**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**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 October 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         |       | (I.R.S.  Employer Identification No.) |
| incorporation  or organization)          |       |                                  |
|                                     |       |                                  |
| **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 November 28, 2005 was 12,448,454.

 

 

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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, restructuringcosts, synergies or other financial items; any statements of plans, strategies,and objectives of management for future operations; any statements regardingfuture economic conditions or performance; any statements of expectation orbelief; and any statements of assumptions underlying any of the foregoing. Therisks, uncertainties, and assumptions referred to above include, but are notlimited to, competitive factors in, and the cyclical nature of, the materialshandling industry; fluctuations in lift truck orders or shipments, availabilityand cost of raw materials; general business and economic conditions in NorthAmerica, Europe, Australia and Asia; assumptions relating to pension and otherpost-retirement costs; share-based compensation; foreign currency fluctuations;pending litigation; 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 orcircumstances that 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  October 31** | ** ** | **Nine Months Ended  October 31** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                   |       | $                                       | 112,599    |                                   | $          | 96,342 |   | $ | 342,080 |   | $ | 282,246 |   |
| Cost of goods sold                          |       | 75,775                                  |       | 65,458                                 |       | 231,197 |   | 190,635 |   |
| Gross profit                                |       | 36,824                                  |       | 30,884                                 |       | 110,883 |   | 91,611 |   |
|                                        |       |                                    |       |                                   |       |   |   |   |   |
| Selling and administrative expenses         |       | 19,287                                  |       | 18,151                                 |       | 56,333 |   | 54,135 |   |
| Amortization                                |       | 251                                     |       | 162                                    |       | 1,195 |   | 470 |   |
| Insurance litigation recovery               |       | —                                  |       | (1,300                                 | )          | — |   | (1,300 | ) |
| Environmental expense                       |       | —                                  |       | 155                                    |       | — |   | 155 |   |
|                                        |       |                                    |       |                                   |       |   |   |   |   |
| Operating income                            |       | 17,286                                  |       | 13,716                                 |       | 53,355 |   | 38,151 |   |
| Interest expense                            |       | 727                                     |       | 934                                    |       | 2,177 |   | 2,758 |   |
| Interest income                             |       | (298                                    | )          | (144                                   | )          | (576 | ) | (364 | ) |
| Other expense                               |       | 191                                     |       | 516                                    |       | 24 |   | 574 |   |
| Gain on sale of investment                  |       | —                                  |       | (1,044                                 | )          | — |   | (1,044 | ) |
|                                        |       |                                    |       |                                   |       |   |   |   |   |
| Income before provision for income taxes    |       | 16,666                                  |       | 13,454                                 |       | 51,730 |   | 36,227 |   |
| Provision for income taxes                  |       | 5,838                                   |       | 4,763                                  |       | 17,944 |   | 12,824 |   |
|                                        |       |                                    |       |                                   |       |   |   |   |   |
| Net income                                  |       | $                                       | 10,828     |                                   | $          | 8,691 |   | $ | 33,786 |   | $ | 23,403 |   |
|                                        |       |                                    |       |                                   |       |   |   |   |   |
| Basic earnings per share                    |       | $                                       | 0.87       |                                   | $          | 0.71 |   | $ | 2.74 |   | $ | 1.93 |   |
| Diluted earnings per share                  |       | $                                       | 0.84       |                                   | $          | 0.68 |   | $ | 2.63 |   | $ | 1.84 |   |
|                                        |       |                                    |       |                                   |       |   |   |   |   |
| Basic weighted average shares outstanding   |       | 12,403                                  |       | 12,195                                 |       | 12,312 |   | 12,149 |   |
| Diluted weighted average shares outstanding |       | 12,966                                  |       | 12,799                                 |       | 12,848 |   | 12,705 |   |

 

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

 

3

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**CASCADECORPORATION**

 

**CONSOLIDATEDBALANCE SHEETS**

 

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

 
| ** **                                                                                                | ** ** | **October 31  2005** | ** ** | **January 31  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
|                                                                                                      |       |                      |       |                      |       |
| **ASSETS**                                                                                                |       |                      |       |                      |       |
| Current assets:                                                                                           |       |                      |       |                      |       |
| Cash and  cash equivalents                                                                                |       | $                         | 30,490     |                      | $          | 30,482 |   |
| Marketable  securities                                                                                    |       | 28,978                    |       | 1,503                     |       |
| Trade  accounts receivable, less allowance for doubtful accounts of $1,556 and  $2,182                    |       | 71,002                    |       | 70,728                    |       |
| Inventories                                                                                               |       | 52,157                    |       | 46,212                    |       |
| Deferred  income taxes                                                                                    |       | 3,450                     |       | 3,042                     |       |
| Prepaid  expenses and other                                                                               |       | 5,786                     |       | 4,592                     |       |
| Total  current assets                                                                                     |       | 191,863                   |       | 156,559                   |       |
| Property, plant and equipment, net                                                                        |       | 75,156                    |       | 82,027                    |       |
| Goodwill                                                                                                  |       | 76,361                    |       | 74,786                    |       |
| Deferred income taxes                                                                                     |       | 9,984                     |       | 9,688                     |       |
| Other assets                                                                                              |       | 4,711                     |       | 5,032                     |       |
| Total assets                                                                                              |       | $                         | 358,075    |                      | $          | 328,092 |   |
|                                                                                                      |       |                      |       |                      |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                            |       |                      |       |                      |       |
| Current liabilities:                                                                                      |       |                      |       |                      |       |
| Notes payable  to banks                                                                                   |       | $                         | 2,682      |                      | $          | 2,461 |   |
| Current  portion of long-term debt                                                                        |       | 12,775                    |       | 12,916                    |       |
| Accounts  payable                                                                                         |       | 21,288                    |       | 25,778                    |       |
| Accrued  payroll and payroll taxes                                                                        |       | 7,225                     |       | 7,283                     |       |
| Income taxes  payable                                                                                     |       | 3,215                     |       | 2,068                     |       |
| Other  accrued expenses                                                                                   |       | 13,214                    |       | 11,005                    |       |
| Accrued  environmental expenses                                                                           |       | 893                       |       | 894                       |       |
| Total  current liabilities                                                                                |       | 61,292                    |       | 62,405                    |       |
| Long-term debt, net of current portion                                                                    |       | 25,085                    |       | 25,187                    |       |
| Accrued environmental expenses                                                                            |       | 7,256                     |       | 7,799                     |       |
| Deferred income taxes                                                                                     |       | 4,562                     |       | 3,988                     |       |
| Postretirement and defined benefit  obligations                                                           |       | 7,928                     |       | 7,560                     |       |
| Other liabilities                                                                                         |       | 3,177                     |       | 3,270                     |       |
| Total  liabilities                                                                                        |       | 109,300                   |       | 110,209                   |       |
|                                                                                                      |       |                      |       |                      |       |
| Commitments and contingencies (Note 8)                                                                    |       |                      |       |                      |       |
| Shareholders’ equity:                                                                                |       |                      |       |                      |       |
| Common  stock, $.50 par value, 20,000 authorized shares; 12,448 and 12,224 shares  issued and outstanding |       | 6,224                     |       | 6,112                     |       |
| Additional  paid-in capital                                                                               |       | 20,305                    |       | 20,004                    |       |
| Unamortized  deferred compensation                                                                        |       | —                    |       | (4,506                    | )          |
| Retained  earnings                                                                                        |       | 217,481                   |       | 188,507                   |       |
| Accumulated  other comprehensive income                                                                   |       | 4,765                     |       | 7,766                     |       |
| Total  shareholders’ equity                                                                          |       | 248,775                   |       | 217,883                   |       |
| Total  liabilities and shareholders’ equity                                                          |       | $                         | 358,075    |                      | $          | 328,092 |   |

 

The accompanying notes are anintegral part of the 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                                                                       |       | —           |       | —      |       | —         |       | —           |       | 33,786            |       | —            |       | 33,786            |       |
| Dividends ($0.39 per share)                                                      |       | —           |       | —      |       | —         |       | —           |       | (4,812            | )          | —            |       | —            |       |
| Common stock issued                                                              |       | 224              |       | 112         |       | 2,597          |       | —           |       | —            |       | —            |       | —            |       |
| Excess tax benefit from exercise of stock options and  stock appreciation rights |       | —           |       | —      |       | 967            |       | —           |       | —            |       | —            |       | —            |       |
| Amortization of stock appreciation rights                                        |       | —           |       | —      |       | (4,734         | )          | 4,734            |       | —            |       | —            |       | —            |       |
| Share-based compensation                                                         |       | —           |       | —      |       | 1,471          |       | (228             | )          | —            |       | —            |       | —            |       |
| Translation adjustment                                                           |       | —           |       | —      |       | —         |       | —           |       | —            |       | (3,001            | )          | (3,001            | )          |
|                                                                             |       |             |       |        |       |           |       |             |       |              |       |              |       |              |       |
|                                                                             |       |             |       |        |       |           |       |             |       |              |       |              |       |              |       |
| **Balance at October 31, 2005**                                             |       | 12,448           |       | $           | 6,224      |           | $          | 20,305           |       | $                 | —     |              | $          | 217,481           |       | $ | 4,765 |   | $ | 30,785 |   |
|                                                                                  |            |                  |            |             |            |                |            |                  |            |                   |            |                   |            |                   |            |  |  |  |  |  |  |

 

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

 

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**CASCADECORPORATION**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 

**(Unaudited—inthousands)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  October 31** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                          |       |                                   |       |   |   |
| Net income                                                                         |       | $                                      | 33,786     |   | $ | 23,403 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                   |       |   |   |
| Depreciation  and amortization                                                     |       | 12,208                                 |       | 10,672 |   |
| Share-based  compensation and amortization of deferred compensation                |       | 1,243                                  |       | 861 |   |
| Deferred  income taxes                                                             |       | (755                                   | )          | (331 | ) |
| Gain on  disposition of assets                                                     |       | 93                                     |       | (76 | ) |
| Changes in operating assets and  liabilities:                                      |       |                                   |       |   |   |
| Trade  accounts receivable                                                         |       | (274                                   | )          | (11,212 | ) |
| Inventories                                                                        |       | (5,945                                 | )          | (3,704 | ) |
| Prepaid  expenses and other                                                        |       | (475                                   | )          | (859 | ) |
| Accounts  payable and accrued expenses                                             |       | (2,339                                 | )          | 7,667 |   |
| Current income  taxes payable                                                      |       | 1,147                                  |       | 3,957 |   |
| Other assets  and liabilities                                                      |       | 81                                     |       | (1,327 | ) |
| Net cash  provided by operating activities                                         |       | 38,770                                 |       | 29,051 |   |
|                                                                               |       |                                   |       |   |   |
| **Cash flows from investing activities:**                                          |       |                                   |       |   |   |
| Capital  expenditures                                                              |       | (7,473                                 | )          | (9,710 | ) |
| Sales of  marketable securities                                                    |       | 17,575                                 |       | 13,206 |   |
| Purchases of  marketable securities                                                |       | (45,050                                | )          | (15,590 | ) |
| Proceeds  from sale of investment                                                  |       | —                                 |       | 1,044 |   |
| Business  acquisition                                                              |       | —                                 |       | (4,710 | ) |
| Proceeds  from sale of assets                                                      |       | 295                                    |       | 275 |   |
| Net cash  used in investing activities                                             |       | (34,653                                | )          | (15,485 | ) |
|                                                                               |       |                                   |       |   |   |
| **Cash flows from financing activities:**                                          |       |                                   |       |   |   |
| Cash  dividends paid                                                               |       | (4,812                                 | )          | (4,012 | ) |
| Payments on  long-term debt and capital leases                                     |       | (243                                   | )          | (338 | ) |
| Notes  payable to banks, net                                                       |       | 221                                    |       | (766 | ) |
| Common stock  issued under share-based compensation plans                          |       | 2,709                                  |       | 1,306 |   |
| Excess tax  benefit from exercise of stock options and stock appreication rights   |       | 967                                    |       | — |   |
| Net cash  used in financing activities                                             |       | (1,158                                 | )          | (3,810 | ) |
|                                                                               |       |                                   |       |   |   |
| **Effect of exchange rate changes**                                                |       | (2,951                                 | )          | (357 | ) |
|                                                                               |       |                                   |       |   |   |
| Change in cash and cash equivalents                                                |       | 8                                      |       | 9,399 |   |
| Cash and cash equivalents at beginning of  period                                  |       | 30,482                                 |       | 25,584 |   |
| Cash and cash equivalents at end of period                                         |       | $                                      | 30,490     |   | $ | 34,983 |   |
|                                                                               |       |                                   |       |   |   |
| **Supplemental disclosure 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.  We are headquartered inFairview, Oregon, employing approximately 1,900 people and maintainingoperations in 15 countries outside the United States.

 

**Note 2—Interim Financial Information**

 

The accompanying consolidated financialstatements for the interim periods ended October 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 notnecessarily indicative of the results to be expected for the full year, andthese financial statements do not contain the detail or footnote disclosuresconcerning accounting policies and other matters that would be included in fullfiscal year 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.

 

Certain reclassifications have been made tothe prior year consolidated financial statements and footnote disclosures toconform to the current year presentation. Such reclassifications had no impact on results of operations.

 

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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 October 31** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|
| **2005**                      | ** ** | **North America**                      | ** ** | **Europe** | ** ** | **Asia Pacific** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                     |       | $                                      | 65,056     |   | $ | 29,786 |   | $ | 17,757 |   | $ | — |   | $ | 112,599 |   |
| Transfers between regions     |       | 5,749                                  |       | 534 |   | 3 |   | (6,286 | ) | — |   |
| Total sales                   |       | $                                      | 70,805     |   | $ | 30,320 |   | $ | 17,760 |   | $ | (6,286 | ) | $ | 112,599 |   |
| Operating income (loss)       |       | $                                      | 15,000     |   | $ | (958 | ) | $ | 3,244 |   |   |   | $ | 17,286 |   |
| Property, plant and equipment |       | $                                      | 34,624     |   | $ | 35,809 |   | $ | 4,723 |   |   |   | $ | 75,156 |   |
|                          |       |                                   |       |   |   |   |   |   |   |   |   |
| **2004**                      | ** ** | **North America**                      | ** ** | **Europe** | ** ** | **Asia Pacific** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                     |       | $                                      | 53,898     |   | $ | 27,614 |   | $ | 14,830 |   | $ | — |   | $ | 96,342 |   |
| Transfers between regions     |       | 4,571                                  |       | 203 |   | 16 |   | (4,790 | ) | — |   |
| Total sales                   |       | $                                      | 58,469     |   | $ | 27,817 |   | $ | 14,846 |   | $ | (4,790 | ) | $ | 96,342 |   |
| Operating income (loss)       |       | $                                      | 11,337     |   | $ | (525 | ) | $ | 2,904 |   |   |   | $ | 13,716 |   |
| Property, plant and equipment |       | $                                      | 36,418     |   | $ | 40,337 |   | $ | 4,853 |   |   |   | $ | 81,608 |   |
|                          |       |                                   |       |   |   |   |   |   |   |   |   |
| ** **                    | ** ** | **Nine Months Ended October 31**  | ** ** |
| **2005**                      | ** ** | **North America**                      | ** ** | **Europe** | ** ** | **Asia Pacific** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                     |       | $                                      | 188,466    |   | $ | 101,787 |   | $ | 51,827 |   | $ | — |   | $ | 342,080 |   |
| Transfers between regions     |       | 17,222                                 |       | 2,100 |   | 175 |   | (19,497 | ) | — |   |
| Total sales                   |       | $                                      | 205,688    |   | $ | 103,887 |   | $ | 52,002 |   | $ | (19,497 | ) | $ | 342,080 |   |
| Operating income              |       | $                                      | 41,658     |   | $ | 2,293 |   | $ | 9,404 |   |   |   | $ | 53,355 |   |
|                          |       |                                   |       |   |   |   |   |   |   |   |   |
| **2004**                      | ** ** | **North America**                      | ** ** | **Europe** | ** ** | **Asia Pacific** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                     |       | $                                      | 153,520    |   | $ | 84,517 |   | $ | 44,209 |   | $ | — |   | $ | 282,246 |   |
| Transfers between regions     |       | 15,637                                 |       | 1,515 |   | 49 |   | (17,201 | ) | — |   |
| Total sales                   |       | $                                      | 169,157    |   | $ | 86,032 |   | $ | 44,258 |   | $ | (17,201 | ) | $ | 282,246 |   |
| Operating income              |       | $                                      | 29,407     |   | $ | 420 |   | $ | 8,324 |   |   |   | $ | 38,151 |   |

 

**Note 4—Goodwill**

 

The breakdown of goodwill by geographicregion at October 31, 2005 and January 31, 2005 is provided in thetable below (in thousands). The change in balances between periods is primarilydue to fluctuations in foreign currencies.

 
| ** **    | ** ** | **October 31** | ** ** | **January 31** | ** ** |
|---------------|------------|---------------------|------------|---------------------|------------|
| ** **    | ** ** | **2005**            | ** ** | **2005**            | ** ** |
| North America |       | $                   | 63,492     |                | $          | 60,429 |   |
| Europe        |       | 9,717               |       | 11,211              |       |
| Asia Pacific  |       | 3,152               |       | 3,146               |       |
|          |       | $                   | 76,361     |                | $          | 74,786 |   |

 

**Note 5—Marketable Securities**

 

Marketable securities consist of auction rate and variablerate demand notes issued by various state agencies throughout the United States. We classify these securities as available-for-sale securities.  Thesesecurities are either insured through third party agencies, reinsured throughthe U.S. government, or secured by a letter of credit from a bank.  Thespecific identification method is used to determine the cost of securitiessold.  There were no realized or unrealized gains

 

8

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orlosses related to our marketable securities during the first nine months offiscal 2006 and fiscal 2005.  These securities are long-term instrumentsmaturing through 2044; 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):

 
| ** **                    | ** ** | **October 31** | ** ** | **January 31** | ** ** |
|-------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                    | ** ** | **2005**            | ** ** | **2005**            | ** ** |
| Finished goods and components |       | $                   | 34,556     |                | $          | 30,516 |   |
| Work in process               |       | 478                 |       | 865                 |       |
| Raw materials                 |       | 17,123              |       | 14,831              |       |
|                          |       | $                   | 52,157     |                | $          | 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 (“intrinsic value”) over thebase price at the time the right was granted. The base price may not be less than the market price of our commonshares on the date of grant.  The pricesfor both 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 have reserved 1,400,000 shares of common stock under our stock optionplan.  As of October 31, 2005 atotal of 464,000 shares have been issued upon the exercise of stock options.  As of October 31, 2005 no additionalstock options can be granted under the terms of the plan.  The SARS plan provides for the issuance of750,000 shares of common stock upon the exercise of SARS of which 18,000 shareshave been issued at October 31, 2005. 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 supersedes Accounting Principles BoardOpinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” SFAS123R addresses the accounting for share-based compensation in which we receiveemployee services in exchange for our equity instruments.  Under the standard, we are required torecognize compensation cost for share-based compensation issued to or purchasedby employees, net of estimated forfeitures, under share-based compensation plansusing a fair value method.  In March 2005,the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107which provided 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, no prior periods wererestated.  Under this method, we recordedcompensation expense for all awards granted after the date of adoption and forthe unvested portion of previously granted awards that remained outstanding asof the beginning of the period of adoption. We calculated share-based compensation cost using the Black-Scholesoption pricing model.  The followingrange of assumptions were used to compute share-based compensation:

 
| 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 astraight-line method over the vesting or service period and is net of estimatedforfeitures.

 

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 compensation expenserelated to stock options was recognized in net income as all options grantedhad an exercise price equal to the market price of the underlying common stockat the date of grant.  FIN 28 requiredSARS to be accounted for under variable plan accounting, which required amark-to-market adjustment each quarter. Accordingly, compensation costs were recorded related to SARS for thechanges in the market price of our common shares.  No share-based compensation was capitalizedas part of the cost of any assets as of October 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 October 31** | ** ** | **Nine Months Ended October 31** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2005**                               | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Method used  to account for share-based compensation | ** ** | Fair  Value                            |       | Intrinsic                             |       | Fair  Value / Intrinsic |   | Intrinsic | ** ** |
| Share-based compensation under SFAS 123R             |       | $                                      | 874        |                                  | $          | — |   | $ | 1,471 |   | $ | — |   |
| Share-based compensation under FIN 28                |       | —                                 |       | 520                                   |       | (228 | ) | 861 |   |
|                                                 |       | $                                      | 874        |                                  | $          | 520 |   | $ | 1,243 |   | $ | 861 |   |
| Tax benefit recognized                               |       | $                                      | 233        |                                  | $          | 184 |   | $ | 313 |   | $ | 305 |   |

 

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, except per share amounts): 

 
| ** **                                                                                                                               | ** ** | **Three Months Ended October 31** | ** ** | **Nine Months Ended October 31** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                               | ** ** | **2005**                               | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income -  as reported                                                                                                                |       | $                                      | 10,828     |                                  | $          | 8,691 |   | $ | 33,786 |   | $ | 23,403 |   |
| Add: SARS amortization,  net of taxes of $0, $184, ($80) and $305                                                                        |       | —                                 |       | 336                                   |       | (148 | ) | 556 |   |
| Net income  excluding SARS amortization                                                                                                  |       | 10,828                                 |       | 9,027                                 |       | 33,638 |   | 23,959 |   |
| Deduct:  total stock-based compensation, net of income tax benefits of $0, $116, $140  and $348 determined under fair value based method |       | —                                 |       | (297                                  | )          | (297 | ) | (891 | ) |
| Net income -  pro forma                                                                                                                  |       | $                                      | 10,828     |                                  | $          | 8,730 |   | $ | 33,341 |   | $ | 23,068 |   |
|                                                                                                                                     |       |                                   |       |                                  |       |   |   |   |   |
| Basic  earnings per share - as reported                                                                                                  |       | $                                      | 0.87       |                                  | $          | 0.71 |   | $ | 2.74 |   | $ | 1.93 |   |
| Basic  earnings per share - pro forma                                                                                                    |       | $                                      | 0.87       |                                  | $          | 0.72 |   | $ | 2.71 |   | $ | 1.90 |   |
| Diluted  earnings per share - as reported                                                                                                |       | $                                      | 0.84       |                                  | $          | 0.68 |   | $ | 2.63 |   | $ | 1.84 |   |
| Diluted  earnings per share - pro forma                                                                                                  |       | $                                      | 0.84       |                                  | $          | 0.68 |   | $ | 2.60 |   | $ | 1.82 |   |

 

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

 
| ** **                                                 | ** ** | ** **         | ** ** | **Weighted-** | ** ** | ** **         | ** ** | **Weighted**      | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|---------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                 | ** ** | ** **         | ** ** | **Average**   | ** ** | **Aggregate**      | ** ** | **Average**       | ** ** |
| ** **                                                 | ** ** | ** **         | ** ** | **Exercise**  | ** ** | **Intrinsic**      | ** ** | **Contractual**   | ** ** |
| ** **                                                 | ** ** | **Awards**         | ** ** | **Price**     | ** ** | **Value**          | ** ** | **Life in Years** | ** ** |
| ** **                                                 | ** ** | **(In thousands)** | ** ** | ** **    | ** ** | **(In thousands)** | ** ** | ** **        | ** ** |
| Outstanding at February 1, 2005                       |       | 1,633              |       | $             | 15.93      |               |       |              |       |   |
| Granted                                                    |       | 612                |       | 35.60         |       |               |       |              |       |
| Exercised                                                  |       | (242               | )          | 14.46         |       |               |       |              |       |
| Forfeited or expired                                       |       | (19                | )          | 13.22         |       |               |       |              |       |
| Outstanding at October 31, 2005                       |       | 1,984              |       | $             | 22.21      |               | $          | 52,439            |       | 8 |   |
| Outstanding at October 31, 2005 and  expected to vest |       | 1,048              |       | $             | 27.07      |               | $          | 22,658            |       | 9 |   |
| Exercisable at October 31, 2005                       |       | 737                |       | $             | 14.15      |               | $          | 25,465            |       | 6 |   |

 

10

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The total intrinsic value of options exercisedduring the three and nine month periods ended October 31, 2005 was $2.0million and $6.2 million, respectively. The total intrinsic value of SARS exercised during the three and ninemonth periods ended October 31, 2005 was $225,000 and $789,000, respectively.

 

A summary of the status of the Plans’nonvested awards as of October 31, 2005, and changes during the ninemonths then ended, is presented below:

 
| ** **                         | ** ** | ** **           | ** ** | **Weighted Average**     | ** ** |
|------------------------------------|------------|----------------------|------------|--------------------------|------------|
| ** **                         | ** ** | ** **           | ** ** | **Grant-Date**           | ** ** |
| ** **                         | ** ** | **Nonvested Awards** | ** ** | **Fair Value Per Award** | ** ** |
| ** **                         | ** ** | **(In thousands)**   | ** ** | ** **               | ** ** |
| Nonvested at February 1, 2005 |       | 974                  |       | $                        | 6.13       |   |
| Granted                            |       | 612                  |       | 17.86                    |       |
| Vested                             |       | (339                 | )          | 5.61                     |       |
| Nonvested at October 31, 2005 |       | 1,247                |       | $                        | 12.03      |   |

 

As of October 31, 2005, there was $10.5 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 of3.3 years.  The following tablerepresents as of October 31, 2005 the share-based compensation costs to berecognized in future periods (in thousands) for awards granted to date:

 
| **Fiscal Year**   | ** ** | **Amount** | ** ** |
|-------------------|------------|------------|------------|
| Remainder of 2006 |       | $          | 869        |   |
| 2007              |       | 3,335      |       |
| 2008              |       | 3,069      |       |
| 2009              |       | 2,368      |       |
| 2010              |       | 831        |       |
|              |       | $          | 10,472     |   |

 

**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. Liabilities are based on our best estimate of undiscounted future costsusing currently available technology, applying current regulations, as well asour own historical experience regarding environmental cleanup costs. Thereliability and precision of the loss estimates are affected by numerousfactors, such as different stages of site evaluation and reevaluation of thedegree of remediation required. We adjust our liabilities as new remediationrequirements are defined, as information becomes available permittingreasonable estimates to be made and to reflect new and changing facts.

 

It is reasonably possible that changes inestimates will occur in the near term and the related adjustments toenvironmental liabilities may have a material impact on our net income andoperating cash flows. Unasserted claims are not currently reflected in ourenvironmental liabilities. It is also reasonably possible that these changes orclaims may also have a material impact on our net income and operating cashflows if asserted. We cannot estimate at this time the amount of any additionalloss or range 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 $7.0 millionand $7.5 million at October 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 October 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 the remaininginsurer 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 was approximately$525,000 at October 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 October 31** | ** ** | **Nine Months Ended October 31** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                               | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Basic  earnings per share:                                      |       |                                   |       |                                  |       |   |   |   |   |
| Net income                                                      |       | $                                      | 10,828     |                                  | $          | 8,691 |   | $ | 33,786 |   | $ | 23,403 |   |
| Weighted  average shares of common stock outstanding            |       | 12,403                                 |       | 12,195                                |       | 12,312 |   | 12,149 |   |
|                                                            |       | $                                      | 0.87       |                                  | $          | 0.71 |   | $ | 2.74 |   | $ | 1.93 |   |
|                                                            |       |                                   |       |                                  |       |   |   |   |   |
| Diluted  earnings per share:                                    |       |                                   |       |                                  |       |   |   |   |   |
| Net income                                                      |       | $                                      | 10,828     |                                  | $          | 8,691 |   | $ | 33,786 |   | $ | 23,403 |   |
| Weighted  average shares of common stock outstanding            |       | 12,403                                 |       | 12,195                                |       | 12,312 |   | 12,149 |   |
| Dilutive  effect of stock options and stock appreciation rights |       | 563                                    |       | 604                                   |       | 536 |   | 556 |   |
| Diluted  weighted average shares of common stock outstanding    |       | 12,966                                 |       | 12,799                                |       | 12,848 |   | 12,705 |   |
|                                                            |       | $                                      | 0.84       |                                  | $          | 0.68 |   | $ | 2.63 |   | $ | 1.84 |   |

 

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 Nine Months Ended October 31** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| Cash paid during the period for:                      |       |                                          |       |   |   |
| Interest                                              |       | $                                             | 1,506      |   | $ | 1,892 |   |
| Income taxes                                          |       | $                                             | 17,088     |   | $ | 8,851 |   |
|                                                  |       |                                          |       |   |   |
| Business acquisition:                                 |       |                                          |       |   |   |
| Plant and  equipment                                  |       | $                                             | —     |   | $ | 4,949 |   |
| Other  liabilities                                    |       | —                                        |       | (239 | ) |
|                                                  |       | $                                             | —     |   | $ | 4,710 |   |
|                                                  |       |                                          |       |   |   |
| Supplemental disclosure of noncash  information:      |       |                                          |       |   |   |
| Deferred  compensation from stock appreciation rights |       | $                                             | (4,734     | ) | $ | 3,873 |   |

 

**Note 11—Benefit Plans**

 

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

 
| ** **                      | ** ** | **Defined Benefit**                    | ** ** | **Postretirement Benefit**             | ** ** |
|---------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **Three Months Ended October 31** | ** ** | **Three Months Ended October 31** | ** ** |
| ** **                      | ** ** | **2005**                               | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net periodic benefit cost:      |       |                                   |       |                                   |       |   |   |   |   |
| Service cost                    |       | $                                      | 49         |                                   | $          | 84 |   | $ | 32 |   | $ | 32 |   |
| Interest  cost                  |       | 115                                    |       | 112                                    |       | 108 |   | 116 |   |
| Expected  return on plan assets |       | (111                                   | )          | (103                                   | )          | — |   | — |   |
| Recognized  net actuarial loss  |       | 31                                     |       | 29                                     |       | 86 |   | 99 |   |
|                            |       | $                                      | 84         |                                   | $          | 122 |   | $ | 226 |   | $ | 247 |   |
|                            |       |                                   |       |                                   |       |   |   |   |   |
| ** **                      | ** ** | **Defined Benefit**                    | ** ** | **Postretirement Benefit**             | ** ** |
| ** **                      | ** ** | **Nine Months Ended October 31**  | ** ** | **Nine Months Ended October 31**  | ** ** |
| ** **                      | ** ** | **2005**                               | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net periodic benefit cost:      |       |                                   |       |                                   |       |   |   |   |   |
| Service cost                    |       | $                                      | 146        |                                   | $          | 251 |   | $ | 96 |   | $ | 106 |   |
| Interest  cost                  |       | 343                                    |       | 337                                    |       | 325 |   | 390 |   |
| Expected  return on plan assets |       | (330                                   | )          | (309                                   | )          | — |   | — |   |
| Recognized  net actuarial loss  |       | 92                                     |       | 88                                     |       | 259 |   | 389 |   |
|                            |       | $                                      | 251        |                                   | $          | 367 |   | $ | 680 |   | $ | 885 |   |

 

**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.

 

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 production facilities.  The provisions of SFAS 151 are to be appliedprospectively and are effective for inventory costs incurred during the fiscalyears beginning after June 15, 2005, with earlier application permittedfor inventory costs incurred during the fiscal years beginning after the datethe statement was issued.  The adoptionof SFAS 151 is not expected to have a material impact on our financial positionand results of operations.  We expect toadopt 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 estimate effectedby 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 |       | 1,548    |       | 1,808    |       |
| Accruals for pre-existing warranties              |       | 52       |       | 33       |       |
| Settlements during the period                     |       | (1,727   | )          | (1,457   | )          |
| Balance at October 31                        |       | $        | 1,784      |     | $          | 1,994 |   |

 

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

 

The followingtable presents the calculation of accumulated other comprehensive income (loss)(in thousands):

 
| ** **                       | ** ** | **Accumulated Other Comprehensive  Income (Loss)** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|
| ** **                       | ** ** | **Translation**                                    | ** ** | **Minimum Pension Liability** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Adjustment**                                     | ** ** | **Adjustment** | ** ** | **Total** | ** ** |
| Balance at January 31, 2005 |       | $                                                  | 10,075     |   | $ | (2,309 | ) | $ | 7,766 |   |
| Translation adjustment           |       | (3,001                                             | )          | — |   | (3,001 | ) |
| Balance at October 31, 2005 |       | $                                                  | 7,074      |   | $ | (2,309 | ) | $ | 4,765 |   |

 

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

 

All references to fiscal periods are defined asperiods 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 financial conditionand results of operations is based on our consolidated financial statementswhich have been prepared in accordance with generally accepted accountingprinciples in the United States of America (GAAP). The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses and thedisclosure of contingent assets and liabilities. We evaluate our estimates andjudgments on an on-going basis, including those related to uncollectiblereceivables, inventories, goodwill and long-lived assets, warranty obligations,environmental liabilities, share-based compensation, employee benefit plans anddeferred taxes. We base our estimates on historical experience and variousother assumptions that we believe to be reasonable under the circumstances.Actual results may differ from these estimates under different assumptions orconditions. A description of our critical accounting policies and relatedjudgments and estimates that affect the preparation of our consolidatedfinancial statements, except for share-based compensation, is set forth on Form 10-Kin our Annual Report for the year ended January 31, 2005.  Share-based compensation and the adoption ofSFAS 123R on May 1, 2005 are discussed in Note 7 to Consolidated FinancialStatements.

 

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

 

**Consolidated Summary**

 

Net income for the third quarter of fiscal 2006increased to $10.8 million ($0.84 per diluted share) from $8.7 million ($0.68per diluted share) for the third quarter of fiscal 2005. Net sales for thethird quarter of fiscal 2006 were $112.6 million or 17% greater than thethird quarter of fiscal 2005. Excluding the effect of foreign currencyfluctuations, net sales in North America, Europe and Asia Pacific grew 20%, 10%and 17%, respectively, in the third 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 of 33% in the thirdquarter of fiscal 2006 was up slightly from 32% in the prior year.  The increase is primarily due to betterabsorption of fixed costs due to higher volumes of product shipments.  However, the benefits of added absorptionwere substantially offset by several factors:

 

•                  Currentyear sales include an increased percentage of lower margin OEM products.  We expanded our OEM production capacity inall regions throughout the prior year and the full effects of the expansion arenow being realized.

•                  Costsrelated to the closure of a manufacturing facility in The Netherlands andmovement of production to a manufacturing facility in Italy.

•                  Highersteel costs for certain steel grades, parts and components.

 

Selling and administrative costs increased by 6% inthe third quarter of fiscal 2006 over the comparable quarter of the prior year.  The increase is primarily due to share-basedcompensation costs related to the adoption of SFAS 123R, higher professionaland consulting fees, employee benefit costs and other miscellaneous costsincreases.  Selling and administrative costsas a percentage of net sales were 17% and 19% for third quarter of fiscal 2006and 2005, respectively.

 

**North America**

 
| ** **                           | ** ** | **Three Months Ended October 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **%**      | ** ** | **2004**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| ** **                           | ** ** | **(In thousands)**                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                            |       | $                                      | 65,056     |       | 100        | %          | $          | 53,898 |   | 100 | % | $ | 11,158 |   | 21 | % |
| Cost of goods sold                   |       | 38,627                                 |       | 59         | %          | 33,000     |       | 61 | % | 5,627 |   | 17 | % |
| Gross profit                         |       | 26,429                                 |       | 41         | %          | 20,898     |       | 39 | % | 5,531 |   | 26 | % |
|                                 |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Selling and  administrative expenses |       | 11,392                                 |       | 18         | %          | 10,676     |       | 20 | % | 716 |   | 7 | % |
| Amortization                         |       | 37                                     |       | —     |       | 30         |       | — |   | 7 |   | 23 | % |
| Insurance litigation recovery        |       | —                                 |       | —     |       | (1,300     | )          | (2 | )% | 1,300 |   | — |   |
| Environmental expense                |       | —                                 |       | —     |       | 155        |       | — |   | (155 | ) | — |   |
| Operating income                     |       | $                                      | 15,000     |       | 23         | %          | $          | 11,337 |   | 21 | % | $ | 3,663 |   | 32 | % |

 

15

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North America net sales increased 21% in the thirdquarter of fiscal 2006 over the same quarter of fiscal 2005.  Currency changes accounted for only 1% of theincrease in sales.  Higher volumes ofshipments from North American plants accounted for virtually all of theincrease.  Shipments benefited from astrong lift truck market in the third quarter of fiscal 2006 in comparison withthe prior year.

 

Historically, we have found that changes in thelevel of our net sales do not correspond directly to the percentage changes inlift truck industry shipments, but industry statistics do provide an indicationof the direction of business activity. North American lift truck industry shipments in the third quarter were 4%higher than the prior year.

 

Gross margin percentage for the third quarter offiscal 2006 in North America was 2% higher than the prior year.  Our added absorption due to higher shipmentvolumes is the primary reason for the increase. We have implemented price increases on certain products which haveessentially offset the impact of increases in the cost of steel.

 

Selling and administrative costs for the thirdquarter of fiscal 2006 increased 7% over the same quarter of the prioryear.  The primary reason for theincrease is an additional $354,000 of compensation costs related to share-based-compensationand consulting fees.  The new accountingstandard for share-based-compensation was adopted in the second quarter offiscal 2006.

 

                                                In October 2004, we reached a settlementwith one of two insurers in litigation relating to recovery of expensesincurred in the cleanup of groundwater contamination at our Fairview, Oregonplant.  The insurer paid us $1.3 millionin October 2004 and was dismissed from a pending appeal of a lower courtjudgment in our favor.

 

**Europe**

 
| ** **                           | ** ** | **Three Months Ended October 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **%**      | ** ** | **2004**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| ** **                           | ** ** | **(In thousands)**                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                             | ** ** |
| Net sales                            |       | $                                      | 29,786     |       | 100        | %          | $          | 27,614 |   | 100 | % | $ | 2,172 |   | 8 | % |
| Cost of  goods sold                  |       | 25,201                                 |       | 85         | %          | 22,479     |       | 81 | % | 2,722 |   | 12 | % |
| Gross profit                         |       | 4,585                                  |       | 15         | %          | 5,135      |       | 19 | % | (550 | ) | (11 | )% |
|                                 |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Selling and  administrative expenses |       | 5,336                                  |       | 18         | %          | 5,534      |       | 20 | % | (198 | ) | (4 | )% |
| Amortization                         |       | 207                                    |       | —     |       | 126        |       | 1 | % | 81 |   | 64 | % |
| Operating  loss                      |       | $                                      | (958       | )          | (3         | )%         | $          | (525 | ) | (2 | )% | $ | (433 | ) | 82 | % |

 

Net sales in Europe for the third quarter of fiscal2006 increased to $29.8 million, an 8% increase over the same quarter offiscal 2005.  The increase was due to highershipment volumes of OEM products due to increased production capacity added inthe prior year when we acquired the assets of a major European competitor inGermany.  The overall sales increase wasoffset by a 2% decrease due to foreign currency changes.  Industry lift truck shipments were flat forthe third quarter compared to the prior year.

 

The gross margin percentage in Europe declined from19% in the third quarter of fiscal 2005 to 15% for the third quarter of fiscal2006. This decrease can be primarily attributed to the following factors:

 

•                  Costsrelated to the closure of one of our manufacturing facilities in TheNetherlands.  See further details below.

•                  Increasedshipments of certain lower margin OEM products relative to total shipments.

•                  Failureto fully recover material cost increases in certain product segments.

 

During the third quarter of fiscal 2006, we closedour manufacturing facility in Hoorn, The Netherlands.  Production operations in Hoorn have now beenintegrated into other manufacturing facilities in Almere, The Netherlands andVerona, Italy.  This closure allowed usto eliminate excess capacity for attachment products and will result in loweroverall production costs.  The totaldirect costs for the plant closure are estimated to be $2.1 million, whichincludes $1.2 million of employee termination costs and $900,000 of costs tomove production equipment.  During thethird quarter we recognized $1.1 million of direct costs related to theclosure, which are primarily recorded in cost of goods sold.  The liability recorded on the October 31,2005 consolidated balance sheet to the plant closure is not material.  The consolidated balance sheet at October 31,2005 includes current assets of $720,000 which represent property and equipmentheld for sale from the closure of the Hoorn facility.  An additional $700,000 in costs related tothe plant closure and other related activities will be incurred in the fourthquarter of fiscal 2006.  We expect tobegin realizing the full benefit of these changes in Europe in fiscal 2007.

 

Selling and administrative costs in Europe decreased4% for the third quarter of fiscal 2006 as compared to the third quarter offiscal 2005 due primarily to lower marketing and warranty costs.

 

16

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**Asia Pacific**

 
| ** **                           | ** ** | **Three Months Ended October 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **%**      | ** ** | **2004**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| ** **                           | ** ** | **(In thousands)**                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                            |       | $                                      | 17,757     |       | 100        | %          | $          | 14,830 |   | 100 | % | $ | 2,927 |   | 20 | % |
| Cost of  goods sold                  |       | 11,947                                 |       | 67         | %          | 9,979      |       | 67 | % | 1,968 |   | 20 | % |
| Gross profit                         |       | 5,810                                  |       | 33         | %          | 4,851      |       | 33 | % | 959 |   | 20 | % |
|                                 |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Selling and  administrative expenses |       | 2,559                                  |       | 15         | %          | 1,941      |       | 13 | % | 618 |   | 32 | % |
| Amortization                         |       | 7                                      |       | —     |       | 6          |       | — |   | 1 |   | 17 | % |
| Operating  income                    |       | $                                      | 3,244      |       | 18         | %          | $          | 2,904 |   | 20 | % | $ | 340 |   | 12 | % |

 

Asia Pacific net sales increased to $17.8 million,a 20% increase in the third quarter of fiscal 2006 over fiscal 2005.  Excluding the effect of foreign currencies,net sales increased 17%.  Virtually allof the Asia Pacific markets experienced strong sales results during the thirdquarter.  Industry lift truck shipmentswere up 13% in the third quarter over the prior year.

 

Gross margin percentages in the Asia Pacific regionremained constant at 33% in the third quarter of fiscal 2006 when compared tothe same quarter of the prior year. Material cost increases mitigated the effects of better absorption ofcosts from higher sales volumes.

 

Selling and administrative costs in the Asia Pacificregion increased 32% for the third quarter of fiscal 2006 as compared to fiscal2005.  The increase was due primarily tohigher employee benefit and travel costs and professional fees.  Foreign currency fluctuations accounted for1% of the change.

 

**Non-Operating Items**

 

 Interestexpense was lower in the third quarter of fiscal 2006 as compared to the samequarter of fiscal 2005 due to the reduction in long-term debt for scheduleddebt payments in the fourth quarter of fiscal 2005.  See “Financial Condition and Liquidity” foradditional discussion of debt levels and payments.

 

During the third quarter of fiscal 2005, a trustunder a U.S. defined benefit plan we terminated in 1997 sold publicly tradedcommon stock received in a demutualization of an insurance company.  The trust had purchased annuities from theinsurance company prior to the termination of the plan.  The sale resulted in a gain of approximately$1.0 million and proceeds of the same amount, which were available to theCompany.

 

The effective tax rate in the third quarter offiscal 2006 was down slightly from the prior year.  The decrease is primarily due to higherlevels of income in certain tax jurisdictions which have lower statutory taxrates.

 

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

 

**Consolidated Summary**

 

Net income for the first nine months of fiscal 2006increased to $33.8 million ($2.63 per diluted share) from $23.4 million ($1.84per diluted share) for the first nine months of fiscal 2005. Net sales for thefirst nine months of fiscal 2006 were $342.1 million or 21% greater thanthe first nine months of fiscal 2005. Excluding the effect of foreign currencyfluctuations, net sales in North America, Europe and Asia Pacific grew 22%, 19%and 14%, respectively, in the first nine months of fiscal 2006 as compared tothe same period of the prior year.  Ourincreased sales levels reflect higher volumes of business in all geographicregions.

 

The gross margin percentage in the first nine monthsof fiscal 2006 of 32% was approximately the same as the prior year.  Although we have increased sales prices oncertain products and realized better fixed cost absorption with higher shipmentvolumes in fiscal 2006, these benefits have been offset by:

 

•                  Increasedpercentage of sales of lower margin OEM products. 

•                  Highermaterial costs.

•                  Costsrelated to the closure of a manufacturing facility in The Netherlands.

 

17

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Selling and administrative costs increased by 4% inthe first nine months of fiscal 2006 over the comparable period of the prioryear. Excluding foreign currency changes, costs increased 3% over the firstnine months of the prior year.  Thisincrease is due primarily to higher costs for share-based compensation,employee benefit costs and professional and consulting fees.  Selling and administrative costs as apercentage of net sales were 16% and 19% for the first nine months of fiscal2006 and 2005, respectively.

 

Effective in the second quarter of the current yearwe elected to early adopt the new accounting standard for share-basedcompensation, Statement of Financial Account Standards No. 123R.  We applied the standard using a modifiedprospective method with no restatement of prior periods.  Prior to the adoption of 123R we onlyrecognized 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 areaccounting for share-based compensation expense for SARs and options on a fairvalue method.  This has eliminated marketrelated expense volatility. Total share-based compensation expense recorded inthe nine months ended October 31, 2005 was $1.2 million compared to$860,000 for the comparable prior year period.

 

**North America**

 
| ** **                           | ** ** | **Nine Months Ended October 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **2005**                              | ** ** | **%**      | ** ** | **2004**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| ** **                           | ** ** | **(In thousands)**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                            |       | $                                     | 188,466    |       | 100        | %          | $          | 153,520 |   | 100 | % | $ | 34,946 |   | 23 | % |
| Cost of  goods sold                  |       | 113,981                               |       | 60         | %          | 93,730     |       | 61 | % | 20,251 |   | 22 | % |
| Gross profit                         |       | 74,485                                |       | 40         | %          | 59,790     |       | 39 | % | 14,695 |   | 25 | % |
|                                 |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Selling and  administrative expenses |       | 32,715                                |       | 18         | %          | 31,428     |       | 20 | % | 1,287 |   | 4 | % |
| Amortization                         |       | 112                                   |       | —     |       | 100        |       | — |   | 12 |   | 12 | % |
| Insurance  litigation recovery       |       | —                                |       | —     |       | (1,300     | )          | — |   | 1,300 |   | — |   |
| Environmental  expense               |       | —                                |       | —     |       | 155        |       | — |   | (155 | ) | — |   |
| Operating  income                    |       | $                                     | 41,658     |       | 22         | %          | $          | 29,407 |   | 19 | % | $ | 12,251 |   | 42 | % |

 

Net sales in North America were $34.9 millionor 23% higher in the first nine months of fiscal 2006 over the same period offiscal 2005.  The increase is primarilydue to higher volumes of shipments and to a lesser extent price increases.  Changes in foreign currencies made up only 1%of the overall sales increase.

 

Historically, we have found that changes in thelevel of our net sales do not correspond directly to the percentage changes inlift truck industry shipments, but industry statistics do provide an indicationof the direction of business activity. North American lift truck industry shipments increased 18% for the firstnine months of the current year as compared to the prior year, althoughincreases in the most recent quarter were only 4% as previously noted.

 

Gross margins for the first nine months of fiscal2006 in North America of 40% were slightly higher than the prior year.  We benefited from the contribution ofadditional unit volume through the plants, absorbing more fixed costs than inthe first nine months of the prior year. However, increases in material costs offset the majority of thisadditional absorption and any sales price increases. 

 

Selling and administrative costs for the first ninemonths of fiscal 2006 increased 4% over the same period of the prior year.  The increase is due primarily to share-basedcompensation costs, consulting fees and other miscellaneous cost increases.

 

18

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**Europe**

 
| ** **                          | ** ** | **Nine Months Ended October 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **2005**                              | ** ** | **%**      | ** ** | **2004**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| ** **                          | ** ** | **(In thousands)**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                           |       | $                                     | 101,787    |       | 100        | %          | $          | 84,517 |   | 100 | % | $ | 17,270 |   | 20 | % |
| Cost of goods sold                  |       | 82,217                                |       | 81         | %          | 67,367     |       | 80 | % | 14,850 |   | 22 | % |
| Gross profit                        |       | 19,570                                |       | 19         | %          | 17,150     |       | 20 | % | 2,420 |   | 14 | % |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative expenses |       | 16,215                                |       | 16         | %          | 16,382     |       | 20 | % | (167 | ) | — |   |
| Amortization                        |       | 1,062                                 |       | 1          | %          | 348        |       | — |   | 714 |   | — |   |
| Operating income                    |       | $                                     | 2,293      |       | 2          | %          | $          | 420 |   | — |   | $ | 1,873 |   | — |   |

 

Net sales in Europe for the first nine months offiscal 2006 increased to $101.8 million or 20% over the same period of fiscal2005.  Changes in foreign currency rates,primarily the Euro and the British Pound, accounted for 2% of theincrease.  The remaining increase wasprimarily the result of increased shipments and to a lesser extent sales priceincreases.  Our sales in Europe for thefirst nine months have benefited from consistent demand in the lift truckmarket and additional production capacity from the purchase of assets of amajor German competitor in late fiscal 2005.

 

The gross margin percentage in Europe for the firstnine months of fiscal 2006 of 19% is down slightly from the 20% in the prioryear.  The decrease is due primarily tocosts related to the closure of a manufacturing facility in The Netherlands asdiscussed below.  Margins were favorablyimpacted by improved absorption due to higher sales volumes and higher salesprices on certain products.  Margins werenegatively impacted by increased steel costs. 

 

During the third quarter of fiscal 2006, we closedour manufacturing facility in Hoorn, The Netherlands.  Production operations in Hoorn have beenintegrated into other manufacturing facilities in Almere, The Netherlands andVerona, Italy.  This closure allowed usto eliminate excess capacity for attachment products and will result in loweroverall production costs.  The totaldirect costs for the plant closure are estimated to be $2.1 million, whichincludes $1.2 million of employee termination costs and $900,000 of costs tomove production equipment.  During the firstnine months of fiscal 2006 we recognized $1.4 million of direct costs relatedto the closure, which are primarily recorded in cost of goods sold.  The liability recorded on the October 31,2005 consolidated balance sheet to the plant closure is not material.  The consolidated balance sheet at October 31,2005 includes current assets of $720,000, which represent property andequipment held for sale from the closure of the Hoorn facility.  An additional $700,000 in costs related tothe plant closure and other related activities will be incurred in the fourthquarter of fiscal 2006.  We expect tobegin realizing the full benefit of these changes in Europe in fiscal year2007.

 

Excluding the effects of changing currencies,selling and administrative costs decreased 3% in Europe for the first ninemonths of fiscal 2006 in comparison to the first nine months of fiscal 2005.  This decrease is due to lower marketing andwarranty costs and other miscellaneous cost reductions.

 

Amortization costs in the first nine months offiscal 2006 increased due to additional amortization of intangible assets inItaly.

 

**Asia Pacific**

 
| ** **                          | ** ** | **Nine Months Ended October 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **2005**                              | ** ** | **%**      | ** ** | **2004**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| ** **                          | ** ** | **(In thousands)**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                           |       | $                                     | 51,827     |       | 100        | %          | $          | 44,209 |   | 100 | % | $ | 7,618 |   | 17 | % |
| Cost of goods sold                  |       | 34,999                                |       | 68         | %          | 29,538     |       | 67 | % | 5,461 |   | 18 | % |
| Gross profit                        |       | 16,828                                |       | 32         | %          | 14,671     |       | 33 | % | 2,157 |   | 15 | % |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative expenses |       | 7,403                                 |       | 14         | %          | 6,326      |       | 14 | % | 1,077 |   | 17 | % |
| Amortization                        |       | 21                                    |       | —     |       | 21         |       | — |   | — |   | — |   |
| Operating income                    |       | $                                     | 9,404      |       | 18         | %          | $          | 8,324 |   | 19 | % | $ | 1,080 |   | 13 | % |

 

19

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Asia Pacific net sales increased to $51.8 millionin the first nine months of fiscal 2006, an increase of 17% over fiscal 2005net sales.  Excluding the effect offoreign currencies, net sales increased 14%. The increase was due to the general strength of the economies in allmarkets.  In particular, net sales inChina have increased with both a strong economy and lift truck market andadditional production capacity for OEM products.

 

Gross margin percentages in the Asia Pacific regiondecreased slightly to 32% for the first nine months of fiscal 2006 as comparedto 33% in the same period of the prior year. The lower percentage is due primarily to a higher percentage of sales oflower margin OEM products and higher steel costs.

 

Selling and administrative costs in the Asia Pacificregion increased 17% for the first nine months of fiscal 2006 as compared tofiscal 2005.  Foreign currencyfluctuations accounted for 2% of the increase. The remainder of the increase was due to costs for employee benefits inChina.

 

**Non-Operating Items**

 

Interest expense decreased during the first ninemonths 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.

 

The effective tax rate in the first nine months offiscal 2006 was down slightly from the rate in the comparable prior year period.  The decrease is primarily due to higherlevels of income in certain tax jurisdictions which have lower statutory taxrates.

 

**CASH FLOWS**

 

The statements of cash flows reflect the changes incash and cash equivalents for the nine months ended October 31, 2005 and October 31,2004 by classifying transactions into three major categories of activities:operating, investing and financing.

 

**Operating**

 

Our main source of liquidity is cash generated from operatingactivities. This consists of net income adjusted for noncash operating itemssuch as depreciation and amortization, losses and gains on the disposal ofassets, share-based compensation, deferred income taxes, and changes inoperating assets and liabilities.

 

Net cash provided by operating activities fromcontinuing operations was $38.8 million in first nine months of fiscal2006 compared to $29.1 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 decreases in the change in accountsreceivables.  These increases werepartially offset by changes in other operating accounts, primarily inventories,accounts payable and accrued expenses.

 

**Investing**

 

Our capital expenditures are primarily for equipmentand tooling related to product improvements, more efficient production methods,expansion of production capacity and replacement for normal wear and tear.Capital expenditures were $7.5 million and $9.7 million in the firstnine 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 $23 million to expandour Chinese operations in the next eighteen months.  This investment will position us to undertakea significant expansion of our business in the Asia Pacific region.  Depreciation expense for the first ninemonths in fiscal 2006 and fiscal 2005 was $11.0 million and $10.2 million,respectively. 

 

Net purchases of marketable securities during thefirst nine months of fiscal 2006 were $27.5 million compared to $2.4 million inthe prior year.  This increase in netpurchases is a result of additional cash provided by operating activitiesduring the current year.  Marketablesecurities consist of auction rate and variable rate demand notes issued byvarious state agencies throughout the United States.  We classify thesesecurities as available-for-sale securities.  These securities are eitherinsured through third party agencies, reinsured through the U.S. federalgovernment, or secured by a letter of credit from a bank.  The specificidentification method is used to determine the cost of securities sold. There were no realized or unrealized gains or losses related to our marketablesecurities during the first nine months of fiscal 2006 and fiscal 2005. These securities are long-term instruments maturing through 2044; however, theinterest rates and maturities are reset approximately every month, at whichtime we can sell the securities.  Accordingly, we have classified thesesecurities as current assets in our consolidated balance sheets.

 

20

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**Financing**

 

The issuance of common stock related to the exerciseof stock options and stock appreciation rights generated $2.7 million and$1.3 million of cash for the first nine months in fiscal 2006 and 2005,respectively.

 

We declared dividends totaling $0.39 and $0.33 pershare during the first nine months of fiscal 2006 and 2005, respectively.

 

**FINANCIALCONDITION AND LIQUIDITY**

 

Our working capital, (current assets less currentliabilities) at October 31, 2005 was $130.6 million as compared to$94.2 million at January 31, 2005. Our current ratio at October 31,2005 was 3.1 to 1 as compared to 2.5 to 1 at January 31, 2005.

 

Total outstanding debt, including notes payable tobanks and capital leases, at October 31, 2005 was $40.5 million wasunchanged from January 31, 2005. Our debt to equity ratio improved to 0.16to 1 at October 31, 2005 from 0.19 to 1 at January 31, 2005. Our debtagreements contain covenants relating to net worth and leverage ratios. We werein compliance with these covenants at October 31, 2005.  Borrowing arrangements currently in placewith commercial banks provide lines of credit totaling $25 million, ofwhich $3.4 million was used to issue letters of credit. The average interestrate on notes payable to banks was 2.1% at October 31, 2005 and 3.7% at January 31,2005.

 

Our current plans are to fund existingpostretirement and defined benefit obligations as costs are incurred or to meetminimum statutory funding requirements.

 

We believe that our cash and cash equivalents,existing credit facilities and cash flows from operations will be sufficient tosatisfy our expected working capital, capital expenditure, acquisition and debtretirement requirements for the next twelve months.

 

**OTHERMATTERS**

 

The U.S. dollar strengthened in comparison with theEuro and British Pound and weakened in comparison with the Canadian Dollar inthe third quarter of fiscal 2006.  Thenet result was these foreign currency translation adjustments increasedshareholders’ equity by $1.6 million in the third quarter of fiscal 2006.  During the first nine months of fiscal 2006,the U.S. dollar strengthened against most currencies, decreasing shareholders’equity by $3.0 million from January 31, 2005 to October 31, 2005.

 

**OFF BALANCESHEET ARRANGEMENTS**

 

At October 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 are met.  FSP 109-2 provides accounting and disclosureguidance for the Repatriation Provision. We have completed a preliminary assessment of the effects ofrepatriating a portion of our undistributed earnings of foreignsubsidiaries.  At the present time, wehave no plans to repatriate any undistributed earnings under the Act.

 

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 ofoperations.  We expect to adopt SFAS 151on February 1, 2006.

 

21

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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 a changein depreciation, amortization, or depletion for long-lived, non-financialassets be accounted for as a change in accounting estimate effected by a changein accounting principle.  This newaccounting standard is effective February 1, 2006.  The adoption of SFAS 154 is not expected tohave 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 third quarter of fiscal 2006 resulting from a 10% weaker U.S. dollar duringthe entire quarter, measured against foreign currencies that affect ouroperations (in millions):

 
| Euro                                                                     |   | $   | 2.2    |   |
|--------------------------------------------------------------------------|--------|-----|--------|--------|
| Canadian dollar                                                          |   | 0.6 |   |
| British pound                                                            |   | 0.7 |   |
| Other currencies with net sales less than  17% of consolidated net sales |   | 1.3 |   |

 

We enter into foreign currency forward exchangecontracts 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 consolidated gross margin percentage sensitivity to beapproximately 0.3% for each 1.0% increase in steel costs without offsettingsales price increases. For example, if the price of specialty steel increases1.0%, and the full impact of that increase is reflected in all raw material andcomponent purchases, the net decrease in the gross margin percentage would beapproximately 0.3%. Based on our statement of income for the quarter ended October 31,2005, a 1% increase in specialty steel costs without offsetting sales priceincreases would have decreased consolidated gross profit by approximately $300,000. 

 

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 were notifiedof 16% price increase by our largest supplier of steel for certain productsmanufactured in North America and China which became effective October 1,2005.  We estimate this will negativelyimpact overall consolidated margins in the fourth quarter by less than 1%.  We intend to continue our efforts in thecoming months to mitigate the full impact of these and any other steel costincreases. It should be noted that there may be some time lag between theabsorption of the steel cost increases and realizing the offsetting benefits ofthe mitigating measures. It should also be noted that there is no assurancethat we can fully mitigate all future steel cost increases through priceincreases and other measures. In addition, actual cost increases from steelsuppliers could differ from cost increases that have been previouslycommunicated to us.

 

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Manufacturing of our products includes the purchase of various rawmaterials and components. Certain of these items are provided worldwide by alimited number of suppliers. We are not currently experiencing shortages inobtaining the raw materials and components. However, certain specialty steelproducts obtained in Europe are subject to allocations from suppliers. At thistime we believe the current allocation of these products from suppliers issufficient to meet planned production volumes. Nevertheless, there can be noassurance that these suppliers will be able to meet our future requirements. Anextended 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 has a fixedinterest rate. Any additional payments to prepay scheduled amounts of debt aresubject to penalties. At December 6, 2005, the penalties to retire all ofour long-term debt would have been $715,000. A hypothetical immediate increase in market interest rates by 1% woulddecrease the fair value of our long-term debt outstanding at October 31,2005 by $386,000.

 

**Item 4. Controls and Procedures**

 

As of October 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 Rule 13a-15(e) and 15d-15(e), of the Securities Exchange Act of1934 (Exchange Act). Based on that evaluation, the Chief Executive Officer andChief Financial Officer have concluded that the disclosure controls andprocedures are effective in ensuring that information required to be disclosedby the Company in reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’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**

 

None

 

**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 |                                                                     |     |
|-----------------------|----------------------|--------------------------------------------------------------------------|----------|
| December 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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