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 October 31, 2004

OR

¨

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 ý  No o

 

                Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes ý  No o

 

                The number of shares outstanding of the registrant’s common stock as of November 29, 2004 was 12,200,722.

 



 

Forward-Looking Statements

 

                This report contains forward-looking statements that involve risks and uncertainties, as well as assumptions which, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, gross margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of plans, strategies, and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties, and assumptions referred to above include, but are not limited to, competitive factors in, and the cyclical nature of, the materials handling industry; fluctuations in lift truck orders or deliveries, availability and cost of raw materials; general business and economic conditions in North America, Europe, Australia and Asia; assumptions relating to pension and other post-retirement costs; foreign currency fluctuations; pending litigation; environmental matters; and the 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.

 

2



 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CASCADE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited—in thousands, except per share amounts)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 31

 

October 31

 

 

 

2004

 

2003

 

2004

 

2003

 

Net sales

 

$

96,342

 

$

75,772

 

$

282,246

 

$

220,338

 

Cost of goods sold

 

65,458

 

50,948

 

190,635

 

147,817

 

Gross profit

 

30,884

 

24,824

 

91,611

 

72,521

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

17,631

 

15,806

 

53,275

 

45,575

 

Amortization

 

682

 

117

 

1,330

 

313

 

Insurance litigation recovery

 

(1,300

)

 

(1,300

)

 

Environmental expense

 

155

 

 

155

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

13,716

 

8,901

 

38,151

 

26,633

 

Interest expense

 

934

 

1,165

 

2,758

 

3,496

 

Interest income

 

(144

)

(234

)

(364

)

(779

)

Other (income) expenses

 

516

 

126

 

574

 

(273

)

Gain on sale of investment

 

(1,044

)

 

(1,044

)

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

13,454

 

7,844

 

36,227

 

24,189

 

Provision for income taxes

 

4,763

 

2,752

 

12,824

 

7,982

 

Net income

 

8,691

 

5,092

 

23,403

 

16,207

 

Dividends paid on preferred shares of subsidiary

 

 

 

 

(30

)

Net income applicable to common shareholders

 

$

8,691

 

$

5,092

 

$

23,403

 

$

16,177

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.71

 

$

0.42

 

$

1.93

 

$

1.36

 

Diluted earnings per share

 

$

0.68

 

$

0.41

 

$

1.84

 

$

1.31

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

12,195

 

12,054

 

12,149

 

11,882

 

Diluted weighted average shares outstanding

 

12,799

 

12,534

 

12,705

 

12,335

 

 

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

 

3



 

CASCADE CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited—in thousands, except per share amounts)

 

 

 

October 31

 

January 31

 

 

 

2004

 

2004

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

34,983

 

$

25,584

 

Marketable securities

 

7,342

 

6,002

 

Accounts receivable, less allowance for doubtful accounts of $1,889 and $2,023

 

68,955

 

57,871

 

Inventories

 

41,661

 

36,353

 

Deferred income taxes

 

3,020

 

2,542

 

Income taxes receivable

 

 

142

 

Prepaid expenses and other

 

5,485

 

4,626

 

Total current assets

 

161,446

 

133,120

 

Property, plant and equipment, net

 

81,608

 

75,244

 

Goodwill

 

74,568

 

68,915

 

Deferred income taxes

 

9,663

 

9,703

 

Other assets

 

5,099

 

5,837

 

Total assets

 

$

332,384

 

$

292,819

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable to banks

 

$

2,039

 

$

2,805

 

Current portion of long-term debt

 

12,858

 

13,018

 

Accounts payable

 

21,047

 

17,904

 

Accrued payroll and payroll taxes

 

6,821

 

6,815

 

Accrued environmental expenses

 

794

 

847

 

Other accrued expenses

 

18,547

 

10,011

 

Total current liabilities

 

62,106

 

51,400

 

Long-term debt

 

37,932

 

38,111

 

Accrued environmental expenses

 

8,144

 

8,551

 

Deferred income taxes

 

2,458

 

1,441

 

Other liabilities

 

10,430

 

9,628

 

Total liabilities

 

121,070

 

109,131

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $.50 par value, 20,000 authorized shares; 12,201 and 12,102 shares issued and outstanding

 

6,100

 

6,051

 

Additional paid-in capital

 

16,599

 

11,111

 

Unamortized deferred compensation

 

(3,012

)

 

Retained earnings

 

184,886

 

165,495

 

Accumulated other comprehensive income

 

6,741

 

1,031

 

 

 

 

 

 

 

Total shareholders’ equity

 

211,314

 

183,688

 

Total liabilities and shareholders’ equity

 

$

332,384

 

$

292,819

 

 

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

 

4



 

CASCADE CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited—in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

Unamortized

 

 

 

Other

 

Annual

 

 

 

Common Stock

 

Paid-In

 

Deferred

 

Retained

 

Comprehensive

 

Comprehensive

 

 

 

Shares

 

Amount

 

Capital

 

Compensation

 

Earnings

 

Income

 

Income

 

Balance at January 31, 2004

 

12,102

 

$

6,051

 

$

11,111

 

$

 

$

165,495

 

$

1,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

23,403

 

 

23,403

 

Dividends ($0.33 per share)

 

 

 

 

 

(4,012

)

 

 

Common stock issued

 

99

 

49

 

1,257

 

 

 

 

 

Tax benefit from exercise of stock options

 

 

 

358

 

 

 

 

 

Deferred compensation from stock appreciation rights

 

 

 

3,873

 

(3,873

)

 

 

 

Amortization of deferred compensation

 

 

 

 

861

 

 

 

 

Translation adjustment

 

 

 

 

 

 

5,710

 

5,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 31, 2004

 

12,201

 

$

6,100

 

$

16,599

 

$

(3,012

)

$

184,886

 

$

6,741

 

$

29,113

 

 

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

 

5



 

CASCADE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited—in thousands)

 

 

 

For the Nine Months Ended

 

 

 

October 31

 

 

 

2004

 

2003

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

23,403

 

$

16,207

 

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

 

 

 

 

 

Depreciation and amortization

 

10,672

 

9,202

 

Amortization of deferred compensation

 

861

 

-

 

Deferred income taxes

 

(331

)

736

 

Gain on disposition of assets

 

(76

)

(71

)

Changes in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

Accounts receivable

 

(11,212

)

(10,044

)

Inventories

 

(3,704

)

622

 

Prepaid expenses and other

 

(859

)

108

 

Accounts payable and accrued expenses

 

3,149

 

988

 

Current income taxes payable and receivable

 

3,957

 

3,954

 

Other liabilities

 

2,922

 

2,814

 

Net cash provided by operating activities

 

28,782

 

24,516

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(9,710

)

(8,835

)

Purchase of marketable securities, net

 

(2,384

)

(17,228

)

Proceeds from sale of investment

 

1,044

 

-

 

Business acquisitions

 

(4,710

)

(11,173

)

Proceeds from sale of assets

 

275

 

819

 

Other assets

 

269

 

(377

)

Proceeds from notes receivable

 

 

9,556

 

Net cash used in investing activities

 

(15,216

)

(27,238

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Cash dividends paid

 

(4,012

)

(3,606

)

Payments on long-term debt and capital leases

 

(338

)

(63

)

Notes payable to banks, net

 

(766

)

(130

)

Common stock issued under stock option plan

 

1,306

 

1,094

 

Net cash used in financing activities

 

(3,810

)

(2,705

)

 

 

 

 

 

 

Effect of exchange rate changes

 

(357

)

1,499

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

9,399

 

(3,928

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

25,584

 

29,501

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

34,983

 

$

25,573

 

 

Supplemental disclosure of noncash information:

See Note 10 to consolidated financial statements.

 

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

 

6



 

CASCADE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Description of Business

 

                Cascade Corporation is an international company engaged in the design, manufacture and distribution of materials handling products that are widely used on industrial forklift trucks and, to a lesser extent, construction and agricultural vehicles. Accordingly, our sales are largely dependent on sales of lift trucks. Our products are produced at facilities located in three global regions: North America, Europe and Asia Pacific. Our products are sold to lift truck manufacturers and also distributed through retail lift truck dealers.

 

Note 2—Interim Financial Information

 

                The accompanying consolidated financial statements for the interim periods ended October 31, 2004 and 2003 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 on Form 10-K in our Annual Report for the fiscal year ended January 31, 2004.

 

Note 3—Segment Information

 

                All of our worldwide operating units have similar economic characteristics, attributes, products, distribution channels and customers. As a result, we aggregate our operating units into a single operating segment related to the manufacturing, distribution and servicing of material handling load engagement products primarily for the lift truck industry. Revenues and operating results are classified according to the region of origin. Property, plant and equipment are attributed to the geographic location in which they are located. Net sales, operating income and property, plant and equipment by geographic region were as follows (in thousands):

 

For the three months ended October 31, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

Europe

 

Asia Pacific

 

Eliminations

 

Consolidated

 

Sales to unaffliated customers

 

$

53,898

 

$

27,614

 

$

14,830

 

$

 

$

96,342

 

Transfers between areas

 

4,571

 

203

 

16

 

(4,790

)

 

Net sales

 

$

58,469

 

$

27,817

 

$

14,846

 

$

(4,790

)

$

96,342

 

Operating income

 

$

11,299

 

$

(487

)

$

2,904

 

 

 

$

13,716

 

Property, plant and equipment

 

$

36,418

 

$

40,337

 

$

4,853

 

 

 

$

81,608

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended October 31, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales to unaffliated customers

 

$

44,167

 

$

19,443

 

$

12,162

 

$

 

$

75,772

 

Transfers between areas

 

4,327

 

475

 

5

 

(4,807

)

 

Net sales

 

$

48,494

 

$

19,918

 

$

12,167

 

$

(4,807

)

$

75,772

 

Operating income (loss)

 

$

6,928

 

$

(478

)

$

2,451

 

 

 

$

8,901

 

Property, plant and equipment

 

$

35,737

 

$

31,428

 

$

4,406

 

 

 

$

71,571

 

 

7



 

 

 

For the nine months ended October 31, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

Europe

 

Asia Pacific

 

Eliminations

 

Consolidated

 

Sales to unaffliated customers

 

$

153,520

 

$

84,517

 

$

44,209

 

$

 

$

282,246

 

Transfers between areas

 

15,637

 

1,515

 

49

 

(17,201

)

 

Net sales

 

$

169,157

 

$

86,032

 

$

44,258

 

$

(17,201

)

$

282,246

 

Operating income

 

$

29,343

 

$

483

 

$

8,325

 

 

 

$

38,151

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended October 31, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales to unaffliated customers

 

$

129,977

 

$

57,123

 

$

33,238

 

$

 

$

220,338

 

Transfers between areas

 

12,382

 

1,182

 

20

 

(13,584

)

 

Net sales

 

$

142,359

 

$

58,305

 

$

33,258

 

$

(13,584

)

$

220,338

 

Operating income

 

$

20,951

 

$

20

 

$

5,662

 

 

 

$

26,633

 

 

                The breakdown of goodwill by geographic region at October 31, 2004 and January 31, 2004 is provided in the table below (in thousands). The change in balances between periods is entirely due to fluctuations in foreign currencies.

 

 

 

October 31

 

January 31

 

 

 

2004

 

2004

 

North America

 

$

60,593

 

$

56,612

 

Europe

 

10,823

 

9,154

 

Other

 

3,152

 

3,149

 

 

 

$

74,568

 

$

68,915

 

 

Note 4—Marketable Securities

 

                Marketable securities consist primarily of asset-backed notes issued by various state agencies throughout the United States and guaranteed by state governments or agencies. The specific identification method is used to determine the cost of securities sold. There were no realized or unrealized gains or losses related to these notes. The notes are long-term instruments maturing through 2031; however, the interest rates and maturities are reset approximately every month, at which time we can sell the notes. Accordingly, we have classified the notes as current assets in our consolidated balance sheet.

 

Note 5—Gain on Sale of Investment

 

                During the three months ended October 31, 2004, a trust under a U.S. defined benefit plan we terminated in 1997 sold publicly traded common stock received in a demutualization of an insurance company.  The trust purchased annuities from the insurance company prior to the termination of the plan.  The sale resulted in a gain of approximately $1.0 million and proceeds in the same amount, which were available for reversion to the Company.  We contributed $324,000 of the proceeds directly to a defined contribution plan maintained for the benefit of all U.S. employees.  The $324,000 contribution is included in selling and administrative expenses.  We will retain the balance of the proceeds.  We hold no shares of publicly traded common stock at October 31, 2004.

8



 

Note 6—Inventories

 

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

 

 

 

October 31

 

January 31

 

 

 

2004

 

2004

 

Finished goods and components

 

$

28,403

 

$

23,490

 

Work in process

 

745

 

1,251

 

Raw materials

 

12,513

 

11,612

 

 

 

$

41,661

 

$

36,353

 

 

Note 7—Stock-Based Compensation

 

                We account for our stock-based employee compensation under Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees,” which permits the use of intrinsic value accounting. No stock-based employee compensation expense related to stock options is reflected in net income, as all options granted had an exercise price equal to the market price of the underlying common stock on the date of grant.

 

                Our shareholders approved the Cascade Corporation Stock Appreciation Rights Plan (SARS Plan) in May 2004. The SARS Plan provides for the award of stock appreciation rights (SARS) to key executives and directors. The 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 over the base price established by our Board of Directors’ Compensation Committee 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.

 

                Under FIN 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans,” SARS are accounted for under variable plan accounting. Accordingly, we record deferred compensation as a reduction of shareholders’ equity, equal to the excess of the market value of our common shares on the balance sheet date or date of exercise over the base price at the date of grant. The deferred compensation is amortized to expense over the vesting period based on the periods in which the executives and directors perform services. On May 26, 2004, the Board of Directors awarded 453,000 SARS which vest over four years. Stock-based employee compensation of $520,000 and $861,000 was recognized as amortization expense related to the SARS for the three and nine month periods ended October 31, 2004, respectively. Unamortized deferred compensation recorded as a reduction of shareholders’ equity at October 31, 2004 was $3.0 million.

 

9



 

                We have adopted disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123.” The following table illustrates the effect on net income applicable to common shareholders and earnings per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, expect per share amounts):

 

 

 

Three Months Ended October 31

 

Nine Months Ended October 31

 

 

 

2004

 

2003

 

2004

 

2003

 

Net income applicable to common shareholders - as reported

 

$

8,691

 

$

5,092

 

$

23,403

 

$

16,177

 

Add: SARS amortization, net of income taxes of $184 and $305

 

$

336

 

 

$

556

 

 

Net income excluding SARS amortization

 

9,027

 

5,092

 

23,959

 

16,177

 

Deduct: total stock-based compensation, net of income taxes of $116, $97, $348 and $122,determined under fair value based method

 

(297

)

(180

)

(891

)

(247

)

Net income applicable to common shareholders - pro forma

 

$

8,730

 

$

4,912

 

$

23,068

 

$

15,930

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share - as reported

 

$

0.71

 

$

0.42

 

$

1.93

 

$

1.36

 

Basic earnings per share - pro forma

 

$

0.72

 

$

0.41

 

$

1.90

 

$

1.34

 

Diluted earnings per share - as reported

 

$

0.68

 

$

0.41

 

$

1.84

 

$

1.31

 

Diluted earnings per share - pro forma

 

$

0.68

 

$

0.39

 

$

1.82

 

$

1.29

 

 

Note 8—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 will be required and the costs can be reasonably estimated. Our liabilities for environmental costs, other than for costs of assessments themselves, are generally determined after the completion of investigations and studies or our commitment to a formal plan of action, such as an approved remediation plan, and are based on our best estimate of undiscounted future costs using currently available technology, applying current regulations, as well as our own historical experience regarding environmental cleanup costs. 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 and operating cash flows. Unasserted claims are not currently reflected in our environmental liabilities. It is also reasonably possible that these changes or claims may also have a material impact on our net income and operating cash flows if asserted. We cannot estimate at this time the amount of any additional loss or range of loss that is reasonably possible.

 

                Our specific environmental matters consist of the following:

 

Fairview, Oregon

 

                In 1996, the Oregon Department of Environmental Quality issued two Records of Decision impacting our Fairview, Oregon manufacturing facility. The Records of Decision required us to initiate remedial activities related to the cleanup of groundwater contamination at and near the facility. Remediation activities have been conducted at or near the facility since 1996 and current estimates provide for some level of activity to continue through 2027. Costs of certain remediation activities at the facility are shared with The Boeing Company, with Cascade paying 70% of these costs. We have a

 

10



 

liability for the ongoing remediation activities at our Fairview facility of $7.7 million and $8.3 million at October 31, 2004 and January 31, 2004, 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 2010. We have a liability for ongoing remediation activities at our Springfield facility of $1.1 and $1.1 million at October 31, 2004 and January 31, 2004, respectively.  During the three months ended October 31, 2004, we recorded $155,000 of additional environmental expenses related to changes in remediation activities.  These changes were based on a reevaluation of the prior remediation plan after regularly scheduled meetings with the Ohio Environmental Protection Agency.

 

Insurance Litigation

 

On April 22, 2002, the Circuit Court of the State of Oregon for Multnomah County entered judgment in our favor for approximately $1.6 million against two non-settling insurers in an action originally brought in 1992 against several insurers to recover various expenses incurred in connection with environmental litigation and related proceedings.  The Company and the two insurers appealed the judgment.  On October 22, 2004, we received a settlement  of $1.3 million from one of the two  insurers.  The appellate proceeding is continuing with the other.   The trial court judgment requires the remaining insurer to defend us in suits alleging liability because of groundwater contamination  at our Fairview, Oregon plant,  and to pay approximately 3% of any liability imposed against us by judgment or settlement on or after March 1, 1997 on account of such contamination. We have not recorded any amounts we may recover from the remaining insurer in our consolidated financial statements.

 

Legal Proceedings

 

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

 

Lease Guarantee

 

                We sold our hydraulic cylinder division to Precision Hydraulic Cylinders, Inc. (Precision) on January 15, 2002. Under the terms of the sale, we assigned to Precision an operating lease related to a manufacturing facility in Beulaville, North Carolina. We are a guarantor on the lease in the event Precision fails to comply with the lease terms. The lease requires payments by Precision of approximately $21,000 per month through November 2007. In the event Precision defaults under the lease, we can seek to recover losses related to the guarantee by pursuing our remedies under agreements securing payment of amounts receivable from Precision. The maximum potential amount of future payments that we could be required to make under the guarantee using undiscounted cash flows was approximately $777,000 and $966,000 at October 31, 2004 and January 31, 2004, respectively.

 

11



 

Note 9—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 October 31

 

Nine Months Ended October 31

 

 

 

2004

 

2003

 

2004

 

2003

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Net income

 

$

8,691

 

$

5,092

 

$

23,403

 

$

16,207

 

Preferred stock dividends

 

 

 

 

(30

)

Net income available to common shareholders

 

$

8,691

 

$

5,092

 

$

23,403

 

$

16,177

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

12,195

 

12,054

 

12,149

 

11,882

 

 

 

$

0.71

 

$

0.42

 

$

1.93

 

$

1.36

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net income applicable to common shareholders

 

$

8,691

 

$

5,092

 

$

23,403

 

$

16,177

 

Preferred stock dividends

 

 

 

 

30

 

Net income

 

8,691

 

5,092

 

23,403

 

16,207

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

12,195

 

12,054

 

12,149

 

11,882

 

Assumed conversion of exchangeable preferred stock

 

 

 

 

135

 

Dilutive effect of stock options and appreciation rights

 

604

 

480

 

556

 

318

 

Diluted weighted average shares of common stock outstanding

 

12,799

 

12,534

 

12,705

 

12,335

 

 

 

$

0.68

 

$

0.41

 

$

1.84

 

$

1.31

 

 

                Earnings per share is based on the weighted average number of common shares and potentially dilutive shares outstanding during the period, computed using the treasury stock method. Diluted weighted average common shares includes the incremental shares that would be issued upon the assumed exercise of stock options and stock appreciation rights, as well as the assumed conversion of exchangeable preferred stock. For the nine month period ended October 31, 2003, 51,000 of our unexercised stock options were excluded from the calculation of diluted earnings per share because they were antidilutive. No unexercised stock options were excluded from the calculation of diluted earnings per share for the three and nine month periods ended October 31, 2004 and for the three month period ended October 31, 2003.

 

Note 10—Supplemental Cash Flow Information

 

 

 

2004

 

2003

 

Cash paid during period for:

 

 

 

 

 

Interest

 

$

1,892

 

$

3,541

 

Income taxes

 

$

8,851

 

$

2,766

 

Business acquisitions:

 

 

 

 

 

Accounts receivable

 

$

 

$

5,079

 

Inventories

 

 

4,677

 

Plant and equipment

 

4,949

 

4,171

 

Goodwill and intangible assets

 

 

4,193

 

Accounts payable assumed

 

 

(5,662

)

Notes payable assumed

 

 

(1,285

)

Other liabilities

 

(239

)

 

 

 

$

4,710

 

$

11,173

 

Supplemental disclosure of noncash information:

 

 

 

 

 

Conversion of exchangeable preferred stock to common stock

 

$

 

$

8,530

 

Deferred compensation from stock appreciation rights

 

$

3,873

 

$

 

 

12



 

Note 11—Benefit Plans

 

                The following represents the net periodic cost related to our benefit plans (in thousands):

 

 

 

Three months ended

 

Three months ended

 

 

 

October 31

 

October 31

 

 

 

Defined Benefit

 

Postretirement Benefit

 

 

 

2004

 

2003

 

2004

 

2003

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

84

 

50

 

$

32

 

$

41

 

Interest cost

 

112

 

107

 

116

 

157

 

Expected return on plan assets

 

(103

)

(98

)

 

 

Recognized net actuarial loss

 

29

 

56

 

99

 

113

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

122

 

$

115

 

$

247

 

$

311

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Nine months ended

 

 

 

October 31

 

October 31

 

 

 

Defined Benefit

 

Postretirement Benefit

 

 

 

2004

 

2003

 

2004

 

2003

 

Service cost

 

$

251

 

$

150

 

$

106

 

$

124

 

Interest cost

 

337

 

321

 

390

 

472

 

Expected return on plan assets

 

(309

)

(294

)

 

 

Recognized net actuarial loss

 

88

 

168

 

389

 

338

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

367

 

$

345

 

$

885

 

$

934

 

 

              Our net periodic benefit costs for the three and nine month periods ended October 31, 2004 have been reduced to account for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act).  See Note 12.

 

Note 12—Recent Accounting Pronouncements

 

                In January 2004, FASB Staff Position No. 106-1 (FSP 106-1), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” was issued. FSP 106-1 permitted the deferral of recognizing the effects of the Act in the accounting for post retirement health care plans under Statement of Financial Accounting Standards (SFAS) No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” and in providing disclosure related to the plans required by SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” We elected the deferral provided by this FSP.

 

                In May 2004, the FASB issued Staff Position No. 106-2 (FSP 106-2), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP No. 106-2 discusses further the effect of the Act and supersedes FSP 106-1. FSP 106-2 considers the effect of the two new features introduced in the Act in determining our accumulated postretirement benefit obligation (“APBO”) and net periodic post retirement benefit cost. The effect on the APBO will be accounted for as an actuarial experience gain to be amortized into income over the average remaining service period of plan participants.  As permitted by FSP 106-2, we have elected to account for the impact of this benefit prospectively beginning in the three months ended October 31, 2004.  The adoption of FSP 106-2 reduced our accumulated postretirement benefit obligation at June 30, 2004 from $9.5 million to $8 million.  This reduction relates to benefits attributed to past service.  Our estimated annual net periodic benefit cost after the adoption of FSP 106-2 was reduced by $286,000 to $1 million.  The $286,000 reduction in annual cost includes $20,000, $85,000 and $181,000 in service cost, interest cost and amortization of recognized actuarial losses, respectively.    The impact on the net periodic benefit cost for the three months ended October 31, 2004 was a $72,000 reduction in the cost.  Since we elected to account for FSP 106-2

 

13



 

prospectively, the periodic pension costs for the first six months ended July 31, 2004 did not change from the amounts previously reported.

 

                The American Jobs Creation Act of 2004, signed into law in October 2004, provides for a variety of changes in the tax law including incentives to repatriate undistributed earnings of foreign subsidiaries, phased elimination of the Foreign Sales Corporation/Extraterritorial Income benefit and a domestic manufacturing benefit.  We are currently evaluating the potential impact of this legislation, including assessing the details of the Act, analyzing the funds available for repatriation and the economic cost of doing so, assessing the qualified uses of repatriated funds and assessing the domestic manufacturing benefit.  However, given the preliminary stage of our evaluation, it is not possible at this time to determine what impact this legislation will have on our consolidated tax accruals or our effective tax rate.

 

14



 

Note 13—Warranty Obligations

 

                We record a liability on our consolidated balance sheet for costs related to certain 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, included in other accrued expenses on the balance sheet, were as follows (in thousands):

 

 

 

2004

 

2003

 

Beginning obligation, January 31

 

$

1,610

 

$

1,322

 

Accruals for warranties issued during the period

 

1,228

 

673

 

Accruals for pre-existing warranties

 

33

 

-

 

Settlements during the quarter

 

(877

)

(429

)

Ending obligation, October 31

 

$

1,994

 

$

1,566

 

 

 

Note 14—Accumulated Other Comprehensive Income (Loss)

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

Translation Adjustment

 

Minimum Pension Liability Adjustment

 

Total

 

Balance at January 31, 2004

 

$

3,340

 

$

(2,309

)

$

1,031

 

Translation adjustment

 

5,706

 

 

5,706

 

 

 

 

 

 

 

 

 

Balance at October 31, 2004

 

$

9,046

 

$

(2,309

)

$

6,737

 

 

15



 

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

 

                All references to fiscal periods are defined as periods ending in the year ended January 31, 2004 (fiscal 2004) and the year ending January 31, 2005 (fiscal 2005).

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

                Our 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, goodwill and long-lived assets, warranty obligations, environmental liabilities 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 on Form 10-K in our Annual Report for the year ended January 31, 2004.

 

COMPARISON OF THIRD QUARTER OF FISCAL 2005 AND FISCAL 2004

 

Consolidated Summary

 

                Net income for the third quarter of fiscal 2005 increased 71% to $8.7 million ($0.68 per diluted share) from $5.1 million ($0.41 per diluted share) for the third quarter of fiscal 2004. Net sales for the third quarter of fiscal 2005 were $96.3 million or 27% greater than the third quarter of fiscal 2004. Excluding the effect of foreign currency fluctuations and acquisitions, net sales in North America, Europe and Asia Pacific grew 21%, 20% and 18%, respectively, in the third quarter of fiscal 2005 as compared to the same quarter of the prior year. The increased net sales largely reflected higher volumes of business in existing product lines in all geographic regions.  The increase also reflects higher sales prices on certain products to cover increases in steel costs.  The consolidated gross margin decreased from 33% in the third quarter of the prior year to 32% in the third quarter of the current year. The decrease was due primarily to higher steel costs, which were partially offset by price increases and better absorption of fixed costs due to the higher sales volumes.  Selling and administrative costs increased by 12% in the third quarter of fiscal 2005 over the comparable quarter of the prior year. Excluding foreign currency changes and acquisitions, costs increased 5% over the third quarter of the prior year. The increase is primarily due to the implementation of Sarbanes-Oxley requirements, increased warranty expenses and costs for the continuing expansion of our marketing and customer service capabilities in China.  Amortization expenses were higher in fiscal 2005 due to stock appreciation rights granted in May 2004.  Results for the third quarter also include $1.3 million of income related to a payment received from the settlement of an insurance litigation matter and a $1 million gain from the sale of marketable securities.

 

North America

 

 

 

Three months ended October 31

 

 

 

 

 

 

 

2004

 

%

 

2003

 

%

 

Change

 

Change %

 

Net sales

 

$

53,898

 

100

%

$

44,168

 

100

%

$

9,730

 

22

%

Cost of goods sold

 

33,000

 

61

%

27,520

 

62

%

5,480

 

20

%

Gross profit

 

20,898

 

39

%

16,648

 

38

%

4,250

 

26

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

10,194

 

19

%

9,662

 

22

%

532

 

6

%

Amortization

 

550

 

1

%

59

 

 

491

 

 

Insurance litigation recovery

 

(1,300

)

(2

)%

 

 

(1,300

)

 

Environmental expense

 

155

 

 

 

 

155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

11,299

 

21

%

$

6,927

 

16

%

$

4,372

 

63

%

 

16



 

                North America net sales increased $9.7 million or 22% in the third quarter of fiscal 2005 over the same quarter of fiscal 2004. Higher volumes of shipments from North American plants accounted for most of the increase. Shipments benefited from a strong lift truck market in the third quarter of fiscal 2005 in comparison with the prior year. Price increases to date have sufficiently covered increases in steel costs. Similar to the first two quarters of fiscal 2005, the relation between the U.S. dollar and the Euro in the third quarter of fiscal 2005 continued to be unfavorable for European imports into the U.S. market when compared to the same quarter in fiscal 2004.

 

                Historically, we have found that changes in the level of our net sales do not correspond directly to the percentage changes in lift truck industry shipments, but industry statistics do provide an indication of the direction of business activity. North American lift truck industry shipments in the third quarter of fiscal 2005 were 16% higher than the third quarter of fiscal 2004.

 

                Gross margins for the third quarter of fiscal 2005 in North America benefited from the contribution of additional shipment volumes. Improved fixed cost absorption and sales price increases more than offset the impact of increases in the cost of steel, resulting in an increase in margins from 38% to 39%.

 

                Selling and administrative costs for the third quarter of fiscal 2005 increased 6% or $532,000 over the same quarter of the prior year.  This increase was primarily due to higher information systems consulting costs and an additional employer contribution to our U.S.A. defined contribution plan of $324,000.

 

                In May 2004, our shareholders approved a stock appreciation rights plan (SARS Plan), which provides for the award of stock appreciation rights (SARS) to key executives and directors. Our Proxy Statement, dated April 13, 2004, contains a detailed description of the terms of the SARS Plan. Amortization expense for the third quarter of fiscal 2005 increased by $520,000 due to SARS granted on May 26, 2004. The SARS Plan was not in effect during the third quarter of fiscal 2004.

 

                In October 2004, we reached a settlement with one of two insurers in litigation relating to recovery of expenses incurred in the cleanup of groundwater contamination at our Fairview, Oregon, plant. The insurer paid us $1.3 million in October and will be dismissed from a pending appeal of a lower court judgment in our favor.  During the third quarter of fiscal 2005, we recorded an additional $155,000 in environmental expenses related to changes in remediation activities at our Springfield, Ohio facility.  These changes were based on a reevaluation of the prior remediation plan after regularly scheduled meetings with the Ohio Environmental Protection Agency.

 

Europe

 

 

 

Three months ended October 31

 

 

 

 

 

 

 

2004

 

%

 

2003

 

%

 

Change

 

Change %

 

Net sales

 

$

27,614

 

100

%

$

19,442

 

100

%

$

8,172

 

42

%

Cost of goods sold

 

22,479

 

81

%

15,485

 

80

%

6,994

 

45

%

Gross profit

 

5,135

 

19

%

3,957

 

20

%

1,178

 

30

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

5,496

 

20

%

4,383

 

22

%

1,113

 

25

%

Amortization

 

126

 

1

%

51

 

 

75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

$

(487

)

(2

)%

$

(477

)

(2

)%

$

(10

)

 

 

                Net sales in Europe for the third quarter of fiscal 2005 increased $8.2 million or 42% over the same quarter of fiscal 2004.  An increase in shipments from our European plants accounted for  $3.9 million or 20% of the increase.    This is due to added demand resulting from a strong European lift truck market in fiscal 2005. The changes in foreign currency rates, primarily the Euro and the British Pound, accounted for $2.1 million or 11% of the sales increase. The remaining increase relates to our acquisition in Italy late in the third quarter of fiscal 2004, which also accounted for $2.2 million or 11% of the increase.

 

                During the third quarter of fiscal 2005, we purchased the assets of Falkenroth Foerdertechnik (Falkenroth), a major

 

17



 

German fork manufacturer.  Falkenroth was placed into insolvency by its creditors in March 2004.  The total purchase price for the assets was approximately $6.6 million, net of assumed liabilities.  As of October 31, 2004, we had paid $4.7 million of the purchase price pending final resolution of the inventory valuation.  The remaining purchase price will be paid in the fourth quarter of fiscal 2005.

 

                Gross margins in Europe declined from 20% for the third quarter of fiscal 2004 to 19% for the third quarter of fiscal 2005. The primary factor contributing to this was increases in steel costs that were not sufficiently offset by customer price increases.

 

                Selling and administrative costs in Europe increased by $1.1 million or 25% for the third quarter of fiscal 2005 as compared to the third quarter of fiscal 2004. The increase was primarily due to selling and administrative costs of an acquired company, Roncari srl, which accounted for an increase of $466,000 or 11% in comparison with the third quarter of fiscal 2004. We acquired Roncari srl late in October 2003. Changes in foreign currency rates accounted for $391,000 of additional selling and administrative costs or an increase of  9% over the prior year. Exclusive of acquisitions and foreign currency fluctuations, selling and administrative costs increased approximately $256,000 for the third quarter of fiscal 2005 as compared to the comparable period of fiscal 2004. The increase was primarily due to warranty costs related to new product introductions and information consulting costs.

 

Asia Pacific

 

 

 

Three months ended October 31

 

 

 

 

 

 

 

2004

 

%

 

2003

 

%

 

Change

 

Change %

 

Net sales

 

$

14,830

 

100

%

$

12,162

 

100

%

$

2,668

 

22

%

Cost of goods sold

 

9,979

 

67

%

7,943

 

65

%

2,036

 

26

%

Gross profit

 

4,851

 

33

%

4,219

 

35

%

632

 

15

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

1,941

 

13

%

1,761

 

14

%

180

 

10

%

Amortization

 

6

 

 

7

 

1

%

(1

)

(14

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

2,904

 

20

%

$

2,451

 

20

%

$

453

 

18

%

 

                Asia Pacific net sales increased $2.7 million or 22% in the third quarter of fiscal 2005 over fiscal 2004. Excluding the effect of foreign currencies, net sales increased $2.2 million or 18%. Virtually all of the Asia Pacific markets experienced strong sales results during the third quarter, with China posting the strongest growth.  Sales in China for the third quarter of fiscal 2005 increased $1.7 million from the expansion of our fork manufacturing operations in Hebei, China.  The expanded facility became fully operational in the second quarter of fiscal 2005.

 

                Gross margins in the Asia Pacific region decreased from 35% to 33% in the third quarter of fiscal 2005 when compared to the same quarter of the prior year.  The decrease is due to both higher material costs and higher volume of lower margin OEM products.

 

                Selling and administrative costs in the Asia Pacific region increased $180,000 for the third quarter of fiscal 2005 as compared to fiscal 2004.  Foreign currency fluctuations accounted for $84,000 of this change. The remainder of the increase was due to continued expansion of our marketing and engineering efforts in China and expenses to support increased levels of business.

 

Non-Operating Items

 

                Interest expense was approximately $934,000 or 20% lower in the third quarter of fiscal 2005 as compared to the same quarter of fiscal 2004. Total borrowings at October 31, 2004 were $12.5 million lower than October  31, 2003 due to scheduled debt payments in the fourth quarter of fiscal 2004. See “Financial Condition and Liquidity” for additional discussion of debt levels and payments.

 

18



 

                Interest income decreased $90,000 from the third quarter of fiscal 2004 to the third quarter of fiscal 2005. This was due primarily to payment in full of the Precision Hydraulic Cylinders, Inc. note receivable during the third quarter of fiscal 2004.

 

                During the three months ended October 31, 2004, a trust under a U.S. defined benefit plan we terminated in 1997 sold publicly traded common stock received in a demutualization of an insurance company.  The trust purchased annuities from the insurance company prior to the termination of the plan.  The sale resulted in a gain approximately $1.0 million and proceeds in the same amount, which were available for reversion to the Company.  We contributed $324,000 of the proceeds directly to a defined contribution plan maintained for the benefit of all U.S. employees.  The $324,000 contribution is included in selling and administrative expenses.  We will retain the balance of the proceeds.  We hold no shares of publicly traded common stock at October 31, 2004.

 

 

                Other expenses related primarily to net losses on foreign currency translation in the third quarter of fiscal 2005 and fiscal 2004.

 

                The effective tax rate of 35% was consistent in both the third quarter of fiscal 2005 and 2004.

 

19



 

COMPARISON OF THE FIRST NINE MONTHS OF FISCAL 2005 AND FISCAL 2004

 

Consolidated Summary

 

                Net income for the first nine months of fiscal 2005 increased 45% to $23.4 million ($1.84 per diluted share) from $16.2 million ($1.31 per diluted share) for the first nine months of fiscal 2004. The largest contributor to the increased net income was a higher volume of business in all geographic regions.  Net sales for the first nine months of fiscal 2005 increased by $61.9 million or 28% over the comparable period of fiscal 2004. Excluding the effect of foreign currency fluctuations and acquisitions, net sales in North America, Europe and Asia Pacific grew 18%, 22% and 28%, respectively, in the first nine months of fiscal 2005 as compared to the same period of the prior year. Gross margin for the first nine months of fiscal 2005 of 32% was slightly lower than the 33% margin in fiscal 2004.  The net effect of steel cost increases and lower margin product mix in Europe and Asia Pacific reduced margins; but this was offset by improved margins in North America.   Selling and administrative costs increased $7.7 million or 17% in the first nine months of fiscal 2005 over the comparable period of the prior year. Excluding foreign currency changes and acquisitions, costs increased $4.1 million or 9% over the comparable prior year period. The increase was due primarily to research and development, engineering costs, Sarbanes-Oxley implementation costs, employee compensation and benefits, costs related to expansion efforts in China and additional warranty costs related to new product introductions.  Amortization expenses were higher in fiscal 2005 due to stock appreciation rights granted in May 2004.  Nine month results for fiscal 2005 also include the settlement of insurance litigation and a gain on the sale of marketable securities.

 

North America

 

 

 

Nine months ended October 31

 

 

 

 

 

 

 

2004

 

%

 

2003

 

%

 

Change

 

Change %

 

Net sales

 

$

153,520

 

100

%

$

129,977

 

100

%

$

23,543

 

18

%

Cost of goods sold

 

93,730

 

61

%

81,189

 

62

%

12,541

 

15

%

Gross profit

 

59,790

 

39

%

48,788

 

38

%

11,002

 

23

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

30,630

 

20

%

27,663

 

21

%

2,968

 

11

%

Amortization

 

961

 

1

%

173

 

1

787

 

 

Insurance litigation recovery

 

(1,300

)

(1

)%

 

 

(1,300

)

 

Environmental expense

 

155

 

 

 

 

155

 

 

Operating income

 

$

29,344

 

19

%

$

20,952

 

16

%

$

8,392

 

40

%

 

                North America net sales increased  $23.5 million or 18% in the first nine months of fiscal 2005 over the same period of fiscal 2004 primarily due to higher shipments. Price increases contributed to a lesser extent to the increase.

 

                Historically, we have found that changes in the level of our net sales do not correspond directly to the percentage changes in lift truck industry shipments, but industry statistics do provide an indication of the direction of business activity. North American lift truck industry shipments for the first nine months of fiscal 2005 as compared to the first nine months of fiscal 2004 increased 12%.

 

                Gross margins for the first nine months of fiscal 2005 in North America benefited from the contribution of additional unit volume through the plants, absorbing more fixed costs. In addition, price increases to date have kept pace with increases in the cost of steel. The net result was an improvement in the margin from 38% for the first nine months in fiscal 2004 to 39% for the same period in fiscal 2005.

 

                Selling and administrative costs for the first nine months of fiscal 2005 increased 11% or $3 million over the same period of the prior year. Implementation costs related to the requirements of Sarbanes-Oxley increased by $466,000. Research and development and engineering costs were $145,000 greater than the prior year.  Foreign currency fluctuations increased selling and administrative costs by $160,000 during the first nine months of fiscal 2005. The remaining increase related to

 

20



 

employee compensation and benefits, miscellaneous costs and a general increase in business levels.

 

                Amortization expense increased by $861,000 for the first nine months of fiscal 2005 due to stock appreciation rights granted in May 2004.

 

                In October 2004, we reached a settlement with one of two insurers in litigation relating to recovery of expenses incurred in the cleanup of groundwater contamination at our Fairview, Oregon, plant. The insurer paid us $1.3 million in October and has been dismissed from a pending appeal of a lower court judgment in our favor.

 

                During the third quarter of fiscal 2005, we recorded an additional $155,000 in environmental expenses related to changes in remediation activities at our Springfield, Ohio facility.  These changes were based on a reevaluation of the remediation plan after regularly scheduled meetings with the Ohio Environmental Protection Agency.

 

Europe

 

 

 

Nine months ended October 31

 

 

 

 

 

 

 

2004

 

%

 

2003

 

%

 

Change

 

Change %

 

Net sales

 

$

84,517

 

100

%

$

57,123

 

100

%

$

27,394

 

48

%

Cost of goods sold

 

67,367

 

80

%

44,317

 

78

%

23,050

 

52

%

Gross profit

 

17,150

 

20

%

12,806

 

22

%

4,344

 

34

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

16,319

 

19

%

12,663

 

22

%

3,656

 

29

%

Amortization

 

348

 

 

123

 

 

225

 

 

Operating income

 

$

483

 

1

%

$

20

 

 

$

463

 

 

 

                Net sales in Europe for the first nine months of fiscal 2005 increased $27.4 million or 48% over the same period of fiscal 2004.  The changes in foreign currency rates, primarily the Euro and the British Pound, accounted for $6.1 million or 11% of the increase.  The acquisition of Roncari srl near the end of October 2003 accounted for $8.9 million or about 16% of the increase.  The remaining increase of $12.4 million or 21% was the result of increased shipments of OEM products out of our European plants.

 

                Gross margins in Europe declined slightly from 22% for the first nine months of fiscal 2004 to 20% for the first nine months of fiscal 2005. The two primary factors contributing to this decrease were increased shipments of lower margin OEM products relative to total shipments, as well as increases in steel costs that were not sufficiently offset by price increases.

 

                Selling and administrative costs in Europe increased by $3.7 million or 29% for the first nine months of fiscal 2005 as compared to the first nine months of fiscal 2004.  Selling and administrative  costs of acquired companies accounted for $1.7 million or 14% of the increase during the first nine months of fiscal 2005.  Changes in foreign currency rates accounted for $1.1 million or 9% of the increase.  Exclusive of acquisitions and foreign currency fluctuations, selling and administrative costs increased by $794,000 for the first nine months of fiscal 2005 as compared to fiscal 2004.    Warranty cost increases related primarily to new product introductions were $440,000.  The remaining increase relates to miscellaneous costs for the integration of acquisitions, Sarbanes-Oxley implementation and other information technology initiatives.  These increases were partially offset by a net reduction of lease expenses of $538,000.  We reduced a lease loss accrual in the second quarter of fiscal 2005 after the lease in question was resolved for a lower amount than had been anticipated.

 

21



 

Asia Pacific

 

 

 

Nine months ended October 31

 

 

 

 

 

 

 

2004

 

%

 

2003

 

%

 

Change

 

Change %

 

Net sales

 

$

44,209

 

100

%

$

33,238

 

100

%

$

10,971

 

33

%

Cost of goods sold

 

29,538

 

67

%

22,311

 

67

%

7,227

 

32

%

Gross profit

 

14,671

 

33

%

10,927

 

33

%

3,744

 

34

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

6,326

 

14

%

5,249

 

16

%

1,077

 

21

%

Amortization

 

21

 

 

17

 

 

4

 

24

%

Operating income

 

$

8,324

 

19

%

$

5,661

 

17

%

$

2,663

 

47

%

 

                Asia Pacific net sales increased $11 million or 33% in the first nine months of fiscal 2005 over fiscal 2004.  Excluding the effect of foreign currencies, net sales increased $9.3 million or 28%.  The increase was due to the general strength of the economies in all markets and the expansion of manufacturing operations in China.

 

                Gross margins in the Asia Pacific region were consistent for the nine months ended October 31 in both fiscal 2004 and 2005.

 

                Selling and administrative costs in the Asia Pacific region increased $1.1 million for the first nine months of fiscal 2005 as compared to fiscal 2004.  Foreign currency fluctuations accounted for $309,000 of the increase.  The remainder of the increase was due to expansion of marketing and engineering efforts in China.

 

Non-Operating Items

 

                Interest expense was approximately $738,000 or 21% lower in the first nine months of fiscal 2005 as compared to the same period of fiscal 2004.  Total borrowings at the end of October 2004 were $12.5 million  lower than the same period of the prior year due to scheduled debt payments in the fourth quarter of fiscal 2004.  See “Financial Condition and Liquidity” for additional discussion of debt levels and payments.

 

                Interest income decreased approximately $415,000 from the first nine months of fiscal 2004 to the first nine months of fiscal 2005. This was due primarily to payment in full of the Precision note receivable during the third quarter of fiscal 2004.

 

                During the three months ended October 31, 2004, a trust under a U.S. defined benefit plan we terminated in 1997 sold publicly traded common stock received in a demutualization of an insurance company.  The trust purchased annuities from the insurance company prior to the termination of the plan.  The sale resulted in a gain approximately $1.0 million and proceeds in the same amount, which were available for reversion to the Company.  We contributed $324,000 of the proceeds directly to a defined contribution plan maintained for the benefit of all U.S. employees.  The $324,000 contribution is included in selling and administrative expenses.  We will retain the balance of the proceeds.  We hold no shares of publicly traded common stock at October 31, 2004.

 

 

                Other expense in the first nine months of fiscal 2005 related primarily to net losses on foreign currency translations.  We maintain a foreign currency risk management strategy to mitigate the impact of unanticipated fluctuations in earnings caused by changes in foreign currency exchange rates. Other income of $273,000 in the first nine months of fiscal 2004 related to the gain on the sale of a building in Germany and the elimination of remaining liabilities from the sale of our cylinder division, which were offset by losses on foreign currency translation.

 

                The effective tax rate increased from 33% in the first nine months of fiscal 2004 to 35% in the current period. This was primarily due to a decrease in benefits of international financing activities and an increase in the recording of additional

 

22



 

valuation allowances on deferred tax assets in Europe.

 

CASH FLOWS

 

                The statements of cash flows reflect the changes in cash and cash equivalents for the nine months ended October  31, 2004 and October  31, 2003 by classifying transactions into three major categories of activities: operating, investing and financing.

 

Operating

 

                Our main source of liquidity is cash generated from operating activities. This consists of net income adjusted for noncash operating items such as depreciation and amortization, losses and gains on disposition of assets, deferred income taxes, and changes in operating assets and liabilities.

 

                Net cash provided by operating activities from continuing operations was $28.8 million in first nine months of fiscal 2005 compared to $24.5 million for the same period in fiscal 2004. The increase in fiscal 2005 was due to higher levels of net income, depreciation and amortization as well as increases in accounts payable and accrued expenses. This increase was partially offset by changes in other operating accounts, primarily accounts receivables and inventories.   These changes are primarily due to increased business activity in the first nine months of fiscal 2005 as compared to the same period in fiscal 2004.

 

Investing

 

                The principal recurring investing activities are capital expenditures. These expenditures are primarily for equipment and tooling related to product improvements, more efficient production methods and replacement for normal wear and tear. Capital expenditures were $9.7 million and $8.8 million in the first nine months of fiscal 2005 and 2004, respectively. We expect capital expenditures in the rest of fiscal 2005 to approximate depreciation expense. Depreciation expense for the first nine months in fiscal 2005 and fiscal 2004 was $10.2 million and $8.9 million, respectively.

 

                Marketable securities at October 31, 2004 consist primarily of asset-backed notes issued by various state agencies throughout the United States and guaranteed by state governments and agencies. The notes are long-term instruments maturing through 2031; however, the interest rates and maturities are reset approximately every month, at which time we can sell the notes. Tax-free interest rates on the notes ranged from 1.8% to 2.6% per annum. Net purchases of marketable securities were $2.4 million and $17.2 million in the first nine months of fiscal 2005 and fiscal 2004, respectively.

 

                Proceeds from the sale of securities received as a reversion from a pension plan terminated in 1997 were $1.0 million during the nine months ended October 31, 2004. See Note 5 to the Consolidated Financial Statements.

 

Financing

 

                The issuance of common stock related to the exercise of stock options generated $1.3 million of cash for the first nine months in fiscal 2005 as compared to $1.1 million in the comparable period of the prior year.

 

                We declared dividends totaling $0.33 and $0.30 per share during the first nine months of fiscal 2005 and 2004, respectively.

 

23



 

FINANCIAL CONDITION AND LIQUIDITY

 

                Our working capital at October 31, 2004 was $99.3 million as compared to $81.7 million at January 31, 2004. Our current ratio at October 31, 2004 was 2.60 to 1 as compared to 2.59 to 1 at January 31, 2004.

 

                Total outstanding debt, including notes payable to banks and capital leases, at October 31, 2004 was $52.8 million in comparison with $53.9 million at January 31, 2004. Our debt to equity ratio improved to .25 to 1 at October 31, 2004 from .29 to 1 at January 31, 2004. Our debt agreements contain covenants relating to net worth and leverage ratios.  We are in compliance with these covenants at October 31, 2004.  Borrowing arrangements currently in place with commercial banks provide lines of credit totaling $35 million, of which $2.8 million was used to issue letters of credit. The average interest rate on notes payable to banks was 4.0% at October 31, 2004 and 2.8% at January 31, 2004.

 

                We believe that our cash and cash equivalents, existing credit facilities and cash flows from operations will be sufficient to satisfy our expected working capital, capital expenditure and debt retirement requirements for fiscal 2005.

 

OTHER MATTERS

 

                During fiscal 2004, the holder of our exchangeable preferred stock exchanged 600,000 shares of exchangeable preferred stock for 600,000 shares of common stock. This non-cash transaction resulted in a reclassification of $8.2 million from exchangeable preferred stock into common stock and additional paid-in-capital and had no effect on earnings per share. No exchangeable preferred stock remained outstanding at October 31, 2004 and January 31, 2004.

 

                The U.S. dollar weakened in the third quarter of fiscal 2005 in comparison to most foreign currencies used by our significant foreign operations. As a result, foreign currency translation adjustments increased shareholders’ equity by $8.6 million in the third quarter of fiscal 2005. The primary currencies driving the increase in shareholders’ equity were the Euro and the Canadian dollar. During the first nine months of fiscal 2005, the U.S. dollar weakened against most currencies, increasing shareholders’ equity by $5.7 million from January 31, 2004 to October 31, 2004.

 

OFF BALANCE SHEET ARRANGEMENTS

 

                At October 31, 2004, 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.

 

24



 

RECENT ACCOUNTING PRONOUNCEMENTS

 

                In January 2004, FASB Staff Position No. 106-1 (FSP 106-1), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” was issued. FSP 106-1 permitted the deferral of recognizing the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) in the accounting for post retirement health care plans under Statement of Financial Accounting Standards (SFAS) No. 106, “Employers’ Accounting for Postretirement Benefactors Other Than Pensions,” and in providing disclosure related to the plans required by SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” We elected the deferral provided by this FSP.

 

                In May 2004, the FASB issued Staff Position No. 106-2 (FSP 106-2), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP No. 106-2 discusses further the effect of the Act and supersedes FSP 106-1. FSP 106-2 considers the effect of the two new features introduced in the Act in determining our accumulated postretirement benefit obligation (“APBO”) and net periodic post retirement benefit cost. The effect on the APBO will be accounted for as an actuarial experience gain to be amortized into income over the average remaining service period of plan participants.  As permitted by FSP 106-2, we have elected to account for the impact of this benefit prospectively beginning in the three months ended October 31, 2004.  The adoption of FSP 106-2 reduced our accumulated postretirement benefit obligation at June 30, 2004 from $9.5 million to $8 million.  Our estimated annual net periodic benefit cost after the adoption of FSP 106-2 was reduced by $286,000 to $1 million.  The $286,000 reduction in annual cost includes $20,000, $85,000 and $181,000 in service cost, interest cost and amortization of recognized actuarial losses, respectively.    The impact on the net periodic benefit cost for the three months ended October 31, 2004 was a $72,000 reduction in the cost.  Since we elected to account for FSP 106-2 prospectively, the periodic pension costs for the first six months ended July 31, 2004 did not change from the amounts previously reported.

 

                The American Jobs Creation Act of 2004, signed into law in October 2004, provides for a variety of changes in the tax law including incentives to repatriate undistributed earnings of foreign subsidiaries, phased elimination of the Foreign Sales Corporation/Extraterritorial Income benefit and a domestic manufacturing benefit.  We are currently evaluating the potential impact of this legislation, including assessing the details of the Act, analyzing the funds available for repatriation and the economic cost of doing so, assessing the qualified uses of repatriated funds and assessing the domestic manufacturing benefit.  However, given the preliminary stage of our evaluation, it is not possible at this time to determine what impact this legislation will have on our consolidated tax accruals or our effective tax rate.

 

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 revenues 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 third quarter of fiscal 2005 resulting from a 10% weaker U.S. dollar during the entire quarter, measured against foreign currencies that affect our operations (in millions):

 

Euro

 

$

2.0

 

Canadian dollar

 

0.2

 

British pound

 

0.7

 

Other currencies with net sales less than 5% of consolidated net sales

 

1.0

 

 

                We enter into foreign currency forward exchange contracts to offset the impact of currency fluctuations on certain nonfunctional currency assets and liabilities. The principal currencies hedged are denominated in Japanese yen, Canadian dollars, Euros and British pounds. Our foreign currency forward exchange contracts have terms lasting up to six months, but generally less than one month. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

 

                A majority of our products are manufactured using steel as a primary raw material and steel based components as purchased parts. As such, our cost of goods sold is sensitive to fluctuations in steel prices, either directly through the purchase of steel as raw material or indirectly through the purchase of steel based components. Presuming that the full impact of commodity steel cost increases is reflected in all steel and steel based component purchases, we estimate our gross margin

 

25



 

percentage sensitivity to be approximately 0.3% for each 1.0% increase in commodity steel cost without offsetting sales price increases. For example, if the price of commodity steel increases 1.0%, and the full impact of that increase is reflected in all raw material and component purchases, the net decrease in the gross margin percentage would be approximately 0.3%. Based on our statement of income for the quarter ended October 31, 2004, a 1% increase in commodity steel costs without offsetting sales price increases would have decreased consolidated gross profit by approximately $260,000.

 

                To date we have been able to mitigate the effect of a portion of the steel cost increases on our gross margins. This has been done through price increases and cost reductions. We intend to continue our efforts in the coming months to mitigate the full impact of any additional steel cost increases. There may be some time lag between the absorption of the steel cost increases and realizing the offsetting benefits of the mitigating measures. It should be noted that there is no assurance that we can fully mitigate all future steel cost increases through price increases and other measures and actual cost increases from steel suppliers could differ from cost increases that have been previously communicated.

 

                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. However, certain steel products obtained in Europe are subject to allocations from suppliers. At this time we believe the current allocation of these products from suppliers is sufficient to meet planned production volumes. Nevertheless, there can be no assurance that these suppliers will be able to meet our future requirements. An extended delay or interruption in the supply of any components could have a material adverse effect on the Company’s business, results of operations and financial condition. We are working to identify alternative supplier sources for these products.

 

                Substantially all of our debt at October 31, 2004 has a fixed interest rate. Any additional payments to prepay scheduled amounts of debt are subject to penalties. At October 31, 2004, the penalties to retire all of our long-term debt were  $4.0 million. A hypothetical immediate increase in market interest rates by 1% would decrease the fair value of our long-term debt outstanding at October 31, 2004 by $800,000.

 

Item 4. Controls and Procedures

 

As of October 31, 2004, the end of the period covered by this report, we reviewed and evaluated, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our ‘‘disclosure controls and procedures’’