5					6					(1		)
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. Our net sales growth is consistent with the expansion of the Chinese economy. Lift truck shipments in China increased 11% in fiscal 2006.

Our gross profit 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 also had a higher percentage of OEM product sales in fiscal 2006, which have lower gross profits.

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.

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