**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

 

**FORM 10-Q**

 

 
| **(Mark One)**                                                                                                                                                                                                                                   | ** ** | ** **                                                                                               |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                                                       | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
| **For the Quarterly Period Ended July 31, 2005**                                                                                                                                                                                            |
| **OR**                                                                                                                                                                                                                                           |
| **o**                                                                                                                                                                                                                                            | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| **For the transition period from                 to                 ** |

 

**Commissionfile number 1-12557**

 

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**CASCADE CORPORATION**

(Exact name of registrant asspecified 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**

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.  Yes ý  No o

 

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

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act.)o  Yes ý  No

 

The number of shares outstanding of theregistrant’s common stock as of August 26, 2005 was 12,383,339.

 

 

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**Forward-LookingStatements**

 

This report contains forward-lookingstatements that involve risks and uncertainties, as well as assumptions which,if they never materialize or prove incorrect, could cause our results to differmaterially from those expressed or implied by such forward-looking statements.All statements other than statements of historical fact are statements thatcould be deemed forward-looking statements, including any projections ofrevenue, gross margin, expenses, earnings or losses from operations, synergiesor other financial items; any statements of plans, strategies, and objectivesof management for future operations; any statements regarding future economicconditions or performance; any statements of expectation or belief; and any statementsof assumptions underlying any of the foregoing. The risks, uncertainties, andassumptions referred to above include, but are not limited to, competitivefactors in, and the cyclical nature of, the materials handling industry;fluctuations in lift truck orders or deliveries, availability and cost of rawmaterials; general business and economic conditions in North America, Europe,Australia and Asia; assumptions relating to pension and other post-retirementcosts; share-based compensation; foreign currency fluctuations; pendinglitigation; environmental matters; and the effectiveness of our capitalexpenditures and cost reduction initiatives. We undertake no obligation topublicly revise or update forward-looking statements to reflect events or circumstancesthat arise after the date of this report.

 

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**PART I—FINANCIALINFORMATION**

 

**Item 1. Financial Statements**

 

**CASCADECORPORATION**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

 

**(Unaudited—inthousands, except per share amounts)**

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **July 31**       | ** ** | **July 31**     | ** ** |
| ** **                                  | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                   |       | $                      | 114,966    |                 | $          | 92,376 |   | $ | 229,481 |   | $ | 185,905 |   |
| Cost of goods sold                          |       | 78,396                 |       | 63,025               |       | 155,422 |   | 125,178 |   |
| Gross profit                                |       | 36,570                 |       | 29,351               |       | 74,059 |   | 60,727 |   |
|                                        |       |                   |       |                 |       |   |   |   |   |
| Selling and administrative expenses         |       | 18,928                 |       | 18,066               |       | 37,046 |   | 35,984 |   |
| Amortization                                |       | 767                    |       | 167                  |       | 944 |   | 307 |   |
|                                        |       |                   |       |                 |       |   |   |   |   |
| Operating income                            |       | 16,875                 |       | 11,118               |       | 36,069 |   | 24,436 |   |
| Interest expense                            |       | 698                    |       | 925                  |       | 1,450 |   | 1,824 |   |
| Interest income                             |       | (170                   | )          | (123                 | )          | (278 | ) | (220 | ) |
| Other expense (income)                      |       | 65                     |       | 153                  |       | (167 | ) | 58 |   |
|                                        |       |                   |       |                 |       |   |   |   |   |
| Income before provision for income taxes    |       | 16,282                 |       | 10,163               |       | 35,064 |   | 22,774 |   |
| Provision for income taxes                  |       | 5,532                  |       | 3,661                |       | 12,106 |   | 8,062 |   |
|                                        |       |                   |       |                 |       |   |   |   |   |
| Net income                                  |       | $                      | 10,750     |                 | $          | 6,502 |   | $ | 22,958 |   | $ | 14,712 |   |
| Basic earnings per share                    |       | $                      | 0.87       |                 | $          | 0.54 |   | $ | 1.87 |   | $ | 1.21 |   |
| Diluted earnings per share                  |       | $                      | 0.84       |                 | $          | 0.51 |   | $ | 1.79 |   | $ | 1.16 |   |
|                                        |       |                   |       |                 |       |   |   |   |   |
| Basic weighted average shares outstanding   |       | 12,302                 |       | 12,146               |       | 12,266 |   | 12,125 |   |
| Diluted weighted average shares outstanding |       | 12,856                 |       | 12,741               |       | 12,808 |   | 12,648 |   |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

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**CASCADECORPORATION**

 

**CONSOLIDATEDBALANCE SHEETS**

 

**(Unaudited—inthousands, except per share amounts)**

 

 
| ** **                                                                                                | ** ** | **July 31** | ** ** | **January 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------|------------|
| ** **                                                                                                | ** ** | **2005**         | ** ** | **2005**            | ** ** |
|                                                                                                      |       |             |       |                |       |
| **ASSETS**                                                                                                |       |             |       |                |       |
| Current assets:                                                                                           |       |             |       |                |       |
| Cash and  cash equivalents                                                                                |       | $                | 26,422     |                | $          | 30,482 |   |
| Marketable  securities                                                                                    |       | 15,403           |       | 1,503               |       |
| Trade  accounts receivable, less allowance for doubtful accounts of $1,931 and  $2,182                    |       | 75,105           |       | 70,728              |       |
| Inventories                                                                                               |       | 49,379           |       | 46,212              |       |
| Deferred  income taxes                                                                                    |       | 3,415            |       | 3,042               |       |
| Prepaid  expenses and other                                                                               |       | 5,663            |       | 4,592               |       |
| Total  current assets                                                                                     |       | 175,387          |       | 156,559             |       |
| Property, plant and equipment, net                                                                        |       | 77,411           |       | 82,027              |       |
| Goodwill                                                                                                  |       | 74,235           |       | 74,786              |       |
| Deferred income taxes                                                                                     |       | 9,715            |       | 9,688               |       |
| Other assets                                                                                              |       | 5,140            |       | 5,032               |       |
| Total assets                                                                                              |       | $                | 341,888    |                | $          | 328,092 |   |
|                                                                                                      |       |             |       |                |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                            |       |             |       |                |       |
| Current liabilities:                                                                                      |       |             |       |                |       |
| Notes  payable to banks                                                                                   |       | $                | 2,346      |                | $          | 2,461 |   |
| Current  portion of long-term debt                                                                        |       | 12,789           |       | 12,916              |       |
| Accounts  payable                                                                                         |       | 21,071           |       | 25,778              |       |
| Accrued  payroll and payroll taxes                                                                        |       | 6,807            |       | 7,283               |       |
| Income taxes  payable                                                                                     |       | 2,119            |       | 2,068               |       |
| Other  accrued expenses                                                                                   |       | 12,073           |       | 11,005              |       |
| Accrued  environmental expenses                                                                           |       | 891              |       | 894                 |       |
| Total  current liabilities                                                                                |       | 58,096           |       | 62,405              |       |
| Long-term debt, net of current portion                                                                    |       | 25,086           |       | 25,187              |       |
| Accrued environmental expenses                                                                            |       | 7,438            |       | 7,799               |       |
| Deferred income taxes                                                                                     |       | 4,090            |       | 3,988               |       |
| Other liabilities                                                                                         |       | 10,976           |       | 10,830              |       |
| Total  liabilities                                                                                        |       | 105,686          |       | 110,209             |       |
|                                                                                                      |       |             |       |                |       |
| Commitments and contingencies (Note 8)                                                                    |       | —           |       | —              |       |
| Shareholders’ equity:                                                                                |       |             |       |                |       |
| Common  stock, $.50 par value, 20,000 authorized shares; 12,383 and 12,224 shares  issued and outstanding |       | 6,192            |       | 6,112               |       |
| Additional  paid-in capital                                                                               |       | 18,319           |       | 20,004              |       |
| Unamortized  deferred compensation                                                                        |       | —           |       | (4,506              | )          |
| Retained  earnings                                                                                        |       | 208,518          |       | 188,507             |       |
| Accumulated  other comprehensive income                                                                   |       | 3,173            |       | 7,766               |       |
| Total  shareholders’ equity                                                                          |       | 236,202          |       | 217,883             |       |
| Total  liabilities and shareholders’ equity                                                          |       | $                | 341,888    |                | $          | 328,092 |   |

 

The accompanying notes are an integral part ofthe consolidated financial statements.

 

4

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**CASCADECORPORATION**

 

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

 

**(Unaudited—inthousands, except per share amounts)**

 
| ** **                                                                       | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** **        | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                       | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | **Unamortized**  | ** ** | ** **        | ** ** | **Other**         | ** ** | **Year-To-Date**  | ** ** |
| ** **                                                                       | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Deferred**   | ** ** | **Retained**     | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                       | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Earnings**      | ** ** | **Income (Loss)** | ** ** | **Income (Loss)** | ** ** |
| **Balance at January 31, 2005**                                             |       | 12,224           |       | $           | 6,112      |           | $          | 20,004           |       | $                 | (4,506     | )                 | $          | 188,507           |       | $ | 7,766 |   |   |   |
|                                                                             |       |             |       |        |       |           |       |             |       |              |       |              |       |              |       |
| Net income                                                                       |       | —           |       | —      |       | —         |       | —           |       | 22,958            |       | —            |       | 22,958            |       |
| Dividends ($0.24 per share)                                                      |       | —           |       | —      |       | —         |       | —           |       | (2,947            | )          | —            |       | —            |       |
| Common stock issued                                                              |       | 159              |       | 80          |       | 1,732          |       | —           |       | —            |       | —            |       | —            |       |
| Excess tax benefit from exercise of stock options and  stock appreciation rights |       | —           |       | —      |       | 720            |       | —           |       | —            |       | —            |       | —            |       |
| Deferred compensation from stock appreciation rights                             |       | —           |       | —      |       | (4,734         | )          | 4,734            |       | —            |       | —            |       | —            |       |
| Share-based compensation                                                         |       | —           |       | —      |       | 597            |       | (228             | )          | —            |       | —            |       | —            |       |
| Translation adjustment                                                           |       | —           |       | —      |       | —         |       | —           |       | —            |       | (4,593            | )          | (4,593            | )          |
|                                                                             |       |             |       |        |       |           |       |             |       |              |       |              |       |              |       |
| **Balance at July 31, 2005**                                                |       | 12,383           |       | $           | 6,192      |           | $          | 18,319           |       | $                 | —     |              | $          | 208,518           |       | $ | 3,173 |   | $ | 18,365 |   |
|                                                                                  |            |                  |            |             |            |                |            |                  |            |                   |            |                   |            |                   |            |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

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**CASCADECORPORATION**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 

**(Unaudited—inthousands)**

 

 
| ** **                                                                        | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                        | ** ** | **July 31**     | ** ** |
| ** **                                                                        | ** ** | **2005**             | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                         |       |                 |       |   |   |
| Net income                                                                        |       | $                    | 22,958     |   | $ | 14,712 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities |       |                 |       |   |   |
| Depreciation  and amortization                                                    |       | 8,434                |       | 7,086 |   |
| Share-based  compensation                                                         |       | 369                  |       | 340 |   |
| Deferred  income taxes                                                            |       | (298                 | )          | (298 | ) |
| Gain on  disposition of assets                                                    |       | (27                  | )          | (48 | ) |
| Changes in operating assets and liabilities:                                      |       |                 |       |   |   |
| Trade  accounts receivable                                                        |       | (4,377               | )          | (6,605 | ) |
| Inventories                                                                       |       | (3,167               | )          | (2,482 | ) |
| Prepaid  expenses and other                                                       |       | (1,071               | )          | (1,153 | ) |
| Accounts  payable and accrued expenses                                            |       | (5,183               | )          | 3,142 |   |
| Current  income taxes payable                                                     |       | 51                   |       | 2,251 |   |
| Other  liabilities                                                                |       | 838                  |       | 926 |   |
| Net cash  provided by operating activities                                        |       | 18,527               |       | 17,871 |   |
|                                                                              |       |                 |       |   |   |
| **Cash flows from investing activities:**                                         |       |                 |       |   |   |
| Capital  expenditures                                                             |       | (5,287               | )          | (6,598 | ) |
| Sales of  marketable securities                                                   |       | 10,150               |       | 6,250 |   |
| Purchases of  marketable securities                                               |       | (24,050              | )          | (13,590 | ) |
| Proceeds  from sale of assets                                                     |       | 190                  |       | 216 |   |
| Other assets                                                                      |       | 91                   |       | 340 |   |
| Net cash  used in investing activities                                            |       | (18,906              | )          | (13,382 | ) |
|                                                                              |       |                 |       |   |   |
| **Cash flows from financing activities:**                                         |       |                 |       |   |   |
| Cash  dividends paid                                                              |       | (2,947               | )          | (2,670 | ) |
| Payments on  long-term debt and capital leases                                    |       | (228                 | )          | (331 | ) |
| Notes  payable to banks, net                                                      |       | (115                 | )          | (900 | ) |
| Common stock  issued under share-based compensation plans                         |       | 1,812                |       | 1,149 |   |
| Excess tax  benefit from exercise of stock options and stock appreciation rights  |       | 720                  |       | — |   |
| Net cash  used in financing activities                                            |       | (758                 | )          | (2,752 | ) |
|                                                                              |       |                 |       |   |   |
| **Effect of exchange rate changes**                                               |       | (2,923               | )          | (1,718 | ) |
|                                                                              |       |                 |       |   |   |
| Change in cash and cash equivalents                                               |       | (4,060               | )          | 19 |   |
| Cash and cash equivalents at beginning of  period                                 |       | 30,482               |       | 25,584 |   |
| Cash and cash equivalents at end of period                                        |       | $                    | 26,422     |   | $ | 25,603 |   |

 

**Supplementaldisclosure of cash flow information**

See Note 10 to the consolidated financial statements

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

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**CASCADECORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**(Unaudited)**

 

**Note 1—Description of Business**

 

Cascade Corporation is an internationalcompany engaged in the manufacture of materials handling products that arewidely 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 andon the sales of replacement parts.  Themajority of our products are sold to lift truck manufacturers and retail lifttruck dealers.  A significant portion ofour sales are made in North America and Europe. We are headquartered in Fairview, Oregon, employing approximately 1,900people and maintaining operations in 15 countries outside the United States.

 

**Note 2—Interim Financial Information**

 

The accompanying consolidated financialstatements for the interim periods ended July 31, 2005 and 2004 areunaudited. In the opinion of management, the accompanying consolidatedfinancial statements reflect normal recurring adjustments necessary for a fairstatement of the financial position, results of operations and cash flows forthose interim periods. Results of operations for the interim periods are not necessarilyindicative of the results to be expected for the full year, and these financialstatements do not contain the detail or footnote disclosures concerningaccounting policies and other matters that would be included in full fiscalyear financial statements. Therefore, these statements should be read inconjunction with our audited financial statements included on Form 10-K inour Annual Report for the fiscal year ended January 31, 2005.

 

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**Note 3—Segment Information**

 

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

 
| ** **                    | ** ** | **Three Months Ended July 31** | ** ** |
|-------------------------------|------------|-------------------------------------|------------|
| **2005**                      | ** ** | **North America**                   | ** ** | **Europe** | ** ** | **Asia Pacific** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                     |       | $                                   | 61,793     |   | $ | 35,297 |   | $ | 17,876 |   | $ | — |   | $ | 114,966 |   |
| Transfers between regions     |       | 5,382                               |       | 881 |   | 156 |   | (6,419 | ) | — |   |
| Total sales                   |       | $                                   | 67,175     |   | $ | 36,178 |   | $ | 18,032 |   | $ | (6,419 | ) | $ | 114,966 |   |
| Operating income              |       | $                                   | 13,130     |   | $ | 584 |   | $ | 3,161 |   |   |   | $ | 16,875 |   |
| Property, plant and equipment |       | $                                   | 35,334     |   | $ | 37,185 |   | $ | 4,892 |   |   |   | $ | 77,411 |   |
|                          |       |                                |       |   |   |   |   |   |   |   |   |
| **2004**                      | ** ** | **North America**                   | ** ** | **Europe** | ** ** | **Asia Pacific** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                     |       | $                                   | 49,028     |   | $ | 29,485 |   | $ | 13,863 |   | $ | — |   | $ | 92,376 |   |
| Transfers between regions     |       | 5,411                               |       | 521 |   | 11 |   | (5,943 | ) | — |   |
| Total sales                   |       | $                                   | 54,439     |   | $ | 30,006 |   | $ | 13,874 |   | $ | (5,943 | ) | $ | 92,376 |   |
| Operating income              |       | $                                   | 8,402      |   | $ | 194 |   | $ | 2,522 |   |   |   | $ | 11,118 |   |
| Property, plant and equipment |       | $                                   | 35,615     |   | $ | 33,421 |   | $ | 4,841 |   |   |   | $ | 73,877 |   |
|                          |       |                                |       |   |   |   |   |   |   |   |   |
| ** **                    | ** ** | **Six Months Ended July 31**   | ** ** |
| **2005**                      | ** ** | **North America**                   | ** ** | **Europe** | ** ** | **Asia Pacific** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                     |       | $                                   | 123,410    |   | $ | 72,001 |   | $ | 34,070 |   | $ | — |   | $ | 229,481 |   |
| Transfers between regions     |       | 11,473                              |       | 1,566 |   | 172 |   | (13,211 | ) | — |   |
| Net sales                     |       | $                                   | 134,883    |   | $ | 73,567 |   | $ | 34,242 |   | $ | (13,211 | ) | $ | 229,481 |   |
| Operating income              |       | $                                   | 26,657     |   | $ | 3,252 |   | $ | 6,160 |   |   |   | $ | 36,069 |   |
|                          |       |                                |       |   |   |   |   |   |   |   |   |
| **2004**                      | ** ** | **North America**                   | ** ** | **Europe** | ** ** | **Asia Pacific** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                     |       | $                                   | 99,622     |   | $ | 56,904 |   | $ | 29,379 |   | $ | — |   | $ | 185,905 |   |
| Transfers between regions     |       | 11,066                              |       | 1,312 |   | 33 |   | (12,411 | ) | — |   |
| Net sales                     |       | $                                   | 110,688    |   | $ | 58,216 |   | $ | 29,412 |   | $ | (12,411 | ) | $ | 185,905 |   |
| Operating income              |       | $                                   | 18,071     |   | $ | 945 |   | $ | 5,420 |   |   |   | $ | 24,436 |   |

 

**Note 4—Goodwill**

 

The breakdown of goodwill by geographicregion at July 31, 2005 and January 31, 2005 is provided in the tablebelow (in thousands). The change in balances between periods is primarily dueto fluctuations in foreign currencies.

 
| ** **    | ** ** | **July 31** | ** ** | **January 31** | ** ** |
|---------------|------------|------------------|------------|---------------------|------------|
| ** **    | ** ** | **2005**         | ** ** | **2005**            | ** ** |
| North America |       | $                | 61,281     |                | $          | 60,429 |   |
| Europe        |       | 9,804            |       | 11,211              |       |
| Asia Pacific  |       | 3,150            |       | 3,146               |       |
|          |       | $                | 74,235     |                | $          | 74,786 |   |

 

**Note 5—Marketable Securities**

 

Marketable securities consist of auction ratesecurities issued by various state agencies throughout the United States andvariable rate demand notes.  We classify these securities asavailable-for-sale securities.  These securities are either insuredthrough third party agencies, reinsured through the U.S. government, or securedby a letter of credit from a bank.  The specific identification method isused to determine the cost of securities sold.  There were no realized orunrealized gains

 

8

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orlosses related to our marketable securities during the first six months offiscal 2006 and fiscal 2005.  These securities are long-term instrumentsmaturing through 2035; however, the interest rates and maturities are resetapproximately every month, at which time we can sell the securities. Accordingly, we have classified these securities as current assets in ourconsolidated balance sheets.

 

**Note 6—Inventories**

 

Inventories stated at the lower of averagecost or market are presented below by major class (in thousands):

 
| ** **                    | ** ** | **July 31** | ** ** | **January 31** | ** ** |
|-------------------------------|------------|------------------|------------|---------------------|------------|
| ** **                    | ** ** | **2005**         | ** ** | **2005**            | ** ** |
| Finished goods and components |       | $                | 30,659     |                | $          | 30,516 |   |
| Work in process               |       | 470              |       | 865                 |       |
| Raw materials                 |       | 18,250           |       | 14,831              |       |
|                          |       | $                | 49,379     |                | $          | 46,212 |   |

 

**Note 7—Share-Based Compensation**

 

We have granted two types of awards, stock optionsand stock appreciation rights (SARS), under our share-based compensation plans(Plans).  Stock options provide theholder the right to receive our common shares at an established price.  SARS provide the holder the right to receivean amount, payable in our common shares, equal to the excess of the marketvalue of our common shares on the date of exercise over the base price at thetime the right was granted.  The baseprice may not be less than the market price of our common shares on the date ofgrant.  The base price for nonstatutorystock options may not be less than 85% of the fair market value of our commonshares on the grant date.  The prices forboth stock options and SARS are established by our Board of Directors’Compensation Committee at the time the awards are granted.  All awards vest ratably over a four yearperiod and have a term of five to ten years. We issue new common shares upon the exercise of awards. 

 

In December 2004, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standards(SFAS) No. 123 (revised 2004), “Share-Based Payment” (123R).  This standard is a revision of SFAS 123, “Accountingfor Stock-Based Compensation” and supercedes Accounting Principles BoardOpinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.”   SFAS 123R addresses the accounting forshare-based compensation in which we receive employee services in exchange forour equity instruments.  Under thestandard, we are required to recognize compensation cost for share-based compensationissued to or purchased by employees, net of estimated forfeitures, undershare-based compensation plans using a fair value method.    In March 2005, the Securities andExchange Commission (SEC) issued Staff Accounting Bulletin No. 107 whichprovided further clarification on the implementation of SFAS 123R.   On April 14, 2005 the SEC amended thecompliance date for SFAS 123R until the first quarter of fiscal 2007. 

 

As permitted by the standard, we adopted SFAS 123Rearlier than required using the modified prospective method as of May 1,2005.  Accordingly, prior periods havenot been restated.  Under this method, weare required to record compensation expense for all awards granted after thedate of adoption and for the unvested portion of previously granted awards thatremain outstanding as of the beginning of the period of adoption.  We recognized share-based compensation costusing the Black-Scholes option pricing model. The following range of assumptions were used to compute share-basedcompensation:

 
| Risk-free  interest rate                 |   | 2.3% - 4.7%      |
|-----------------------------------------------|--------|------------------|
| Expected volatility                           |   | 40% - 42%        |
| Expected dividend yield                       |   | 0.0% - 2.9%      |
| Expected life (in years)                      |   | 5.00 - 6.25      |
| Weighted average fair value at date of  grant |   | $4.16% -  $17.86 |

 

Expected volatility is based on the historicalvolatility of the price of our common shares over the past six years.  We use historical information to estimateaward exercise and forfeitures within the valuation model.  The expected term of awards is derived fromthe output of the option valuation model and represents the period of time thatoptions granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the optionis based on the U.S. Treasury yield curve in effect at the time of grant.  Compensation cost is recognized using a straight-linemethod over the vesting or service period and is net of estimated forfeitures.

 

9

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Prior to adoption of SFAS 123R, we applied APB 25 toaccount for stock options and FIN 28, “Accounting for Stock Appreciation Rightsand Other Variable Stock Option or Award Plans,” to account for SARS.  Under APB 25 no stock-based compensationexpense related to stock options was recognized in net income as all optionsgranted had an exercise price equal to the market price of the underlyingcommon stock at the date of grant.  FIN28 required SARS to be accounted for under variable plan accounting, whichrequired a mark-to-market adjustment each quarter.  Accordingly, compensation costs were recordedrelated to SARS for the changes in the market price of our common shares.  No share-based compensation was capitalizedas part of the cost of any assets as of July 31, 2005 and January 31,2005. 

 

The following table presents all share-basedcompensation costs recognized in our statements of income (in thousands): 

 
| ** **                                                | ** ** | **Three Months Ended July 31** | ** ** | **Six Months Ended July 31** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                | ** ** |                                |       |                              |       | Fair Value/ |   |   |   |
| Method used to account for share-based  compenation  | ** ** | Fair Value                          |       | Intrinsic                         |       | Intrinsic |   | Intrinsic |   |
| Share-based compensation under SFAS 123R                  |       | $                                   | 597        |                              | $          | — |   | $ | 597 |   | $ | — |   |
| Share-based compensation under FIN 28                     |       | —                              |       | 340                               |       | (228 | ) | 340 |   |
|                                                      |       | $                                   | 597        |                              | $          | 340 |   | $ | 369 |   | $ | 340 |   |
| Tax benefit recognized                                    |       | $                                   | 177        |                              | $          | 120 |   | $ | 97 |   | $ | 120 |   |

 

We would have recognized share-based compensationexpense of $4.2 million and $4.0 million for the three month and six monthperiods ended July 31, 2005, respectively, if we had not adopted SFAS123R. 

 

The following table illustrates the pro forma effecton net income and earnings per share if we had recorded compensation expensebased on the fair value method for all share-based compensation awards (inthousands, exceptper share amount): 

 
| ** **                                                                                                                        | ** ** | **Three Months Ended July 31** | ** ** | **Six Months Ended July 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income - as reported                                                                                                     |       | $                                   | 10,750     |                              | $          | 6,502 |   | $ | 22,958 |   | $ | 14,712 |   |
| Add: SARS  amortization, net of taxes of $0, $120, $80 and $120                                                                   |       | —                              |       | 220                               |       | (148 | ) | 220 |   |
| Net income  excluding SARS amortization                                                                                           |       | 10,750                              |       | 6,722                             |       | 22,810 |   | 14,932 |   |
| Deduct:  total share-based compensation, net of taxes of $0, $117, $ 140 and $233,  determined under fair value based method |       | —                              |       | (302                              | )          | (297 | ) | (604 | ) |
| Net income -  pro forma                                                                                                           |       | $                                   | 10,750     |                              | $          | 6,420 |   | $ | 22,513 |   | $ | 14,328 |   |
|                                                                                                                              |       |                                |       |                              |       |   |   |   |   |
| Basic  earnings per share - as reported                                                                                           |       | $                                   | 0.87       |                              | $          | 0.54 |   | $ | 1.87 |   | $ | 1.21 |   |
| Basic  earnings per share - pro forma                                                                                             |       | $                                   | 0.87       |                              | $          | 0.53 |   | $ | 1.84 |   | $ | 1.18 |   |
| Diluted  earnings per share - as reported                                                                                         |       | $                                   | 0.84       |                              | $          | 0.51 |   | $ | 1.79 |   | $ | 1.16 |   |
| Diluted  earnings per share - pro forma                                                                                           |       | $                                   | 0.84       |                              | $          | 0.50 |   | $ | 1.76 |   | $ | 1.13 |   |

 

A summary of award activity under the Plans as of July 31,2005, and changes during the six months then ended, is presented below: 

 
| ** **                                              | ** ** | ** **         | ** ** | **Weighted-** | ** ** | ** **         | ** ** | **Weighted**     | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** **         | ** ** | **Average**   | ** ** | **Aggregate**      | ** ** | **Average**      | ** ** |
| ** **                                              | ** ** | ** **         | ** ** | **Exercise**  | ** ** | **Intrinsic**      | ** ** | **Contractural** | ** ** |
| ** **                                              | ** ** | **Awards**         | ** ** | **Price**     | ** ** | **Value**          | ** ** | **Life**         | ** ** |
| ** **                                              | ** ** | **(In thousands)** | ** ** | ** **    | ** ** | **(In thousands)** | ** ** | ** **       | ** ** |
|                                                    |       |               |       |          |       |               |       |             |       |
| Outstanding at February 1, 2005               |       | 1,633              |       | $             | 15.33      |               |       |             |       |   |
| Granted                                                 |       | 612                |       | 35.60         |       |               |       |             |       |
| Exercised                                               |       | (177               | )          | 14.68         |       |               |       |             |       |
| Forfeited or expired                                    |       | (19                | )          | 13.17         |       |               |       |             |       |
| Outstanding at July 31, 2005                       |       | 2,049              |       | $             | 22.07      |               | $          | 45,408           |       | 8 |   |
| Outstanding at July 31, 2005 and  expected to vest |       | 1,005              |       | $             | 27.19      |               | $          | 17,048           |       | 9 |   |
| Exercisable at July 31, 2005                       |       | 792                |       | $             | 14.17      |               | $          | 23,758           |       | 6 |   |

 

10

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The total intrinsic value of options exercisedduring the three and six month periods ended July 31, 2005 was $3.9million and $4.2 million, respectively. 

 

A summary of the status of the Plans’nonvested awards as of July 31, 2005, and changes during the six monthsthen ended, is presented below:

 
| ** **                               | ** ** | ** **           | ** ** | **Weighted Average**     | ** ** |
|------------------------------------------|------------|----------------------|------------|--------------------------|------------|
| ** **                               | ** ** | ** **           | ** ** | **Grant-Date**           | ** ** |
| ** **                               | ** ** | **Nonvested Awards** | ** ** | **Fair Value Per Award** | ** ** |
| ** **                               | ** ** | **(In thousands)**   | ** ** | ** **               | ** ** |
| Nonvested at February 1, 2005  |       | 974                  |       | $                        | 6.16       |   |
| Granted                                  |       | 612                  |       | 17.86                    |       |
| Vested                                   |       | (329                 | )          | 5.65                     |       |
| Nonvested at July 31, 2005          |       | 1,257                |       | $                        | 11.99      |   |

 

As of July 31, 2005, there was $11.3 millionof total unrecognized compensation cost related to nonvested share-basedcompensation awards granted under the Plans. That cost is expected to be recognized over a weighted average period of3.6 years.  The following tablerepresents as of July 31, 2005 the share-based compensation costs to berecognized in future periods (in thousands): 

 
| **Fiscal**         | ** ** | **Amount** | ** ** |
|--------------------|------------|------------|------------|
| Remainder of  2006 |       | $          | 1,743      |   |
| 2007               |       | 3,335      |       |
| 2008               |       | 3,069      |       |
| 2009               |       | 2,368      |       |
| 2010               |       | 831        |       |
|               |       | $          | 11,346     |   |

 

**Note 8—Commitments and Contingencies**

 

We are subject to environmental laws andregulations, which include obligations to remove or mitigate environmentaleffects of past disposal and release of certain wastes and substances atvarious sites. We record liabilities for affected sites when environmentalassessments indicate probable cleanup will be required and the costs can bereasonably estimated. Our liabilities for environmental costs, other than forcosts of assessments themselves, are generally determined after the completionof 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 ofundiscounted future costs using currently available technology, applying currentregulations, as well as our own historical experience regarding environmentalcleanup costs. The reliability and precision of the loss estimates are affectedby numerous factors, such as different stages of site evaluation andreevaluation of the degree of remediation required. We adjust our liabilitiesas new remediation requirements are defined, as information becomes availablepermitting reasonable estimates to be made and to reflect new and changingfacts.

 

It is reasonably possible that changes in estimateswill occur in the near term and the related adjustments to environmentalliabilities may have a material impact on our net income and operating cashflows. Unasserted claims are not currently reflected in our environmentalliabilities. It is also reasonably possible that these changes or claims mayalso have a material impact on our net income and operating cash flows ifasserted. We cannot estimate at this time the amount of any additional loss orrange of loss that is reasonably possible.

 

Our specific environmental matters consist ofthe following:

 

**Fairview, Oregon**

 

In 1996, the Oregon Department ofEnvironmental Quality issued two Records of Decision impacting our Fairview,Oregon manufacturing facility. The Records of Decision required us to initiateremedial activities related to the cleanup of 

 

11

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groundwater contamination at and near the facility. Remediationactivities have been conducted at or near the facility since 1996 and currentestimates provide for some level of activity to continue through 2027. Costs ofcertain remediation activities at the facility are shared with The BoeingCompany, with Cascade paying 70% of these costs. We have a liability for theongoing remediation activities at our Fairview facility of $7.2 millionand $7.5 million at July 31, 2005 and January 31, 2005,respectively.

 

**Springfield, Ohio**

 

In 1994, we entered into a consent order withthe Ohio Environmental Protection Agency, which required the installation of remediationsystems for the cleanup of groundwater contamination at our Springfield, Ohiofacility. The current estimate is that the remediation activities will continuethrough 2010. We have a liability for ongoing remediation activities at ourSpringfield facility of $1.0 and $1.1 million at July 31, 2005 and January 31,2005, respectively.

 

**Insurance Litigation**

 

In 2002, the Circuit Court of the State ofOregon for Multnomah County entered judgment in our favor in an actionoriginally brought in 1992 against several insurers to recover various expensesincurred in connection with environmental litigation and relatedproceedings.  The judgment was againsttwo non-settling insurers.  Wesubsequently reached a settlement of all claims with one of the insurers inreturn for a payment of $1.3 million, which we received October 22,2004.   The judgment against theremaining insurer is in the amount of approximately $800,000.  The judgment also requires the insurer todefend us in suits alleging liability because of groundwater contaminationemanating from our Fairview, Oregon plant and to pay approximately 3.1% of anyliability imposed against us by judgment or settlement on or after March 1,1997 on account of such contamination. We appealed the judgment, contending that the remaining insurer shouldbe required to pay a larger share of our past and future expenses andliabilities, additional interest and increased attorneys fees.  The insurer has cross-appealed.   We have not recorded any amounts we mayrecover from the remaining insurer in our consolidated financial statements.

 

**Lease Guarantee**

 

We sold our hydraulic cylinder division toPrecision Hydraulic Cylinders, Inc. (Precision) on January 15, 2002.Under the terms of the sale, we assigned to Precision an operating leaserelated to a manufacturing facility in Beulaville, North Carolina. We are aguarantor on the lease in the event Precision fails to comply with the leaseterms. The lease requires payments by Precision of approximately $21,000 permonth through November 2007.   Thetotal value of the lease guarantee using undiscounted cash flows wasapproximately $588,000 at July 31, 2005.

 

**Note 9—Earnings Per Share**

 

The following table presents the calculationof basic and diluted earnings per share (in thousands, except per shareamounts):

 
| ** **                                                      | ** ** | **Three Months Ended July 31** | ** ** | **Six Months Ended July 31** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                      | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Basic earnings per share:                                       |       |                                |       |                              |       |   |   |   |   |
| Net income                                                      |       | $                                   | 10,750     |                              | $          | 6,502 |   | $ | 22,958 |   | $ | 14,712 |   |
| Weighted  average shares of common stock outstanding            |       | 12,302                              |       | 12,146                            |       | 12,266 |   | 12,125 |   |
|                                                            |       | $                                   | 0.87       |                              | $          | 0.54 |   | $ | 1.87 |   | $ | 1.21 |   |
|                                                            |       |                                |       |                              |       |   |   |   |   |
| Diluted earnings per share:                                     |       |                                |       |                              |       |   |   |   |   |
| Net income                                                      |       | $                                   | 10,750     |                              | $          | 6,502 |   | $ | 22,958 |   | $ | 14,712 |   |
| Weighted  average shares of common stock outstanding            |       | 12,302                              |       | 12,146                            |       | 12,266 |   | 12,125 |   |
| Dilutive  effect of stock options and stock appreciation rights |       | 554                                 |       | 595                               |       | 542 |   | 523 |   |
| Diluted  weighted average shares of common stock outstanding    |       | 12,856                              |       | 12,741                            |       | 12,808 |   | 12,648 |   |
|                                                            |       | $                                   | 0.84       |                              | $          | 0.51 |   | $ | 1.79 |   | $ | 1.16 |   |

 

12

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Earnings per share is based on the weightedaverage number of common shares and potentially dilutive shares outstandingduring the period, computed using the treasury stock method. Diluted weightedaverage common shares includes the incremental shares that would be issued uponthe assumed exercise of stock options and stock appreciation rights.

 

**Note 10—Supplemental Cash FlowInformation**

 

The followingtable supplements the consolidated statements of cash flow (in thousands):

 
| ** **                                            | ** ** | **For the Six Months Ended July 31** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Cash paid during the period for:                      |       |                                      |       |   |   |
| Interest                                              |       | $                                         | 1,439      |   | $ | 1,831 |   |
| Income taxes                                          |       | $                                         | 12,088     |   | $ | 5,991 |   |
|                                                  |       |                                      |       |   |   |
| Supplemental disclosure of noncash  information:      |       |                                      |       |   |   |
| Deferred  compensation from stock appreciation rights |       | $                                         | (4,734     | ) | $ | 3,678 |   |
| Unrealized  gain on investment, net of tax            |       | $                                         | —     |   | $ | 620 |   |

 

**Note 11—Benefit Plans**

 

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

 
| ** **                      | ** ** | **Defined Benefit**                 | ** ** | **Postretirement Benefit**          | ** ** |
|---------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                      | ** ** | **Three Months Ended July 31** | ** ** | **Three Months Ended July 31** | ** ** |
| ** **                      | ** ** | **2005**                            | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net periodic benefit cost:      |       |                                |       |                                |       |   |   |   |   |
| Service cost                    |       | $                                   | 49         |                                | $          | 55 |   | $ | 32 |   | $ | 37 |   |
| Interest  cost                  |       | 114                                 |       | 110                                 |       | 108 |   | 137 |   |
| Expected  return on plan assets |       | (110                                | )          | (101                                | )          | — |   | — |   |
| Recognized  net actuarial loss  |       | 31                                  |       | 29                                  |       | 86 |   | 145 |   |
|                            |       | $                                   | 84         |                                | $          | 93 |   | $ | 226 |   | $ | 319 |   |

 
| ** **                      | ** ** | **Defined Benefit**               | ** ** | **Postretirement Benefit**        | ** ** |
|---------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **Six Months Ended July 31** | ** ** | **Six Months Ended July 31** | ** ** |
| ** **                      | ** ** | **2005**                          | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|                            |       |                              |       |                              |       |   |   |   |   |
| Net periodic benefit cost:      |       |                              |       |                              |       |   |   |   |   |
| Service cost                    |       | $                                 | 97         |                              | $          | 208 |   | $ | 64 |   | $ | 74 |   |
| Interest  cost                  |       | 228                               |       | 219                               |       | 217 |   | 274 |   |
| Expected  return on plan assets |       | (219                              | )          | (201                              | )          | — |   | — |   |
| Recognized  net actuarial loss  |       | 61                                |       | 57                                |       | 173 |   | 290 |   |
|                            |       | $                                 | 167        |                              | $          | 283 |   | $ | 454 |   | $ | 638 |   |

 

**Note 12—Recent Accounting Pronouncements**

 

In December 2004, the Financial AccountingStandards Board (FASB) issued FASB Staff Position No. 109-2 (FSP 109-2), “Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004” (the Act).  The Act introduced a special one-timedividends received deduction on the repatriation of certain foreign earnings toa U.S. taxpayer (Repatriation Provision), provided certain criteria aremet.  FSP 109-2 provides accounting anddisclosure guidance for the Repatriation Provision.  We have completed a preliminary assessment ofthe effects of repatriating a portion of our undistributed earnings of foreignsubsidiaries.  At the present time, wehave no plans to repatriate any undistributed earnings under the Act throughthe remainder of fiscal 2006.

 

13

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In November 2004, the FASB issued SFAS No. 151(SFAS 151), “Inventory Costs, an amendment of ARB No. 43,Chapter 4.”  This statement amendsthe guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that “....undersome circumstances, items such as idle facility expense, excessive spoilage,double freight, and re-handling costs may be so abnormal as to requiretreatment as current period charges...” SFAS 151 requires that those items berecognized as current-period charges regardless of whether they meet thecriterion of “so abnormal.”  In addition,this statement requires that allocation of fixed production overhead to thecosts of conversion be based on the normal capacity of the productionfacilities.  The provisions of SFAS 151are to be applied prospectively and are effective for inventory costs incurredduring the fiscal years beginning after June 15, 2005, with earlierapplication permitted for inventory costs incurred during the fiscal yearsbeginning after the date the statement was issued.  The adoption of SFAS 151 is not expected tohave a material impact on our financial position and results of operations.  We expect to adopt SFAS 151 on February 1,2006.

 

In December 2004, the FASB issued SFAS No. 153(SFAS 153), “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.”  The guidance in APB Opinion No. 29 (APB29), “ Accounting for Nonmonetary Transactions”, is based on the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofassets exchanged.  The guidance in thatopinion, however, included certain exceptions to that principle.   SFAS 153 amends APB 29 to eliminate theexception for nonmonetary exchanges of similar productive assets that do nothave commercial substance.  A nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange.  SFAS 153 is effective for nonmonetaryexchanges occurring in fiscal periods beginning after June 15, 2005.  The adoption of SFAS 153 is not expected tohave a material impact on our financial position and results of operations.

 

In June 2005, the FASB issued SFAS No. 154(SFAS 154), “Accounting Changes and Error Corrections.”  SFAS 154 changes the requirements for theaccounting for and reporting of a change in accounting principle.  This statement requires retrospectiveapplications to prior periods’ financial statements of a voluntary change inaccounting principle unless it is impracticable.  In addition, this statement requires that achange in depreciation, amortization, or depletion for long-lived,non-financial assets be accounted for as a change in accounting estimateeffected by a change in accounting principle. This new accounting standard is effective February 1, 2006.  The adoption of SFAS 154 is not expected tohave a material impact on our financial statements.

 

**Note 13—Warranty Obligations**

 

We record a liability on our consolidatedbalance sheet for costs related to certain warranties with the sales of ourproducts. This liability is estimated through historical customer claims,product failure rates, material usage and service delivery costs incurred incorrecting a product failure. Our warranty obligations were as follows (inthousands):

 
| ** **                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Balance at January 31                        |       | $        | 1,911      |     | $          | 1,610 |   |
| Accruals for warranties issued during the  period |       | 1,065    |       | 818      |       |
| Accruals for pre-existing warranties              |       | 52       |       | —   |       |
| Settlements during the period                     |       | (1,063   | )          | (715     | )          |
| Balance at July 31                           |       | $        | 1,965      |     | $          | 1,713 |   |

 

**Note 14—Accumulated Other ComprehensiveIncome (Loss)**

 
| ** **                       | ** ** | **Accumulated Other Comprehensive  Income (Loss)** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|
| ** **                       | ** ** | **Translation Adjustment**                         | ** ** | **Minimum Pension Liability  Adjustment** | ** ** | **Total** | ** ** |
| Balance at January 31, 2005 |       | $                                                  | 10,075     |   | $ | (2,309 | ) | $ | 7,766 |   |
| Translation adjustment           |       | (4,593                                             | )          | — |   | (4,593 | ) |
| Balance at July 31, 2005    |       | $                                                  | 5,482      |   | $ | (2,309 | ) | $ | 3,173 |   |

 

14

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

 

All references to fiscal periods are definedas periods ending in the year ended January 31, 2005 (fiscal 2005) and theyear ending January 31, 2006 (fiscal 2006).

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Our discussion and analysis of financialcondition and results of operations is based on our consolidated financialstatements which have been prepared in accordance with generally acceptedaccounting principles in the United States of America (GAAP). The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses andthe disclosure of contingent assets and liabilities. We evaluate our estimatesand judgments on an on-going basis, including those related to uncollectiblereceivables, inventories, goodwill and long-lived assets, warranty obligations,environmental liabilities, share-based compensation and deferred taxes. We baseour estimates on historical experience and various other assumptions that webelieve to be reasonable under the circumstances. Actual results may differfrom these estimates under different assumptions or conditions. A descriptionof our critical accounting policies and related judgments and estimates thataffect the preparation of our consolidated financial statements is set forth onForm 10-K in our Annual Report for the year ended January 31, 2005.

 

**COMPARISONOF SECOND QUARTER OF FISCAL 2006 AND FISCAL 2005**

 

**Consolidated Summary**

 

Net income for the second quarter of fiscal2006 increased to $10.8 million ($0.84 per diluted share) from $6.5 million($0.51 per diluted share) for the second quarter of fiscal 2005. Net sales forthe second quarter of fiscal 2006 were $115.0 million or 24% greater thanthe second quarter of fiscal 2005. Excluding the effect of foreign currencyfluctuations, net sales in North America, Europe and Asia Pacific grew 25%, 18%and 25%, respectively, in the second quarter of fiscal 2006 as compared to thesame quarter of the prior year.  Ourincreased sales levels reflect higher volumes of business in all geographicregions.

 

The gross margin percentage in the secondquarter of fiscal 2006 was consistent with the prior year, even with highersales levels, due to two primary factors. The first factor is the current year sales include a higher percentageof lower margin OEM products.  This isdue to the expansion of production capacity in North America and Asia Pacificand due to the acquisition of certain fork production assets in Germany.  These expansion activities have occurredwithin the last year but the full effects are being realized in the most recentquarters.  The second factor is highermaterial costs.

 

Selling and administrative costs increased by5% in the second quarter of fiscal 2006 over the comparable quarter of theprior year. Excluding foreign currency changes, costs increased 3% over thesecond quarter of the prior year. The increase is primarily due to share-basedcompensation costs related to the adoption of SFAS 123R.  Selling and administrative costs as apercentage of net sales were 16% and 20% for second quarter of fiscal 2006 and2005, respectively.

 

Effective inthe second quarter of the current year we elected to early adopt the newaccounting standard for share-based compensation, Statement of FinancialAccount Standards No. 123R.  We appliedthe standard using a modified prospective method with no restatement of priorperiods.  Prior to the adoption of 123Rwe only recognized compensation expense related to stock appreciation rights(SARs).  This expense was calculatedquarterly, based on our share price at quarter-end, resulting in substantialexpense volatility.  Under 123R we willbe accounting for share-based compensation expense for SARs and options on afair value method.  This will eliminatemarket related expense volatility and provide a more transparent view of ourtotal share-based compensation expense. Total share-based compensation expense under SFAS 123R was $597,000compared to $340,000 in the second quarter of fiscal 2005.  We would have recognized share-basedcompensation expense of $4.2 million for the three months ended July 31, 2005if we had not adopted SFAS 123R. 

 

**North America**

 
| ** **                 | ** ** | **Three Months Ended July 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|-------------------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **2005**                            | ** ** | **%**      | ** ** | **2004**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| ** **                 | ** ** | **(In thousands)**                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                  |       | $                                   | 61,793     |       | 100        | %          | $          | 49,028 |   | 100 | % | $ | 12,765 |   | 26 | % |
| Cost of goods sold         |       | 37,730                              |       | 61         | %          | 30,092     |       | 61 | % | 7,638 |   | 25 | % |
| Gross profit               |       | 24,063                              |       | 39         | %          | 18,936     |       | 39 | % | 5,127 |   | 27 | % |
|                       |       |                                |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative |       | 10,896                              |       | 18         | %          | 10,499     |       | 21 | % | 397 |   | 4 | % |
| Amortization               |       | 37                                  |       | —     |       | 35         |       | — |   | 2 |   | 6 | % |
| Operating income           |       | $                                   | 13,130     |       | 21         | %          | $          | 8,402 |   | 17 | % | $ | 4,728 |   | 56 | % |

 

North America net sales were up $12.8 millionor 26% in the second quarter of fiscal 2006 over the same quarter of fiscal2005.  Currency changes accounted for 1%of the increase in sales.  Higher volumesof shipments from North American plants accounted for virtually all of theincrease.  Shipments benefited from astrong lift truck market in the second quarter of fiscal 2006 in comparisonwith the prior year.  As in the firstquarter of fiscal 2006, the relation between the U.S. dollar and the

 

15

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Euro in the second quarter of fiscal 2006 continued to be unfavorablefor European imports into the U.S. market when compared to the same quarter offiscal 2005.

 

Historically, we have found that changes inthe level of our net sales do not correspond directly to the percentage changesin lift truck industry shipments, but industry statistics do provide anindication of the direction of business activity.  North American lift truck industry shipmentsin the second quarter of fiscal 2006 were 17% higher than the second quarter offiscal 2005.

 

Gross margin percentages for the secondquarter of fiscal 2006 in North America were consistent with the prioryear.  Our added absorption due to highervolumes and sales price increases essentially offset the impact of increases inthe cost of steel.

 

Selling and administrative costs for thesecond quarter of fiscal 2006 increased 4% over the same quarter of the prioryear.  The primary reason for theincrease is an additional $195,000 of share-based compensation costs related tothe adoption of SFAS 123R.

 

**Europe**

 
| ** **                 | ** ** | **Three Months Ended July 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|-------------------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **2005**                            | ** ** | **%**      | ** ** | **2004**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| ** **                 | ** ** | **(In thousands)**                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                  |       | $                                   | 35,297     |       | 100        | %          | $          | 29,485 |   | 100 | % | $ | 5,812 |   | 20 | % |
| Cost of goods sold         |       | 28,606                              |       | 81         | %          | 23,656     |       | 80 | % | 4,950 |   | 21 | % |
| Gross profit               |       | 6,691                               |       | 19         | %          | 5,829      |       | 20 | % | 862 |   | 15 | % |
|                       |       |                                |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative |       | 5,384                               |       | 15         | %          | 5,509      |       | 19 | % | (125 | ) | (2 | )% |
| Amortization               |       | 723                                 |       | 2          | %          | 126        |       | — |   | 597 |   | — |   |
| Operating income           |       | $                                   | 584        |       | 2          | %          | $          | 194 |   | 1 | % | $ | 390 |   | — |   |

 

Net sales in Europe for the second quarter offiscal 2006 increased $5.8 million or 20% over the same quarter of fiscal2005.  The increase was primarily theresult of increased shipments of OEM products due to a strong European lifttruck market in fiscal 2006.  In thesecond half of fiscal 2005 we acquired the assets of a major Europeancompetitor in Germany.  Our currentquarter sales also reflect the additional sales volume as a result of thisacquisition.   Changes in currencies madeup 2% of the overall sales increase in Europe.

 

The gross margin percentage in Europedeclined from 20% for the second quarter of fiscal 2005 to 19% for the secondquarter of fiscal 2006. The primary factors in this decrease were the announcedclosure of one of our manufacturing facilities in The Netherlands, increasedshipments of certain lower margin OEM products relative to total shipments andincreases in steel costs that were not sufficiently offset by customer priceincreases.

 

During the second quarter of fiscal 2006, weannounced the planned closure of our manufacturing facility in Hoorn, TheNetherlands.   Production operations inHoorn will be integrated into other manufacturing facilities in Almere, TheNetherlands and Verona, Italy.  Webelieve the plant closure will allow us to eliminate excess capacity forattachment products and reduce overall production costs.  We estimate the total direct costs for theplant closure, to be approximately $1.8 million, which includes $1.0 million ofemployee termination costs and $800,000 of costs to move production equipment.During the second quarter we accrued $275,000 of costs which are recorded incost of goods sold and as a liability on the July 31, 2005 consolidatedbalance sheet.  We expect the majority ofthe remaining costs to be recognized in the remaining two quarters of fiscal2006 as the closure is completed. 

 

Selling and administrative costs in Europedecreased 2% for the second quarter of fiscal 2005 as compared to the secondquarter of fiscal 2004 due to lower warranty, marketing and other miscellaneouscosts.

 

Amortization costs in the second quarter offiscal 2006 increased due to additional amortization of intangible assetsrelated to our fiscal 2004 acquisition in Italy.

 

16

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**Asia Pacific**

 
| ** **                 | ** ** | **Three Months Ended July 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|-------------------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **2005**                            | ** ** | **%**      | ** ** | **2004**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| ** **                 | ** ** | **(In thousands)**                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                  |       | $                                   | 17,876     |       | 100        | %          | $          | 13,863 |   | 100 | % | $ | 4,013 |   | 29 | % |
| Cost of goods sold         |       | 12,060                              |       | 67         | %          | 9,277      |       | 67 | % | 2,783 |   | 30 | % |
| Gross profit               |       | 5,816                               |       | 33         | %          | 4,586      |       | 33 | % | 1,230 |   | 27 | % |
|                       |       |                                |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative |       | 2,648                               |       | 15         | %          | 2,058      |       | 15 | % | 590 |   | 29 | % |
| Amortization               |       | 7                                   |       | —     |       | 6          |       | — |   | 1 |   | 17 | % |
| Operating income           |       | $                                   | 3,161      |       | 18         | %          | $          | 2,522 |   | 18 | % | $ | 639 |   | 25 | % |

 

Asia Pacific net sales increased$4.0 million or 29% in the second quarter of fiscal 2006 over fiscal2005.  Excluding the effect of foreigncurrencies, net sales increased 25%. Virtually all of the Asia Pacific marketsexperienced strong sales results during the second quarter, with China postingthe strongest growth.

 

Gross margin percentages in the Asia Pacificregion remained constant at 33% in the second quarter of fiscal 2006 whencompared to the same quarter of the prior year. This reflects the fact that a significant portion of the sales increasefor the second quarter related to lower margin OEM products, which reduced theoverall margins.  Increases in materialcosts also mitigated the effects of better absorption of costs from highersales volumes.

 

Selling and administrative costs in the AsiaPacific region increased 29% for the second quarter of fiscal 2006 as comparedto fiscal 2005.  Foreign currencyfluctuations accounted for 4% of the change. The remainder of the increase wasdue primarily to continued expansion of our marketing and engineering effortsin China.

 

**Non-Operating Items**

 

 Interest expense was lower in the secondquarter of fiscal 2006 as compared to the same quarter of fiscal 2005 due tothe reduction in long-term debt for scheduled debt payments in the fourthquarter of fiscal 2005.  See “FinancialCondition and Liquidity” for additional discussion of debt levels and payments.

 

 Theeffective tax rate decreased from 36% in the second quarter of fiscal 2005 to34% in the current quarter. This was primarily due to higher levels of incomein certain foreign jurisdictions, which have lower statutory tax rates.

 

**COMPARISONOF THE FIRST SIX MONTHS OF FISCAL 2006 AND FISCAL 2005**

 

**Consolidated Summary**

 

Net income for the first six months of fiscal2006 increased to $23.0 million ($1.79 per diluted share) from $14.7 million($1.16 per diluted share) for the first six months of fiscal 2005. Net salesfor the first six months of fiscal 2006 were $229.5 million or 23% greaterthan the first six months of fiscal 2005. Excluding the effect of foreigncurrency fluctuations, net sales in North America, Europe and Asia Pacific grew23%, 23% and 12%, respectively, in the first six months of fiscal 2006 ascompared to the same period of the prior year. Our increased sales levels reflect higher volumes of business in allgeographic regions.

 

The gross margin percentage in the first sixmonths of fiscal 2006 was down slightly from the prior year.    This is due primarily to a higherpercentage of sales of lower margin OEM products effects.  Higher material costs have also contributedto the lower margins.    While we havebeen able to offset a portion of the increased material costs through priceincreases and cost controls, the full effect of these increases has reduced ouroverall margins in comparison with the prior year.

 

Selling and administrative costs increased by3% in the first six months of fiscal 2006 over the comparable period of theprior year. Excluding foreign currency changes, costs increased 1% over thesecond quarter of the prior year.  Sellingand administrative costs as a percentage of net sales were 16% and 19% for thefirst six months of fiscal 2006 and 2005, respectively.

 

Effective inthe second quarter of the current year we elected to early adopt the newaccounting standard for share-based compensation, Statement of FinancialAccount Standards No. 123R.  We appliedthe standard using a modified prospective method with no restatement of priorperiods.  Prior to the adoption of 123Rwe only recognized compensation expense related to stock appreciation rights(SARs).  This expense was calculatedquarterly, based on our share price at quarter-end, resulting in substantialexpense volatility.  Under 123R we willbe accounting for share-based compensation expense for SARs and options on a fairvalue method.  This will eliminate marketrelated expense volatility and provide a more transparent view of our totalshare-based compensation expense.  Totalshare-based compensation expense recorded in the six months ended July 31, 2005was $369,000 compared to $340,000 for the comparable prior year period.  We would have recognition share-basedcompensation expense of $4.0 million for the six months ended July 31, 2005 ifwe had not adopted SFAS 123R. 

 

17

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**North America**

 
| ** **                 | ** ** | **Six Months Ended July 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|-----------------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **2005**                          | ** ** | **%**      | ** ** | **2004**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| ** **                 | ** ** | **(In thousands)**                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                  |       | $                                 | 123,410    |       | 100        | %          | $          | 99,622 |   | 100 | % | $ | 23,788 |   | 24 | % |
| Cost of goods sold         |       | 75,354                            |       | 61         | %          | 60,730     |       | 61 | % | 14,624 |   | 24 | % |
| Gross profit               |       | 48,056                            |       | 39         | %          | 38,892     |       | 39 | % | 9,164 |   | 24 | % |
|                       |       |                              |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative |       | 21,323                            |       | 17         | %          | 20,751     |       | 21 | % | 572 |   | 3 | % |
| Amortization               |       | 76                                |       | —     |       | 70         |       | — |   | 6 |   | 9 | % |
| Operating income           |       | $                                 | 26,657     |       | 22         | %          | $          | 18,071 |   | 18 | % | $ | 8,586 |   | 48 | % |

 

North America net sales were up$23.8 million or 24% in the first six months of fiscal 2006 over the sameperiod of fiscal 2005 primarily due to higher volumes of shipments. Priceincreases contributed to a lesser extent to the increase.  Changes in currencies made up 1% of theoverall sales increase.

 

Historically, we have found that changes inthe level of our net sales do not correspond directly to the percentage changesin lift truck industry shipments, but industry statistics do provide anindication of the direction of business activity.  North American lift truck industry shipmentsfor the first six months of fiscal 2006 as compared to the first six months offiscal 2005 increased 19%.

 

Gross margins for the first six months offiscal 2006 in North America were consistent with the prior year.  We benefited from the contribution ofadditional unit volume through the plants, absorbing more fixed costs than inthe first six months of the prior year. However, increases in material costs offset this additional absorptionand any sales price increases, resulting in a gross profit percentageconsistent with the first six months of fiscal 2005.

 

Selling and administrative costs for thefirst six months of fiscal 2006 increased 3% over the same period of the prioryear.  The increase is due tomiscellaneous cost increases.

 

18

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**Europe**

 
| ** **                 | ** ** | **Six Months Ended July 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|-----------------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **2005**                          | ** ** | **%**      | ** ** | **2004**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| ** **                 | ** ** | **(In thousands)**                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                  |       | $                                 | 72,001     |       | 100        | %          | $          | 56,904 |   | 100 | % | $ | 15,097 |   | 27 | % |
| Cost of goods sold         |       | 57,016                            |       | 79         | %          | 44,888     |       | 79 | % | 12,128 |   | 27 | % |
| Gross profit               |       | 14,985                            |       | 21         | %          | 12,016     |       | 21 | % | 2,969 |   | 25 | % |
|                       |       |                              |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative |       | 10,879                            |       | 15         | %          | 10,848     |       | 19 | % | 31 |   | — |   |
| Amortization               |       | 854                               |       | 1          | %          | 223        |       | — |   | 631 |   | — |   |
| Operating income           |       | $                                 | 3,252      |       | 5          | %          | $          | 945 |   | 2 | % | $ | 2,307 |   | — |   |

 

Net sales in Europe for the first six monthsof fiscal 2006 increased $15.1 million or 27% over the same period of fiscal2005.  The changes in foreign currencyrates, primarily the Euro and the British Pound, accounted for 3% of theincrease.  The remaining increase was theresult of increased shipments out of our European plants.  Our sales in Europe for the first six monthshave benefited from both strong demand in the lift truck market and additionalproduction capacity after our purchase of the assets of a major Germancompetitor in late fiscal 2005.

 

During the second quarter of fiscal 2006 weannounced the planned closure of our manufacturing facility in Hoorn, TheNetherlands.   Production operations inHoorn will be integrated into other manufacturing facilities in Almere, TheNetherlands and Verona, Italy.  Webelieve the plant closure will allow us to eliminate excess capacity forattachment products and reduce overall production costs.   Weestimate the total direct costs for the plant closure, to be approximately $1.8million, which includes $1.0 million of employee termination costs and $800,000of costs to move production equipment. During the second quarter we accrued$275,000 of costs which are recorded in cost of goods sold and as a liabilityon the July 31, 2005 consolidated balance sheet.  We expect the majority of the remaining coststo be recognized in the remaining two quarters of fiscal 2006. 

 

Gross margins in Europe for the first sixmonths of fiscal 2006 have remained consistent with the prior year.   Margins were favorably impacted by improvedabsorption due to higher sales volumes and negatively impacted by increasedshipments of lower margin OEM products and increased steel costs that were notcompletely offset by price increases.

 

Selling and administrative costs in Europefor the first six months of fiscal 2006 were comparable to the first six monthsof fiscal 2005.  Excluding the effects ofchanging currencies, selling and administrative costs decreased 3%.

 

Amortization costs in the first six months offiscal 2006 increased due to additional amortization of intangible assetsrelated to our fiscal 2004 acquisition in Italy.

 

**Asia Pacific**

 
| ** **                 | ** ** | **Six Months Ended July 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|-----------------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **2005**                          | ** ** | **%**      | ** ** | **2004**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| ** **                 | ** ** | **(In thousands)**                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                  |       | $                                 | 34,070     |       | 100        | %          | $          | 29,379 |   | 100 | % | $ | 4,691 |   | 16 | % |
| Cost of goods sold         |       | 23,052                            |       | 68         | %          | 19,560     |       | 67 | % | 3,492 |   | 18 | % |
| Gross profit               |       | 11,018                            |       | 32         | %          | 9,819      |       | 33 | % | 1,199 |   | 12 | % |
|                       |       |                              |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative |       | 4,844                             |       | 14         | %          | 4,385      |       | 15 | % | 459 |   | 10 | % |
| Amortization               |       | 14                                |       | —     |       | 14         |       | — |   | — |   | — |   |
| Operating income           |       | $                                 | 6,160      |       | 18         | %          | $          | 5,420 |   | 18 | % | $ | 740 |   | 14 | % |

 

Asia Pacific net sales increased$4.7 million or 16% in the first six months of fiscal 2006 over fiscal2005.  Excluding the effect of foreigncurrencies, net sales increased 12%.  Theincrease was due to the general strength of the economies in all markets.  In particular, net sales in China haveincreased with both a strong economy and additional production capacity for OEMproducts.

 

19

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Gross margin percentages in the Asia Pacificregion decreased slightly to 32% for the first six months of fiscal 2006 ascompared to 33% in the same period of the prior year.  The lower percentage is due primarily to ahigher percentage of sales of lower margin OEM products and higher steel costs.

 

Selling and administrative costs in the AsiaPacific region increased $459,000 or 10% for the first six months of fiscal2006 as compared to fiscal 2005. Foreign currency fluctuations accounted for 3%of the increase.  The remainder of theincrease was due to continued expansion of operations in China.

 

**Non-Operating Items**

 

 Interest expense decreased during the firstsix months of fiscal 2006 as compared to the same period of fiscal 2006 due toscheduled debt payments in the fourth quarter of fiscal 2005.  See “Financial Condition and Liquidity” foradditional discussion of debt levels and payments.

 

 Theeffective tax rate decreased 1% in the first six months of fiscal 2006 ascompared to the comparable prior year period.  This was primarily due to higher levels of income in certain foreignjurisdictions with lower statutory tax rates, primarily China. 

 

**CASHFLOWS**

 

The statements of cash flows reflect thechanges in cash and cash equivalents for the six months ended July 31,2005 and July 31, 2004 by classifying transactions into three majorcategories of activities: operating, investing and financing.

 

**Operating**

 

Our main source of liquidity is cashgenerated from operating activities. This consists of net income adjusted fornoncash operating items such as depreciation and amortization, losses and gainson disposition of assets, share-based compensation, deferred income taxes, andchanges in operating assets and liabilities.

 

Net cash provided by operating activitiesfrom continuing operations was $18.5 million in first six months of fiscal2006 compared to $17.9 million for the same period in fiscal 2005. Theincrease in fiscal 2006 was due to higher levels of net income, depreciationand amortization as well as increases in accounts receivables andinventories.  These increases werepartially offset by changes in other operating accounts, primarily accounts payableand accrued expenses.

 

**Investing**

 

The principal recurring investing activitiesare capital expenditures. These expenditures are primarily for equipment andtooling related to product improvements, more efficient production methods,expansion of production capacity and replacement for normal wear and tear.Capital expenditures were $5.3 million and $6.6 million in the firstsix months of fiscal 2006 and 2005, respectively. We expect capitalexpenditures in the rest of fiscal 2006 to approximate depreciation expense,excluding expenditures related to our expansion plans in China.  We plan to invest up to $18 million relatedto the expansion of our Chinese operations in the next eighteen months.Depreciation expense for the first six months in fiscal 2006 and fiscal 2005was $7.4 million and $6.8 million, respectively. 

 

Marketable securities consist of auction ratesecurities issued by various state agencies throughout the United States andvariable rate demand notes.  We classify these securities as available-for-salesecurities.  These securities are either insured through third partyagencies, reinsured through the U.S. federal government, or secured by a letterof credit from a bank.  The specific identification method is used todetermine the cost of securities sold.  There were no realized orunrealized gains or losses related to our marketable securities during thefirst six months of fiscal 2006 and fiscal 2005.  These securities arelong-term instruments maturing through 2035; however, the interest rates andmaturities are reset approximately every month, at which time we can sell thesecurities.  Accordingly, we have classified these securities as currentassets in our consolidated balance sheets.

 

**Financing**

 

The issuance of common stock related to theexercise of stock options and stock appreciation rights generated$1.8 million and $1.1 million of cash for the first six months in fiscal2006 and 2005, respectively.

 

We declared dividends totaling $0.24 and$0.22 per share during the first six months of fiscal 2006 and 2005,respectively.

 

20

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**FINANCIALCONDITION AND LIQUIDITY**

 

Our working capital at July 31, 2005 was$117.3 million as compared to $94.2 million at January 31, 2005.Our current ratio at July 31, 2005 was 3.0 to 1 as compared to 2.5 to 1 atJanuary 31, 2005.

 

Total outstanding debt, including notespayable to banks and capital leases, at July 31, 2005 was$40.2 million in comparison with $40.6 million at January 31,2005. Our debt to equity ratio improved to 0.17 to 1 at July 31, 2005 from0.19 to 1 at January 31, 2005. Our debt agreements contain covenantsrelating to net worth and leverage ratios. We were in compliance with thesecovenants at July 31, 2005. Borrowing arrangements currently in place with commercial banks providelines of credit totaling $25 million, of which $2.3 million was used toissue letters of credit. The average interest rate on notes payable to bankswas 2.1% at July 31, 2005 and 3.7% at January 31, 2005.

 

We believe that our cash and cashequivalents, existing credit facilities and cash flows from operations will besufficient to satisfy our expected working capital, capital expenditure,acquisition and debt retirement requirements for the next twelve months.

 

**OTHERMATTERS**

 

The U.S. dollar strengthened in the secondquarter of fiscal 2006 in comparison to most foreign currencies used by oursignificant foreign operations. As a result, foreign currency translationadjustments decreased shareholders’ equity by $3.8 million in the secondquarter of fiscal 2006. The primary currencies driving the decrease inshareholders’ equity were the Euro and the British Pound. During the first sixmonths of fiscal 2005, the U.S. dollar strengthened against most currencies,decreasing shareholders’ equity by $4.6 million from January 31, 2005to July 31, 2005.

 

**OFFBALANCE SHEET ARRANGEMENTS**

 

At July 31, 2005, we did not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities,which would have been established for the purpose of facilitating off-balancesheet arrangements or for other contractually narrow or limited purposes. Assuch, we are not materially exposed to any financing, liquidity market orcredit risk that could arise if we had engaged in such relationships.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

In December 2004, the Financial AccountingStandards Board (FASB) issued FASB Staff Position No. 109-2 (FSP 109-2), “Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004” (the Act).  The Act introduced a special one-timedividends received deduction on the repatriation of certain foreign earnings toa U.S. taxpayer (Repatriation Provision), provided certain criteria aremet.  FSP 109-2 provides accounting anddisclosure guidance for the Repatriation Provision.  We have completed a preliminary assessment ofthe effects of repatriating a portion of our undistributed earnings of foreignsubsidiaries.  At the present time, wehave no plans to repatriate any undistributed earnings under the Act throughthe remainder of fiscal 2006.

 

In November 2004, the FASB issued SFAS No. 151(SFAS 151), “Inventory Costs, an amendment of ARB No. 43,Chapter 4.”  This statement amendsthe guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that “....undersome circumstances, items such as idle facility expense, excessive spoilage,double freight, and re-handling costs may be so abnormal as to requiretreatment as current period charges...” SFAS 151 requires that those items berecognized as current-period charges regardless of whether they meet thecriterion of “so abnormal.”  In addition,this statement requires that allocation of fixed production overhead to thecosts of conversion be based on the normal capacity of the productionfacilities.  The provisions of SFAS 151are to be applied prospectively and are effective for inventory costs incurredduring the fiscal years beginning after June 15, 2005, with earlierapplication permitted for inventory costs incurred during the fiscal yearsbeginning after the date the statement was issued.  The adoption of SFAS 151 is not expected tohave a material impact on our financial position and results of operations.  We expect to adopt SFAS 151 on February 1,2006.

 

In December 2004, the FASB issued SFAS No. 153(SFAS 153), “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.”  The guidance in APB Opinion No. 29 (APB29), “ Accounting for Nonmonetary Transactions”, is based on the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofassets exchanged.  The guidance in thatopinion, however, included certain exceptions to that principle.   SFAS 153 amends

 

21

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APB29 to eliminate the exception for nonmonetary exchanges of similar productiveassets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flowsof the entity are expected to change significantly as a result of theexchange.  SFAS 153 is effective fornonmonetary exchanges occurring in fiscal periods beginning after June 15,2005.  The adoption of SFAS 153 is notexpected to have a material impact on our financial position and results ofoperations.

 

In June 2005, the FASB issued SFAS No. 154(SFAS 154), “Accounting Changes and Error Corrections.”  SFAS 154 changes the requirements for theaccounting for and reporting of a change in accounting principle.  This statement requires retrospective applicationsto prior periods’ financial statements of a voluntary change in accountingprinciple unless it is impracticable.  Inaddition, this statement requires that a change in depreciation, amortization,or depletion for long-lived, non-financial assets be accounted for as a changein accounting estimate effected by a change in accounting principle.  This new accounting standard is effective February 1,2006.  The adoption of SFAS 154 is notexpected to have a material impact on our financial statements.

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

 

Market risk is the potential loss arisingfrom adverse changes in market rates and prices, such as foreign currencyexchange rate and interest rate fluctuations. A significant portion of ourrevenues and expenses are denominated in foreign currencies. As a result, ouroperating results could become subject to significant fluctuations based uponchanges 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 forthe second quarter of fiscal 2006 resulting from a 10% weaker U.S. dollarduring the entire quarter, measured against foreign currencies that affect ouroperations (in millions):

 
| Euro                                                                     |   | $   | 2.7    |   |
|--------------------------------------------------------------------------|--------|-----|--------|--------|
| Canadian dollar                                                          |   | 0.7 |   |
| British pound                                                            |   | 0.7 |   |
| Other currencies with net sales less than  17% of consolidated net sales |   | 1.3 |   |

 

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

 

A majority of our products are manufacturedusing specialty steel as a primary raw material and specialty steel basedcomponents as purchased parts. As such, our cost of goods sold is sensitive tofluctuations in specialty steel prices, either directly through the purchase ofspecialty steel as raw material or indirectly through the purchase of specialtysteel based components. Presuming that the full impact of specialty steel costincreases is reflected in all of our steel and steel based component purchases,we estimate our gross margin percentage sensitivity to be approximately 0.3%for each 1.0% increase in steel costs without offsetting sales price increases.For example, if the price of specialty steel increases 1.0%, and the fullimpact of that increase is reflected in all raw material and componentpurchases, the net decrease in the gross margin percentage would beapproximately 0.3%. Based on our statement of income for the quarter ended July 31,2005, a 1% increase in specialty steel costs without offsetting sales priceincreases would have decreased consolidated gross profit by approximately$314,000. 

 

To date we have been able to mitigate theeffect of a portion of the specialty steel cost increases on our gross margins.This has been done through price increases and cost reductions. We haverecently been notified of 16% price increase by our largestsupplier of steel for certain products manufactured in North America and Chinawhich will become effective October 1, 2005.  Assuming no recovery of this increase throughprice increases or other cost savings, we estimate this will negatively impactmargins in the second half of the year by less than 1%.  We intend to continue our efforts in thecoming months to mitigate the full impact of any of these steel cost increases.It should be noted that there may be some time lag between the absorption ofthe specialty steel cost increases and realizing the offsetting benefits of themitigating measures. It should also be noted that there is no assurance that wecan fully mitigate all future steel cost increases through price increases andother measures. In addition, actual cost increases from steel suppliers coulddiffer from cost increases that have been previously communicated to us. 

 

Manufacturing of our products includes thepurchase of various raw materials and components. Certain of these items areprovided worldwide by a limited number of suppliers. We are not currentlyexperiencing shortages in obtaining the raw materials and components. However,certain specialty steel products obtained in Europe are subject to allocationsfrom suppliers. At this time we believe the current allocation of theseproducts from suppliers is sufficient to meet planned production volumes.Nevertheless, there can be no assurance that these suppliers will be able tomeet our future requirements. An extended

 

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delay or interruption in the supply of any components could have amaterial adverse effect on the Company’s business, results of operations andfinancial condition. We are working to identify alternative supplier sourcesfor these products.

 

Substantially all of our debt at July 31,2005 has a fixed interest rate. Any additional payments to prepay scheduledamounts of debt are subject to penalties. At July 31, 2005, the penaltiesto retire all of our long-term debt were $1.0 million. A hypothetical immediateincrease in market interest rates by 1% would decrease the fair value of ourlong-term debt outstanding at July 31, 2005 by $482,000.

 

**Item 4. Controls and Procedures**

 

As of July 31, 2005, the end of theperiod covered by this report, the Company reviewed and evaluated, under thesupervision and with the participation of management, including its ChiefExecutive Officer and Chief Financial Officer, the effectiveness of the designand operation of the Company’s “disclosure controls and procedures” (as definedin Exchange Act Rule 13a-15(e) and15d-15(e)) of the Securities and Exchange Act of 1934 (Exchange Act). Based onthat evaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that the disclosure controls and procedures are effective in ensuringthat information required to be disclosed by the Company in reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

There were no changes in the Company’sinternal controls over financial reporting that occurred during the periodcovered by this report that have materially affected, or are reasonably likelyto materially affect, the Company’s internal controls over financial reporting.

 

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**PART II—OTHERINFORMATION**

 

**Item 1. Legal Proceedings**

 

None

 

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds**

 

None

 

**Item 3. Defaults Upon Senior Securities**

 

None

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders**

 

At our Annual Meeting of Shareholders, held June 7,2005, the following matters were submitted to a vote of common shareholders:

 

Election of directors to terms expiring in2008:

 
| **Nominee**           | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-----------------------|------------|---------------|------------|--------------------|------------|
| Robert C. Warren, Jr  |       | 10,994,513    |       | 470,444            |       |
| Henry W. Wessinger II |       | 10,945,363    |       | 519,594            |       |

 

The following individuals continue to serve as directors:

 
| **Director**                | ** ** | **Term Expires** | ** ** |
|-----------------------------|------------|------------------|------------|
| Duane C. McDougall          |       | 2006             |       |
| James S. Osterman           |       | 2006             |       |
| Nicholas R. Lardy, Ph.D.    |       | 2007             |       |
| Nancy A. Wilgenbusch, Ph.D. |       | 2007             |       |

 

Company Proposal:

 
| **Proposal**                                                                         | ** ** | **Votes For** | ** ** | **Votes Against** | ** ** | **Abstentions and Broker  Non-Votes** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------|------------|-------------------|------------|---------------------------------------|------------|
| Approval of  the Amendment of the Cascade Corporation Stock Appreciation Rights Plan |       | 9,380,190     |       | 949,015           |       | 1,898,878                             |       |

 

**Item 5. Other Information**

 

None

 

**Item 6. Exhibits**

 
| 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. |

 

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**SIGNATURES**

 

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

 
|               | CASCADE CORPORATION                            |
|--------------------|------------------------------------------------|
| September 9,  2005 |                                           |   |
|               |                                           | /s/ Richard S. Anderson |   |
|               |                                           |
|               |                                           | Richard S.  Anderson*Senior Vice President and  Chief Financial Officer* | * * |
|               | *(Principal Financial and Accounting Officer)* |
|                    |                                                |  |  |  |  |

 

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