UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark
One)

 

 

 

 

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the Quarterly Period Ended April 30, 2008

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from         to         

 

Commission file number 1-12557

 

CASCADE CORPORATION

(Exact name of registrant as specified in its charter)

 

Oregon

 

93-0136592

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

2201 N.E. 201st Ave.

 

 

Fairview, Oregon

 

97024-9718

(Address of principal executive office)

 

(Zip Code)

 

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

 

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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 number of shares outstanding of the registrant’s common stock as of May 20, 2008 was 10,826,064.

 

 



 

CASCADE CORPORATION

FORM 10-Q

Quarter Ended April 30, 2008

 

TABLE OF CONTENTS

 

Page

Part I – Financial Information:

4

 

 

Item 1. Financial Statements (unaudited):

4

Consolidated Statements of Income

4

Consolidated Balance Sheets

5

Consolidated Statement of Changes in Shareholders’ Equity

6

Consolidated Statements of Cash Flows

7

Notes to Consolidated Financial Statements

8

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

29

 

 

Item 4. Controls and Procedures

30

 

 

Part II – Other Information

31

 

 

Signatures

33

 

 

Exhibit Index

34

 

2



 

Forward-Looking Statements

 

This Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Item 2) 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:

 

·                  Fluctuations in lift truck orders or deliveries;

 

·                  Competitive factors in, and the cyclical nature of, the materials handling and construction equipment industries;

 

·                  Cost and availability of raw materials;

 

·                  General business and economic conditions in North America, Europe, Asia Pacific and China;

 

·                  Risks associated with international operations;

 

·                  Effectiveness of our capital expenditures and cost reduction initiatives;

 

·                  Foreign currency fluctuations;

 

·                  Levels of construction;

 

·                  Environmental matters;

 

·                  Assumptions relating to pension and other postretirement costs;

 

·                  Fluctuations in interest rates;

 

·                  Impact of acquisitions.

 

We undertake no obligation to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report.  See “Risk Factors” (Item 1A) for additional information on risk factors with the potential to impact our business.

 

3



 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CASCADE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited — in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

April 30

 

 

 

2008

 

2007

 

Net sales

 

$

149,867

 

$

135,500

 

Cost of goods sold

 

107,519

 

92,271

 

Gross profit

 

42,348

 

43,229

 

 

 

 

 

 

 

Selling and administrative expenses

 

23,806

 

21,132

 

Loss (gain) on disposition of assets, net

 

115

 

(35

)

Amortization

 

675

 

798

 

Insurance litigation recovery, net

 

 

(15,977

)

 

 

 

 

 

 

Operating income

 

17,752

 

37,311

 

Interest expense

 

1,131

 

995

 

Interest income

 

(107

)

(157

)

Other expense, net

 

121

 

78

 

 

 

 

 

 

 

Income before provision for income taxes

 

16,607

 

36,395

 

Provision for income taxes

 

5,749

 

12,599

 

 

 

 

 

 

 

Net income

 

$

10,858

 

$

23,796

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.01

 

$

1.99

 

Diluted earnings per share

 

$

0.98

 

$

1.90

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

10,782

 

11,966

 

Diluted weighted average shares outstanding

 

11,098

 

12,545

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4



 

CASCADE CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited - in thousands, except per share amounts)

 

 

 

April 30

 

January 31

 

 

 

2008

 

2008

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

23,879

 

$

21,223

 

Accounts receivable, less allowance for doubtful accounts of $1,636 and $1,623

 

101,208

 

93,117

 

Inventories

 

90,445

 

85,049

 

Deferred income taxes

 

5,549

 

6,213

 

Prepaid expenses and other

 

8,720

 

10,887

 

Total current assets

 

229,801

 

216,489

 

Property, plant and equipment, net

 

100,809

 

98,350

 

Goodwill

 

119,097

 

118,826

 

Deferred income taxes

 

6,594

 

5,948

 

Intangible assets, net

 

20,277

 

20,916

 

Other assets

 

1,963

 

1,971

 

Total assets

 

$

478,541

 

$

462,500

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable to banks

 

$

6,001

 

$

2,484

 

Current portion of long-term debt

 

433

 

423

 

Accounts payable

 

38,218

 

32,727

 

Accrued payroll and payroll taxes

 

11,061

 

10,148

 

Other accrued expenses

 

18,262

 

18,736

 

Total current liabilities

 

73,975

 

64,518

 

Long-term debt, net of current portion

 

101,786

 

107,809

 

Accrued environmental expenses

 

4,072

 

4,314

 

Deferred income taxes

 

5,622

 

5,710

 

Employee benefit obligations

 

8,576

 

8,824

 

Other liabilities

 

4,195

 

3,300

 

Total liabilities

 

198,226

 

194,475

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $.50 par value, 20,000 authorized shares; 10,826 and 10,840 shares issued and outstanding

 

5,413

 

5,420

 

Additional paid-in capital

 

474

 

 

Retained earnings

 

235,841

 

226,932

 

Accumulated other comprehensive income

 

38,587

 

35,673

 

Total shareholders’ equity

 

280,315

 

268,025

 

Total liabilities and shareholders’ equity

 

$

478,541

 

$

462,500

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5



 

CASCADE CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited — in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

Year-To-Date

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Shareholders’

 

Comprehensive

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Equity

 

Income (Loss)

 

Balance at January 31, 2008

 

10,840

 

$

5,420

 

$

 

$

226,932

 

$

35,673

 

$

268,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

10,858

 

 

10,858

 

$

10,858

 

Dividends ($0.18 per share)

 

 

 

 

(1,949

)

 

(1,949

)

 

Common stock issued

 

4

 

2

 

60

 

 

 

62

 

 

Common stock repurchased

 

(18

)

(9

)

(901

)

 

 

(910

)

 

Share-based compensation

 

 

 

1,315

 

 

 

1,315

 

 

Translation adjustment

 

 

 

 

 

2,914

 

2,914

 

2,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2008

 

10,826

 

$

5,413

 

$

474

 

$

235,841

 

$

38,587

 

$

280,315

 

$

13,772

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6



 

CASCADE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited - in thousands)

 

 

 

Three Months Ended

 

 

 

April

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

10,858

 

$

23,796

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

3,600

 

3,479

 

Amortization

 

675

 

798

 

Share-based compensation

 

1,315

 

984

 

Deferred income taxes

 

30

 

355

 

Loss (gain) on disposition of assets, net

 

115

 

(35

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(6,017

)

(12,713

)

Inventories

 

(3,215

)

(3,174

)

Prepaid expenses and other

 

(2

)

1,066

 

Accounts payable and accrued expenses

 

4,751

 

2,582

 

Income taxes payable and receivable

 

3,029

 

6,787

 

Other assets and liabilities

 

346

 

(858

)

Net cash provided by operating activities

 

15,485

 

23,067

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(3,903

)

(5,249

)

Proceeds from disposition of assets

 

34

 

176

 

Net cash used in investing activities

 

(3,869

)

(5,073

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on long-term debt

 

(16,608

)

(31,073

)

Proceeds from long-term debt

 

10,500

 

37,000

 

Notes payable to banks, net

 

3,485

 

(2,413

)

Common stock repurchased

 

(3,220

)

(24,496

)

Common stock issued under share-based compensation plans

 

62

 

1,404

 

Excess tax benefit from exercise of share-based compensation awards

 

 

686

 

Net cash used in financing activities

 

(5,781

)

(18,892

)

 

 

 

 

 

 

Effect of exchange rate changes

 

(3,179

)

(1,053

)

 

 

 

 

 

 

Change in cash and cash equivalents

 

2,656

 

(1,951

)

Cash and cash equivalents at beginning of period

 

21,223

 

36,593

 

Cash and cash equivalents at end of period

 

$

23,879

 

$

34,642

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

See Note 9 to the consolidated financial statements

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

7



 

CASCADE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Description of Business

 

Cascade Corporation is an international company engaged in the manufacture of materials handling products that are widely used on industrial fork lift trucks and, to a lesser extent, construction, mining and agricultural vehicles. Accordingly, our sales are largely dependent on sales of lift trucks and replacement parts. Our sales are made throughout the world. We are headquartered in Fairview, Oregon, employing approximately 2,500 people and maintaining operations in 15 countries outside the United States.

 

Note 2—Interim Financial Information

 

The accompanying consolidated financial statements for the interim periods ended April 30, 2008 and 2007 are unaudited. In the opinion of management, the accompanying consolidated financial statements reflect normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for those interim periods. Results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year, and these financial statements do not contain the detail or footnote disclosures concerning accounting policies and other matters that would be included in full fiscal year financial statements. Therefore, these statements should be read in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2008.

 

Note 3—Segment Information

 

Our operating units have several economic characteristics and attributes, including similar products, distribution patterns and classes of customers.  As a result, we aggregate our operating units into four geographic operating segments related to the manufacturing, distribution and servicing of material handling load engagement products.  We evaluate the performance of each of our operating segments based on operating income, which consists of income before interest, miscellaneous income/expense and income taxes.  The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies contained in Note 2 of our consolidated financial statements included in our Form 10-K for the fiscal year ended January 31, 2008.

 

Revenues and operating results are classified according to the country of origin.  Transfers represent sales between our geographic operating segments.  The costs of our corporate office are included in North America.  Identifiable assets are attributed to the geographic location in which they are located.  Net sales and transfers, operating results and identifiable assets by geographic operating segment were as follows (in thousands):

 

8



 

 

 

Three Months Ended April 30

 

2008

 

North America

 

Europe

 

Asia Pacific

 

China

 

Eliminations

 

Consolidation

 

Net sales

 

$

69,320

 

$

49,336

 

$

19,180

 

$

12,031

 

$

 

$

149,867

 

Transfers between areas

 

7,719

 

581

 

83

 

6,150

 

(14,533

)

 

Net sales and transfers

 

$

77,039

 

$

49,917

 

$

19,263

 

$

18,181

 

$

(14,533

)

$

149,867

 

Gross profit

 

$

24,251

 

$

7,392

 

$

5,114

 

$

5,591

 

 

 

$

42,348

 

Selling and administrative

 

12,749

 

7,631

 

2,339

 

1,087

 

 

 

23,806

 

Loss (gain) on disposition of assets, net

 

120

 

(1

)

(3

)

(1

)

 

 

115

 

Amortization

 

597

 

78

 

 

 

 

 

675

 

Operating income (loss)

 

$

10,785

 

$

(316

)

$

2,778

 

$

4,505

 

 

 

$

17,752

 

Total assets

 

$

237,152

 

$

142,429

 

$

48,522

 

$

50,438

 

 

 

$

478,541

 

Property, plant and equipment, net

 

$

34,714

 

$

40,410

 

$

6,940

 

$

18,745

 

 

 

$

100,809

 

Capital expenditures

 

$

1,546

 

$

1,252

 

$

198

 

$

907

 

 

 

$

3,903

 

Depreciation expense

 

$

1,693

 

$

1,348

 

$

131

 

$

428

 

 

 

$

3,600

 

 

 

 

Three Months Ended April 30

 

2007

 

North America

 

Europe

 

Asia Pacific

 

China

 

Eliminations

 

Consolidation

 

Net sales

 

$

71,382

 

$

41,604

 

$

13,795

 

$

8,719

 

$

 

$

135,500

 

Transfers between areas

 

8,309

 

324

 

70

 

2,669

 

(11,372

)

 

Net sales and transfers

 

$

79,691

 

$

41,928

 

$

13,865

 

$

11,388

 

$

(11,372

)

$

135,500

 

Gross profit

 

$

28,156

 

$

7,605

 

$

3,597

 

$

3,871

 

 

 

$

43,229

 

Selling and administrative

 

12,319

 

6,113

 

1,903

 

797

 

 

 

21,132

 

Loss (gain) on disposition of assets, net

 

(74

)

8

 

 

31

 

 

 

(35

)

Amortization

 

588

 

205

 

 

5

 

 

 

798

 

Insurance litigation recovery, net

 

(15,977

)

 

 

 

 

 

(15,977

)

Operating income

 

$

31,300

 

$

1,279

 

$

1,694

 

$

3,038

 

 

 

$

37,311

 

Total assets

 

$

222,123

 

$

122,363

 

$

35,158

 

$

41,047

 

 

 

$

420,691

 

Property, plant and equipment, net

 

$

33,187

 

$

36,373

 

$

1,794

 

$

15,369

 

 

 

$

86,723

 

Capital expenditures

 

$

1,554

 

$

818

 

$

187

 

$

2,690

 

 

 

$

5,249

 

Depreciation expense

 

$

1,910

 

$

1,225

 

$

99

 

$

245

 

 

 

$

3,479

 

 

9



 

Note 4—Inventories

 

Inventories stated at the lower of average cost or market are presented below by major class (in thousands).

 

 

 

April 30

 

January 31

 

 

 

2008

 

2008

 

Finished goods

 

$

31,673

 

$

31,618

 

Raw materials and components

 

58,772

 

53,431

 

 

 

$

90,445

 

$

85,049

 

 

Note 5—Goodwill

 

During the three months ended April 30, 2008, goodwill increased due to fluctuations in foreign currencies.  We have no goodwill recorded in China. The following table provides a breakdown of goodwill by geographic region (in thousands):

 

 

 

April 30

 

January 31

 

 

 

2008

 

2008

 

North America

 

$

103,726

 

$

103,965

 

Europe

 

12,414

 

11,893

 

Asia Pacific

 

2,957

 

2,968

 

 

 

$

119,097

 

$

118,826

 

 

Note 6—Share-Based Compensation Plans

 

We have granted three types of share-based awards, stock appreciation rights (SARS), restricted stock and stock options under our share-based compensation plans to officers, key managers and directors.  The grant prices are established by our Board of Directors’ Compensation Committee based on the end of day market price of our common stock on the grant date.  We issue new common shares upon the exercise of all awards.

 

SARS provide the holder the right to receive an amount, payable in our common shares, equal to the excess of the market value of our common shares on the date of exercise (“intrinsic value”) over the base price at the time the right was granted. The base price may not be less than the market price of our common shares on the date of grant.  All SARS vest ratably over a four year period and have a term of ten years.

 

 During the second quarter of fiscal 2008, our shareholders approved a proposal to amend the SARS plan to permit the issuance of restricted shares of common stock.  Upon the granting of restricted stock, common shares are issued to the recipient, but the shares may not be sold, assigned, transferred, pledged, or disposed of by the recipient until vested.  Regardless of vesting, restricted shares have full voting rights and any dividends declared will be paid to the restricted stock recipient.  Restricted shares vest ratably over a period of three years for officers and four years for directors.  The number of restricted shares issued to directors is based on the market value of our shares on the date of grant.

 

The amended SARS plan provides for the issuance of a maximum of 750,000 shares of common stock upon the exercise of SARS or issuance of restricted stock.  As of April 30, 2008, a total of 223,000 shares of common stock have been issued under the SARS plan, which includes 42,000 shares of restricted stock with a grant date fair market value of $73.73 per share.

 

Stock options provide the holder the right to receive our common shares at an established price.  We have reserved 1,400,000 shares of common stock under our stock option plan. As of April 30, 2008, a total of 1,087,000 shares have been issued upon the exercise of stock options.  No additional stock options can be granted under the terms of the plan.  All outstanding stock options vest ratably over a four year period and have a term of ten years.

 

10



 

A summary of the plans’ status at April 30, 2008 together with changes during the three months then ended are presented in the following tables (in thousands, except per share amounts):

 

 

 

Stock Options

 

Stock Appreciation Rights

 

 

 

 

 

Weighted Average

 

 

 

Weighted Average

 

 

 

Outstanding

 

Exercise Price

 

Outstanding

 

Exercise Price

 

 

 

Awards

 

Per Share

 

Awards

 

Per Share

 

 

 

 

 

 

 

 

 

 

 

Balance at January 31, 2008

 

286

 

$

13.39

 

815

 

$

34.84

 

Granted

 

 

 

 

 

Exercised

 

(4

)

16.56

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2008

 

282

 

$

13.35

 

815

 

$

34.84

 

 

We calculate share-based compensation cost for stock options and SARS using the Black-Scholes option pricing model.  We calculate share-based compensation cost for restricted stock by multiplying the fair market value of our common shares on the grant date by the number of restricted shares expected to vest.  Share-based compensation is expensed ratably over the applicable vesting period.  Additional information regarding the assumptions used to calculate fair value of our share-based compensation plans is presented in Note 2 to our consolidated financial statements included in our Form 10-K for the year ended January 31, 2008.

 

As of April 30, 2008, there was $7.6 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the plans, which is expected to be recognized over a weighted average period of 2.1 years. The following table represents as of April 30, 2008 the share-based compensation costs to be recognized in future periods (in thousands) for awards granted to date:

 

Fiscal Year

 

Amount

 

2009*

 

3,302

 

2010

 

3,017

 

2011

 

1,119

 

2012

 

198

 

 

 

$

7,636

 

 


*Represents last nine months of fiscal 2009.

 

11



 

Note 7—Commitments and Contingencies

 

Environmental Matters

 

We are subject to environmental laws and regulations, which include obligations to remove or mitigate environmental effects of past disposal and release of certain wastes and substances at various sites. We record liabilities for affected sites when environmental assessments indicate probable cleanup and the costs can be reasonably estimated. Other than for costs of assessments themselves, the timing and amount of these liabilities is determined based on the estimated costs of remediation activities and our commitment to a formal plan of action, such as an approved remediation plan.  The reliability and precision of the loss estimates are affected by numerous factors, such as different stages of site evaluation and reevaluation of the degree of remediation required. We adjust our liabilities as new remediation requirements are defined, as information becomes available permitting reasonable estimates to be made and to reflect new and changing facts.

 

It is reasonably possible that changes in estimates will occur in the near term and the related adjustments to environmental liabilities may have a material impact on our net income. Unasserted claims are not currently reflected in our environmental remediation liabilities. It is also reasonably possible that these claims may also have a material impact on our net income if asserted. We cannot estimate at this time the amount of any additional loss or range of loss that is reasonably possible.

 

Our specific environmental matters consist of the following:

 

Fairview, Oregon

 

In 1996, the Oregon Department of Environmental Quality issued two Records of Decision affecting our Fairview, Oregon manufacturing facility. The Records of Decision required us to initiate remedial activities related to the cleanup of groundwater contamination at and near the facility. Remediation activities have been conducted since 1996 and current estimates provide for some level of activity to continue through 2019. Costs of certain remediation activities at the facility are shared with The Boeing Company, with Cascade paying 70% of these costs. The recorded liability for ongoing remediation activities at our Fairview facility was $4.6 million and $4.8 million at April 30, 2008 and January 31, 2008, respectively.

 

Springfield, Ohio

 

In 1994, we entered into a consent order with the Ohio Environmental Protection Agency, which required the installation of remediation systems for the cleanup of groundwater contamination at our Springfield, Ohio facility. The current estimate is that the remediation activities will continue through 2013. The recorded liability for ongoing remediation activities in Springfield was $855,000 at April 30, 2008 and $900,000 at January 31, 2008.

 

Insurance Litigation

 

On April 9, 2007, we entered into a settlement agreement with Employers Reinsurance Corporation with respect to litigation to recover various expenses incurred in connection with environmental and related proceedings.  The recovery from the settlement, recorded during the three months ended April 30, 2007, was $16.0 million, net of expenses.  In connection with the settlement, we released all rights we might have under insurance policies issued by Employers Reinsurance Corporation and certain related entities.  This concluded all litigation against our insurance companies with regard to environmental matters.

 

Legal Proceedings

 

We are subject to legal proceedings, claims and litigation, in addition to the environmental matters previously discussed, arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect the ultimate costs to be material to our consolidated financial position, result of operations, or cash flows.

 

12



 

Note 8—Earnings Per Share

 

The following table presents the calculation of basic and diluted earnings per share (in thousands, except per share amounts):

 

 

 

Three Months Ended April 30

 

 

 

2008

 

2007

 

Basic earnings per share:

 

 

 

 

 

Net income

 

$

10,858

 

$

23,796

 

Weighted average shares of common stock outstanding

 

10,782

 

11,966

 

 

 

$

1.01

 

$

1.99

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Net income

 

$

10,858

 

$

23,796

 

Weighted average shares of common stock outstanding

 

10,782

 

11,966

 

Dilutive effect of stock awards

 

316

 

579

 

Diluted weighted average shares of common stock outstanding

 

11,098

 

12,545

 

 

 

$

0.98

 

$

1.90

 

 

Basic earnings per share is based on the weighted average number of common shares outstanding for the period. Diluted weighted average common shares includes the incremental shares that would be issued upon the assumed exercise of stock options and stock appreciation rights and the amount of unvested restricted stock.  Unexercised SARS totaling 64,000 awards and unvested restricted stock totaling 4,070 shares were excluded from the fiscal 2009 calculation of diluted earnings per share because they were antidilutive.  The remaining SARS and restricted stock and all stock options were included in our calculation of incremental shares because they are dilutive.

 

13



 

Note 9—Supplemental Cash Flow Information

 

The following table presents information that supplements the consolidated statements of cash flow (in thousands):

 

 

 

For the Three Months Ended April 30

 

 

 

2008

 

2007

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

1,097

 

$

775

 

Income taxes

 

$

3,097

 

$

4,716

 

 

 

 

 

 

 

Supplemental disclosure of noncash information:

 

 

 

 

 

Dividends declared

 

$

1,949

 

$

1,886

 

 

14



 

Note 10—Benefit Plans

 

The following table represents the net periodic cost related to our defined benefit plans in England and France and our postretirement health benefit plan in the United States (in thousands):

 

 

 

Defined Benefit

 

Postretirement Benefit

 

 

 

Three Months Ended April

 

Three Months Ended April

 

 

 

2008

 

2007

 

2008

 

2007

 

Net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

6

 

$

14

 

$

26

 

$

30

 

Interest cost

 

147

 

129

 

108

 

105

 

Expected return on plan assets

 

(131

)

(125

)

 

 

Recognized prior service cost

 

 

 

(19

)

(19

)

Recognized net actuarial loss

 

23

 

22

 

1

 

48

 

 

 

$

45

 

$

40

 

$

116

 

$

164

 

 

Note 11—Recent Accounting Pronouncements

 

SFAS 157 - In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 (SFAS 157), “Fair Value Measurements.” SFAS 157 provides a common definition of fair value, establishes a framework for measuring fair value and expands the related disclosure requirements.  In February 2008, the FASB issued final Staff Positions that will (1) defer the effective date of this statement for one year for certain nonfinancial assets and nonfinancial liabilities and (2) remove certain leasing transactions from the scope of the statement.  We applied SFAS 157 to all other fair value measurements effective February 1, 2008.  The adoption of SFAS 157 did not have a material impact on our financial statements.

 

FSP 157-2 - In February 2008, the FASB issued FASB Staff Position on Statement 157, “Effective Date of FASB Statement No. 157” (FSP 157-2).  FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed on a recurring basis, to fiscal years beginning after November 15, 2008.  Our significant nonfinancial assets and liabilities that could be impacted by this deferral include assets and liabilities initially measured at fair value in a business combination and goodwill tested annually for impairment.  FSP 157-2 will become effective for the fiscal year beginning February 1, 2009.  We are currently evaluating the impact of the adoption of FSP 157-2 on our financial statements.

 

SFAS 158 - In September 2006, the FASB issued SFAS No. 158 (SFAS 158), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).”  This statement requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in other comprehensive income, net of tax effects, until they are amortized as a component of net periodic benefit cost.  In addition, the measurement date, the date at which plan assets and the benefit obligation are measured, is required to be the company’s fiscal year end. Presently, we use a December 31 measurement date for the postretirement benefit plan, which will change to coincide with our January 31 fiscal year-end date.  As required by SFAS 158, we adopted the balance sheet recognition provision as of January 31, 2007 and the measurement date provision effective February 1, 2008.  The adoption of the measurement date provision did not have a material impact on our financial statements.

 

SFAS 159 - In February 2007, the FASB issued SFAS No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.” SFAS 159 allows companies the choice to measure many financial instruments and certain other items at fair value. Application of SFAS 159 was required for our financial statements beginning February 1, 2008.  We did not elect to measure any financial instruments or any other items at fair value as permitted by SFAS 159.  Therefore, the adoption of SFAS 159 did not have a material impact on our financial statements.

 

15



 

SFAS 141(R) & SFAS 160 – In December 2007, the FASB issued SFAS No. 141(R) (SFAS 141(R)), “Business Combinations,” and SFAS No. 160 (SFAS 160), “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS 141(R) requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed. Further, SFAS 141(R) also changes the accounting for acquired in-process research and development assets, contingent consideration, partial acquisitions and transaction costs.  Under SFAS 160, all entities are required to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. In addition, transactions between an entity and noncontrolling interests will be treated as equity transactions.  SFAS 141(R) and SFAS 160 will become effective for business combinations for which the acquisition date is on or after February 1, 2009.  We are currently evaluating the impact of the adoption of these standards on our financial statements.

 

SFAS 161 – In March 2008, the FASB issued SFAS No. 161 (SFAS 161), “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” SFAS 161 expands disclosures for derivative instruments by requiring entities to disclose the fair value of derivative instruments and their gains or losses in tabular format.  SFAS 161 also requires disclosure of information about credit risk-related contingent features in derivative agreements, counterparty credit risk, and strategies and objectives for using derivative instruments.   SFAS 161 will become effective for fiscal years beginning after November 15, 2008.  We will adopt this new accounting standard on February 1, 2009.  We are currently evaluating the impact of the adoption of this standard on our financial statements.

 

16



 

Note 12—Warranty Obligations

 

We record a liability on our consolidated balance sheet for costs related to warranties with the sales of our products. This liability is estimated through historical customer claims, product failure rates, material usage and service delivery costs incurred in correcting a product failure. Our warranty obligations, which are recorded in other accrued expenses on the consolidated balance sheets, were as follows (in thousands):

 

 

 

2008

 

2007

 

Balance at January 31

 

$

1,900

 

$

1,755

 

Accruals for warranties issued during the period

 

438

 

645

 

Settlements during the period

 

(568

)

(589

)

Balance at April 30

 

$

1,770

 

$

1,811

 

 

Note 13—Accumulated Other Comprehensive Income

 

The following table presents the changes in and the components of accumulated other comprehensive income (in thousands):

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

Translation Adjustment

 

Minimum Pension Liability
Adjustment

 

Total

 

Balance at January 31, 2008

 

$

37,492

 

$

(1,819

)

$

35,673

 

Translation adjustment

 

2,914

 

 

2,914

 

Balance at April 30, 2008

 

$

40,406

 

$

(1,819

)

$

38,587

 

 

Note 14—Income Taxes

 

As of April 30, 2008 our liability for uncertain tax positions under FASB Interpretation No. 48 (FIN 48) was $1.1 million.  There were no material changes in unrecognized tax benefits during the current period.  The reserve for unrecognized tax benefits as of April 30, 2008 included an accrual for interest and penalties of $122,000.

 

We are subject to taxation primarily in the U.S., Canada and China, as well as various state and other foreign jurisdictions.  The Internal Revenue Service (IRS) is currently reviewing our U.S. income tax returns for fiscal years 2004 - 2007. The IRS has proposed an adjustment of $5 million related to interest deductions reported on tax returns for the 2004 and 2005 tax years.  These adjustments would result in an additional federal and state tax liability of approximately $1.8 million.  We are in the process of appealing the issue with the IRS and have determined that we will more-likely-than-not prevail on the issue.  No amount has been recorded in our financial statements as of April 30, 2008 related to this matter.  As of April 30, 2008, we remain subject to examination in various state and foreign jurisdictions for the 1997-2006 tax years.

 

17



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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 in four geographic segments:  North America, Europe, Asia Pacific and China.  All references to fiscal periods are defined as the period ended April 30, 2007 (fiscal 2008) and the period ended April 30, 2008 (fiscal 2009).

 

RECENT TRENDS AND DEVELOPMENTS AFFECTING OUR RESULTS

 

European Business

 

Our European business continues to provide both the biggest opportunity for improvement and the biggest challenge facing our company.  Europe’s lift truck industry continued to be strong during the first quarter of fiscal 2009 with shipments increasing 16%.  We captured some of this growth with a 5% increase in sales, excluding currency changes.  However, our sales growth and profitability continue to fall short of our expectations.  Below is an update on previously reported trends and activities impacting our European business:

 

·                  We are continuing with an operational review of our entire European business, which includes among other things a rationalization of production capacity.  We had previously announced steps we were taking to reduce our workforce in Almere, The Netherlands and to transfer the production of certain products to Verona, Italy.  This plan was formally announced in May 2008 and we expect to incur severance and other costs of approximately $600,000 in the second quarter of fiscal 2009.  These costs are in addition to costs of $375,000 incurred in the first quarter.  We anticipate incurring additional costs through the remainder of fiscal 2009 related to operational and reorganization changes now under development.

 

·                  In fiscal 2008 we commenced operation of a facility in Xiamen, China to begin manufacturing fork products to supply OEM customers and secondary markets.  While we have been importing Chinese-made products into Europe over the last six months, the distribution of these products has been limited, pending product approval from key European OEMs.  We are currently working to obtain additional OEM approvals.

 

·                  We are aggressively working to lower our material costs through global sourcing from both internal and external suppliers and particularly from our own factories in North America.

 

·                  While the strategies related to available production capacity, product sourcing and pricing are important steps in improving our European business results, the key component in our reorganization is the transition of our European factories to our North American operating model and the full implementation of “Lean Principles” throughout the organization.  We have begun this transformation.

 

We believe we will see gradual improvements over time as a result of the reorganization that is in process.  Improving operational performance in Europe, the world’s largest lift truck market, remains our top priority.

 

Material Cost Increases

 

We continue to feel the pressures of increasing material costs globally.  The following are some of the activities and initiatives underway to mitigate the cost increases:

 

·                  We continue our efforts to lower our material costs by sourcing from alternative suppliers or purchasing larger volumes ahead of scheduled price increases.  In the short-term, these strategies will result in maintaining or adding to inventory levels at certain locations.  Over the long-term we expect inventory levels to decrease as material costs stabilize.

 

18



 

·                  We are working to create efficiencies by improving our internal processes in manufacturing and administration which we believe will ultimately result in lower operation costs.

 

·                  We implemented sales price increases in all markets globally in the first quarter of fiscal 2009 and we anticipate additional sales price increases or surcharges will be necessary during the remainder of the year.

 

19



 

COMPARISON OF FIRST QUARTER OF FISCAL 2009 AND FISCAL 2008

 

Executive Summary

 

 

 

Three Months Ended April 30

 

 

 

 

 

 

 

2008

 

2007

 

Change

 

Change %

 

 

 

(In thousands except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

149,867

 

$

135,500

 

$

14,367

 

11

%

Operating income

 

$

17,752

 

$

37,311

 

$

(19,559

)

(52

)%

Net income

 

$

10,858

 

$

23,796

 

$

(12,938

)

(54

)%

 

During fiscal 2008 we settled an insurance litigation matter which accounted for a $16 million increase to operating income and a $10 million after tax increase to net income.  We believe the exclusion of the insurance litigation recovery provides a more appropriate comparison with the current year results:

 

 

Three Months Ended April 30

 

 

 

 

 

 

 

2008

 

2007

 

Change

 

Change %

 

 

 

(In thousands except per share amounts)

 

 

 

Net of insurance litigation recovery:

 

 

 

 

 

 

 

 

 

Operating income

 

$

17,752

 

$

21,334

 

$

(3,582

)

(17

)%

Net income

 

$

10,858

 

$

13,770

 

$

(2,912

)

(21

)%

Diluted earnings per share

 

$

0.98

 

$

1.10

 

$

(0.12

)

(11

)%

 

The calculation of operating income, net income and diluted earnings per share, excluding the insurance recovery, is as follows (in thousands, except per share amounts):

 

 

 

Three months ended

 

 

 

April 30, 2007

 

 

 

 

 

Operating income as reported

 

$

37,311

 

Less: insurance litigation recovery

 

(15,977

)

Adjusted operating income, excluding insurance litigation recovery

 

$

21,334

 

 

 

 

 

Net income as reported

 

$

23,796

 

Less: insurance litigation recovery, net of income taxes of $5,951

 

(10,026

)

Adjusted net income, excluding insurance litigation recovery

 

$

13,770

 

 

 

 

 

Diluted weighted average shares outstanding

 

12,545

 

 

 

 

 

Diluted earnings per share, excluding insurance litigation recovery

 

$

1.10

 

 

The following are financial highlights for the first quarter of fiscal 2009:

 

·                  During the current year we posted higher levels of consolidated net sales primarily as a result of the strength of lift truck markets in China, Asia Pacific and Europe.  Excluding the impact of foreign currency and an acquisition, net sales increased 4% during fiscal 2009.  Global lift truck shipments increased 15% compared to the first quarter of the prior year.

·                  Our consolidated gross profit percentage decreased to 28% in fiscal 2009 from 32% in fiscal 2008 primarily as a result of significant material price increases experienced in all geographic segments.

 

20



 

North America

 

 

 

Three Months Ended April 30

 

 

 

 

 

 

 

2008

 

%

 

2007

 

%

 

Change

 

Change %

 

 

 

(In thousands)

 

 

 

 

 

Net sales

 

$

69,320

 

90

%

$

71,382

 

90

%

$

(2,062

)

(3

)%

Transfers between areas

 

7,719

 

10

%

8,309

 

10

%

(590

)

(7

)%

Net sales and transfers

 

77,039

 

100

%

79,691

 

100

%

(2,652

)

(3

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

52,788

 

69

%

51,535

 

65

%

1,253

 

2

%

Gross profit

 

24,251

 

31

%

28,156

 

35

%

(3,905

)

(14

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

12,749

 

16

%

12,319

 

15

%

430

 

3

%

Loss (gain) on disposition of assets, net

 

120

 

 

(74

)

 

194

 

 

Amortization

 

597

 

1

%

588

 

1

%

9

 

 

Insurance litigation recovery, net

 

 

 

(15,977

)

(20

)%

15,977

 

 

Operating income

 

$

10,785

 

14

%

$

31,300

 

39

%

$

(20,515

)

(66

)%

 

The following are financial highlights for North America for the first quarter of fiscal 2009:

 

·                  Excluding net sales from a prior year acquisition and the impact of currency changes, net sales decreased 5%.  Lower sales in fiscal 2009 are primarily the result of the general downturn in the United States economy, which is reflected in both the lift truck and construction markets.  We were able to partially offset the effect of lower sales volumes with sales price increases.  First quarter North America lift truck industry shipments from 2008 to 2009 decreased 6%.  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, because certain industry sectors of the economy use our products more than others.

·                  Our gross profit percentage decreased 4% during fiscal 2009, due to higher material costs, changes in product mix, lower sales volumes and other cost increases.

·                  Selling and administrative costs increased during the current year due to an acquisition (1%) and currency changes (2%).

·                  During the first quarter of fiscal 2008, 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 this settlement was $16.0 million, net of expenses.

 

Europe

 

 

 

Three Months Ended April 30

 

 

 

 

 

 

 

2008

 

%

 

2007

 

%

 

Change

 

Change %

 

 

 

(In thousands)

 

 

 

 

 

Net sales

 

$

49,336

 

99

%

$

41,604

 

99

%

$

7,732

 

19

%

Transfers between areas

 

581

 

1

%

324

 

1

%

257

 

79

%

Net sales and transfers

 

49,917

 

100

%

41,928

 

100

%

7,989

 

19

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

42,525

 

85

%

34,323

 

82

%

8,202

 

24

%

Gross profit

 

7,392

 

15

%

7,605

 

18

%

(213

)

(3

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

7,631

 

16

%

6,113

 

15

%

1,518

 

25

%

Loss (gain) on disposition of assets, net

 

(1

)

 

8

 

 

(9

)

 

Amortization

 

78

 

 

205

 

 

(127

)

(62

)%

Operating income (loss)

 

$

(316

)

(1

)%

$

1,279

 

3

%

$

(1,595

)

(125

)%

 

The following are financial highlights for Europe for the first quarter of fiscal 2009:

 

·                  Net sales increased 5%, excluding currency changes, due to increased shipment volumes, which reflect a strong European lift truck market.  Lift truck industry shipments for the same period increased 16%.  While

 

21



 

we have kept pace with the expanding lift truck market in certain parts of Europe and in certain product categories, overall our sales increase fell short of market increases.  The markets in Eastern Europe and the Middle East are expanding rapidly and to date we have not been able to capitalize on this market growth.  This is due in part to lower application rates of lift truck attachments in these developing markets.  We are taking steps to expand our presence in these markets.

·                  The 3% decrease in current year gross profit percentage is primarily due to material price increases and operational inefficiencies.  The gross margin was also negatively affected by delays in approval of Chinese-made products by European OEMs.  These delays required us to continue supplying OEMs with European-made products at lower margins.

·                  Excluding the impact of currency changes, selling and administrative expenses increased 11%, because of higher personnel and other general costs.   Included in this increase is approximately $375,000 of initial costs related to our European reorganization.

 

Asia Pacific

 

 

 

Three Months Ended April 30

 

 

 

 

 

 

 

2008

 

%

 

2007

 

%

 

Change

 

Change %

 

 

 

(In thousands)

 

 

 

 

 

Net sales

 

$

19,180

 

100

%

$

13,795

 

99

%

$

5,385

 

39

%

Transfers between areas

 

83

 

 

70

 

1

%

13

 

19

%

Net sales and transfers

 

19,263

 

100

%

13,865

 

100

%

5,398

 

39

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

14,149

 

74

%

10,268

 

74

%

3,881

 

38

%

Gross profit

 

5,114

 

26

%

3,597

 

26

%

1,517

 

42

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

2,339

 

12

%

1,903

 

14

%

436

 

23

%

Gain on disposition of assets, net

 

(3

)

 

 

 

(3

)

 

Operating income

 

$

2,778

 

14

%

$

1,694

 

12

%

$

1,084

 

64

%

 

The following are financial highlights for Asia Pacific for the first quarter of fiscal 2009:

 

·                  Excluding currency changes, net sales increased 29%.  This increase occurred in all locations throughout the region due to increased shipping volumes as a result of strong lift truck markets and our initiative to produce a wider selection of products in China for sale in this region.  Lift truck industry shipments in Asia Pacific increased 19% in fiscal 2009 compared to fiscal 2008.

·                  Our gross profit percentage in Asia Pacific remained consistent at 26%.  The benefits of sourcing lower cost product from China were offset by increased sales of lower margin products.

·                  Selling and administrative costs increased 11%, excluding currency changes, due to higher personnel and selling costs.  However, as a percentage of net sales and transfers, selling and administrative costs decreased from 14% in fiscal 2008 to 12% in fiscal 2009.

 

22



 

China

 

 

 

Three Months Ended April 30

 

 

 

 

 

 

 

2008

 

%

 

2007

 

%

 

Change

 

Change %

 

 

 

(In thousands)

 

 

 

 

 

Net sales

 

$

12,031

 

66

%

$

8,719

 

77

%

$

3,312

 

38

%

Transfers between areas

 

6,150

 

34

%

2,669

 

23

%

3,481

 

130

%

Net sales and transfers

 

18,181

 

100

%

11,388

 

100

%

6,793

 

60

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

12,590

 

69

%

7,517

 

66

%

5,073

 

67

%

Gross profit

 

5,591

 

31

%

3,871

 

34

%

1,720

 

44

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

1,087

 

6

%

797

 

7

%

290

 

36

%

Loss (gain) on disposition of assets, net

 

(1

)

 

31

 

 

(32

)

 

Amortization

 

 

 

5

 

 

(5

)

 

Operating income

 

$

4,505

 

25

%

$

3,038

 

27

%

$

1,467

 

48

%

 

The following are financial highlights for China for the first quarter of fiscal 2009:

 

·                  Net sales increased 29%, excluding the impact of currency changes.  This increase is a result of our prior capital expansion in China which increased our capabilities to manufacture a larger volume of products and the growth in the lift truck industry.  Lift truck shipments in China increased 30% in the current year.

·                  Transfers to other Cascade geographic areas increased 130% during fiscal 2009, due to the export of Chinese-made products to Europe and Asia-Pacific.

·                  The gross profit percentage decreased 3% due to material price increases, changes in product mix and higher intercompany transfers, which carry lower gross margins.

·                  Selling and administrative costs increased 27%, excluding currency changes, due to additional costs to support our expanded operations in China.  As a percentage of net sales and transfers, selling and administrative costs decreased from 7% in fiscal 2008 to 6% in fiscal 2009.

 

Non-Operating Items

 

The following are financial highlights for non-operating items during the first quarter of fiscal 2009:

 

·                  Interest expense increased $136,000 during fiscal 2009 due to additional borrowings in 2008 to fund various initiatives, primarily our share repurchase program.  This was offset by a lower effective interest rate during the current year.

·                  Our effective tax rate remained consistent at 35%.

 

Lift Truck Market Outlook

 

Based on our review of preliminary industry data we believe the general lift truck market outlook for the remainder of fiscal 2009 is as follows:

 

·                  The market in North America will continue to be down 5-10% compared to the prior year.

·                  Europe will continue to experience growth compared to the prior year.

·                  The growth rate in the Asia Pacific market will remain at current levels through the remainder of the year.

·                  The market in China will continue to experience its current rate of growth through the remainder of the year.

 

Additional information on lift truck industry trends can be found at www.cascorp.com/investor/industrytrends.  This website address is intended to provide an inactive, textual reference only.  The information at this website is not a part of this Form 10-Q and is not incorporated by reference.

 

23



 

CASH FLOWS

 

The statements of cash flows reflect the changes in cash and cash equivalents for the three months ended April 30, 2008 and April 30, 2007 by classifying transactions into three major categories of activities: operating, investing and financing.

 

Operating

 

Our primary source of liquidity is cash generated from operating activities. The major operating activity is net income adjusted for changes in working capital and non-cash operating items such as depreciation, amortization and share-based compensation.

 

Net cash provided by operating activities decreased $7.6 million during the first quarter of fiscal 2009 compared to the prior year.  The following are the major differences between the current and prior year operating activities:

 

·                  During fiscal 2008, net income was significantly higher due to the insurance litigation settlement.

·                  Accounts receivable increased at a slower rate during the current year with our increased focus on collections.

 

Investing

 

Our primary investing activity is capital expenditures, which 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 segments were as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

April 30

 

 

 

2008

 

2007

 

 

 

 

 

 

 

North America

 

$

1,546

 

$

1,554

 

Europe

 

1,252

 

818

 

Asia Pacific

 

198

 

187

 

China

 

907

 

2,690

 

 

 

$

3,903

 

$

5,249

 

 

The following are capital expenditure highlights during the first quarter of fiscal 2009 and 2008:

 

·                  China’s capital expenditures in fiscal 2008 relate primarily to the completion of two new manufacturing facilities.  China’s capital expenditures in fiscal 2009 relate to equipment upgrades and the initial work on a building to manufacture construction attachments.

·                  The increase in capital expenditures in Europe during the current year relates primarily to costs associated with the future introduction of new products.

·                  We expect capital expenditures for the remainder of fiscal 2009 to be approximately $15 million.  We believe this level of capital expenditures is sufficient to meet operational requirements.

 

Financing

 

The following are major financing activities during the first quarter of fiscal 2009 and fiscal 2008:

 

·                  During fiscal 2009, net payments made against our long-term debt and notes payable were $2.6 million, compared to net borrowings of $3.5 million during fiscal 2008.  In the prior year, we utilized borrowings against our line of credit and cash received from the insurance litigation settlement to fund our share repurchase program.

 

24



 

·                  We concluded our share repurchase program at the beginning of the first quarter of fiscal 2009.  In total, we repurchased 2,435,000 shares of common stock for $130 million over 18 months.

·                  We declared dividends of $0.18 and $0.16 per share during the first three months of fiscal 2009 and 2008, respectively.

·                  The issuance of common stock related to the exercise of share-based awards generated $62,000 and $1.4 million of cash for the first three months of fiscal 2009 and 2008, respectively.

 

25



 

FINANCIAL CONDITION AND LIQUIDITY

 

The following are highlights regarding our financial condition and liquidity for the first quarter of fiscal 2009:

 

·                  Our working capital, defined as current assets less current liabilities, increased from $152.0 million at January 31, 2008 to $155.8 million at April 30, 2008, primarily due to increases in accounts receivable and inventory.

·                  Our current ratio decreased slightly from 3.4 to 1 at January 31, 2008 to 3.1 to 1 at April 30, 2008.  On a percentage basis, current liabilities increased at a higher rate than current assets, primarily due to increases in notes payable to banks and accounts payable.

·                  Total outstanding debt, including notes payable to banks, decreased slightly from $110.7 million at January 31, 2008 to $108.2 million at April 30, 2008.

·                  Borrowing arrangements currently in place with commercial banks provide lines of credit totaling $148.8 million, of which $98.0 million was outstanding and an additional $3.7 million was used to issue letters of credit at April 30, 2008.  The borrowings available under the line of credit decreases $1.25 million quarterly through the debt expiration date of December 7, 2011.  The interest rate on the lines of credit, which is based on LIBOR plus a margin of 0.75%, was 3.60% and 4.66% at April 30, 2008 and January 31, 2008, respectively. The lines of credit contain certain covenants relating to net worth and leverage ratios.  We were in compliance with these covenants at April 30, 2008.

·                  Borrowings under notes payable to banks, which includes bank overdrafts and short-term lines of credit, increased $3.5 million from January 31, 2008 to April 30, 2008.  The average interest rate on these notes was 4.9% and 4.3% at April 30, 2008 and January 31, 2008, respectively.

·                  Our current plans are to fund our existing postretirement obligation as costs are incurred.  Any defined benefit obligations will be funded to meet minimum statutory funding requirements or any additional funding requirements which we have committed to in specific plan agreements.  Currently, these additional funding requirements are limited to annual contributions of $400,000 through fiscal year 2011 to a defined benefit plan in England.

·                  We believe our cash and cash equivalents, existing credit facilities and cash flows from operations will be sufficient to satisfy our expected working capital, capital expenditure and debt retirement requirements for the next twelve months.

 

OTHER MATTERS

 

The U.S. dollar weakened in the first three months of fiscal 2009 in comparison to some foreign currencies used by our significant foreign operations, including the Euro and Chinese Yuan.  The U.S. dollar strengthened slightly in the first three months of fiscal 2009 compared to the Canadian Dollar and British Pound.  As a result, foreign currency translation adjustments increased shareholders’ equity by $2.9 million in the first three months of fiscal 2009.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Management’s discussion and analysis of 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 historical experience and various other assumptions that we believe to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.  A description of our critical accounting policies and related judgments and estimates that affect the preparation of our consolidated financial statements is set forth in our Annual Report on Form 10-K for the year ended January 31, 2008.

 

26



 

OFF BALANCE SHEET ARRANGEMENTS

 

At April 30, 2008, 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 materially exposed to any financing, liquidity market or credit risk that could arise if we had engaged in such relationships.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

SFAS 157 - In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 (SFAS 157), “Fair Value Measurements.” SFAS 157 provides a common definition of fair value, establishes a framework for measuring fair value and expands the related disclosure requirements.  In February 2008, the FASB issued final Staff Positions that will (1) defer the effective date of this statement for one year for certain nonfinancial assets and nonfinancial liabilities and (2) remove certain leasing transactions from the scope of the statement.  We applied SFAS 157 to all other fair value measurements effective February 1, 2008.  The adoption of SFAS 157 did not have a material impact on our financial statements.

 

FSP 157-2 In February 2008, the FASB issued FASB Staff Position on Statement 157, “Effective Date of FASB Statement No. 157” (FSP 157-2).  FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed on a recurring basis, to fiscal years beginning after November 15, 2008.  Our significant nonfinancial assets and liabilities that could be impacted by this deferral include assets and liabilities initially measured at fair value in a business combination and goodwill tested annually for impairment.  FSP 157-2 will become effective for the fiscal year beginning February 1, 2009.  We are currently evaluating the impact of the adoption of FSP 157-2 on our financial statements.

 

SFAS 158 - In September 2006, the FASB issued SFAS No. 158 (SFAS 158), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).”  This statement requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in other comprehensive income, net of tax effects, until they are amortized as a component of net periodic benefit cost.  In addition, the measurement date, the date at which plan assets and the benefit obligation are measured, is required to be the company’s fiscal year end. Presently, we use a December 31 measurement date for the postretirement benefit plan, which will change to coincide with our January 31 fiscal year-end date.  As required by SFAS 158, we adopted the balance sheet recognition provision as of January 31, 2007 and the measurement date provision effective February 1, 2008.  The adoption of the measurement date provision did not have a material impact on our financial statements.

 

SFAS 159 - In February 2007, the FASB issued SFAS No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.” SFAS 159 allows companies the choice to measure many financial instruments and certain other items at fair value. Application of SFAS 159 was required for our financial statements beginning February 1, 2008.  We did not elect to measure any financial instruments or any other items at fair value as permitted by SFAS 159.  Therefore, the adoption of SFAS 159 did not have a material impact on our financial statements.

 

SFAS 141(R) & SFAS 160 – In December 2007, the FASB issued SFAS No. 141(R) (SFAS 141(R)), “Business Combinations,” and SFAS No. 160 (SFAS 160), “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS 141(R) requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed. Further, SFAS 141(R) also changes the accounting for acquired in-process research and development assets, contingent consideration, partial acquisitions and transaction costs.  Under SFAS 160, all entities are required to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. In addition, transactions between an entity and noncontrolling interests will be treated as equity transactions.  SFAS 141(R) and SFAS 160 will become effective for business combinations for which the acquisition date is on or after February 1, 2009.  We are currently evaluating the impact of the adoption of these standards on our financial statements.

 

27



 

SFAS 161 – In March 2008, the FASB issued SFAS No. 161 (SFAS 161), “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” SFAS 161 expands disclosures for derivative instruments by requiring entities to disclose the fair value of derivative instruments and their gains or losses in tabular format.  SFAS 161 also requires disclosure of information about credit risk-related contingent features in derivative agreements, counterparty credit risk, and strategies and objectives for using derivative instruments.   SFAS 161 will become effective for fiscal years beginning after November 15, 2008.  We will adopt this new accounting standard on February 1, 2009.  We are currently evaluating the impact of the adoption of this standard on our financial statements.

 

28



 

Item 3. 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 and expenses are denominated in foreign currencies. 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 U.S. dollar.

 

The table below illustrates the hypothetical increase in net sales for the first quarter of fiscal 2009 resulting from a 10% weaker U.S. dollar during the quarter, measured against foreign currencies that affect our operations (in millions):

 

Euro

 

$

3.8

 

Chinese yuan

 

1.2

 

British pound

 

1.0

 

Japanese yen

 

0.8

 

Canadian dollar

 

0.7

 

Other currencies (representing 9% of consolidated net sales)

 

1.3

 

 

A 10% weaker U.S. dollar during the quarter, measured against foreign currencies that affect our operations, would have an immaterial impact on our operating income.

 

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, Chinese yuan, Swedish krona 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.

 

A majority of our products are manufactured using steel as the primary raw material and steel based components as purchased parts. As such, our cost of goods sold is sensitive to fluctuations in steel prices, either directly through the purchase of steel as raw material or indirectly through the purchase of steel based components.

 

Presuming that the full impact of commodity steel cost increases is reflected in all steel and steel based component purchases, we estimate our gross profit percentage sensitivity to be approximately 0.3% for each 1.0% increase in commodity steel cost without offsetting sales price increases.  Based on our statement of income for the quarter ended April 30, 2008, a 1% increase in commodity steel costs would have decreased consolidated gross profit by approximately $430,000.

 

During the first quarter of fiscal 2009, we continued to experience increases in prices for steel and steel components, which comprise 35-40% of our total product cost.  We have continued to move aggressively to offset these increases through a variety of means, including sales price increases, cost reduction activities and alternative sourcing arrangements.  Unfortunately, we have been unable to mitigate the full impact of the material cost increases, thus resulting in some erosion of gross profit.

 

Manufacturing of our products includes the purchase of various raw materials and components. Certain of these items are provided worldwide by a limited number of suppliers. We are not currently experiencing shortages in obtaining the raw materials and components.

 

29



 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management has evaluated, under the supervision and with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in the internal control over financial reporting that occurred during the three months ended April 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

30



 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None

 

Item 1A. Risk Factors

 

There are no material changes from risk factors previously disclosed in our Form 10-K for the year ended January 31, 2008.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

 

 

Total Number of

 

Maximum Dollar Value

 

 

 

 

 

 

 

Shares Purchased as

 

of Shares that May Yet

 

 

 

Total Number of

 

Average Price Paid

 

Part of Publicly Announced

 

be Purchased Under the

 

Period

 

Shares Purchased

 

Per Share

 

Plans or Programs

 

Plans or Programs (1)

 

February 1 - 29, 2008

 

18,301

 

$

49.74

 

18,301

 

$

 

March 1 - 31, 2008

 

 

 

 

 

April 1 - 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended April 30, 2008

 

18,301

 

$

49.74

 

18,301

 

 

 

 


(1)           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.  We completed this share repurchase program in October 2007.  During the share repurchase program, we purchased a total of 1,448,235 shares of stock at an average price per share of $55.24.  On September 24, 2007, we announced that our Board of Directors had authorized a new share repurchase program of up to $50 million over a two-year period.  We completed this share repurchase program in February 2008.  During this share repurchase program, we purchased a total of 986,801 shares of stock at an average price per share of $50.67.

 

Item 3. Defaults Upon Senior Securities

 

None

 

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

 

None

 

Item 5. Other Information

 

None

 

31



 

Item 6. Exhibits

 

The following exhibits are included with this report:

 

Exhibit No.

 

Description

31.1

 

Certification of Chief Executive Officer of Cascade Corporation.

31.2

 

Certification of Chief Financial Officer of Cascade Corporation.

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

 

32



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

CASCADE CORPORATION

June 6, 2008

 

 

 

 

/s/ JOSEPH G. POINTER

 

Joseph G. Pointer

 

Chief Financial Officer
(Principal Financial and Accounting Officer)

 

33



 

EXHIBIT INDEX

 

Exhibit No.

 

Description

31.1

 

Certification of Chief Executive Officer

31.2

 

Certification of Chief Financial Officer

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

 

34