UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 2004
OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to

 

Commission file number 1-12557

 

 

CASCADE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

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

 

 

                Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

 

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

 

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

 

Forward-Looking Statements

 

                This report contains forward-looking statements that involve risks and uncertainties, as well as assumptions which, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, gross margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of plans, strategies, and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties, and assumptions referred to above include, but are not limited to, competitive factors in, and the cyclical nature of, the materials handling industry; fluctuations in lift truck orders or deliveries, availability and cost of raw materials; general business and economic conditions in North America, Europe, Australia and Asia; assumptions relating to pension and other post-retirement costs; foreign currency fluctuations; pending litigation; environmental matters; and the effectiveness of our capital expenditures and cost reduction initiatives. We undertake no obligation to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report.

 

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PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CASCADE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited—in thousands, except per share amounts)

 

		Three Months Ended						Nine Months Ended
		October 31						October 31
		2004			2003			2004			2003
Net sales		$	96,342		$	75,772		$	282,246		$	220,338
Cost of goods sold		65,458			50,948			190,635			147,817
Gross profit		30,884			24,824			91,611			72,521
Selling and administrative expenses		17,631			15,806			53,275			45,575
Amortization		682			117			1,330			313
Insurance litigation recovery		(1,300		)	—			(1,300		)	—
Environmental expense		155			—			155			—
Operating income		13,716			8,901			38,151			26,633
Interest expense		934			1,165			2,758			3,496
Interest income		(144		)	(234		)	(364		)	(779		)
Other (income) expenses		516			126			574			(273		)
Gain on sale of investment		(1,044		)	—			(1,044		)	—
Income before provision for income taxes		13,454			7,844			36,227			24,189
Provision for income taxes		4,763			2,752			12,824			7,982
Net income		8,691			5,092			23,403			16,207
Dividends paid on preferred shares of subsidiary		—			—			—			(30		)
Net income applicable to common shareholders		$	8,691		$	5,092		$	23,403		$	16,177
Basic earnings per share		$	0.71		$	0.42		$	1.93		$	1.36
Diluted earnings per share		$	0.68		$	0.41		$	1.84		$	1.31
Basic weighted average shares outstanding		12,195			12,054			12,149			11,882
Diluted weighted average shares outstanding		12,799			12,534			12,705			12,335

 

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

 

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CASCADE CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited—in thousands, except per share amounts)

 

		October 31			January 31
		2004			2004
ASSETS
Current assets:
Cash and cash equivalents		$	34,983		$	25,584
Marketable securities		7,342			6,002
Accounts receivable, less allowance for doubtful accounts of $1,889 and $2,023		68,955			57,871
Inventories		41,661			36,353
Deferred income taxes		3,020			2,542
Income taxes receivable		—			142
Prepaid expenses and other		5,485			4,626
Total current assets		161,446			133,120
Property, plant and equipment, net		81,608			75,244
Goodwill		74,568			68,915
Deferred income taxes		9,663			9,703
Other assets		5,099			5,837
Total assets		$	332,384		$	292,819
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Notes payable to banks		$	2,039		$	2,805
Current portion of long-term debt		12,858			13,018
Accounts payable		21,047			17,904
Accrued payroll and payroll taxes		6,821			6,815
Accrued environmental expenses		794			847
Other accrued expenses		18,547			10,011
Total current liabilities		62,106			51,400
Long-term debt		37,932			38,111
Accrued environmental expenses		8,144			8,551
Deferred income taxes		2,458			1,441
Other liabilities		10,430			9,628
Total liabilities		121,070			109,131
Commitments and contingencies (Note 8)
Shareholders’ equity:
Common stock, $.50 par value, 20,000 authorized shares; 12,201 and 12,102 shares issued and outstanding		6,100			6,051
Additional paid-in capital		16,599			11,111
Unamortized deferred compensation		(3,012		)	—
Retained earnings		184,886			165,495
Accumulated other comprehensive income		6,741			1,031
Total shareholders’ equity		211,314			183,688
Total liabilities and shareholders’ equity		$	332,384		$	292,819

 

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

 

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CASCADE CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited—in thousands, except per share amounts)

 

																Accumulated
							Additional			Unamortized						Other			Annual
		Common Stock					Paid-In			Deferred			Retained			Comprehensive			Comprehensive
		Shares		Amount			Capital			Compensation			Earnings			Income			Income
Balance at January 31, 2004		12,102		$	6,051		$	11,111		$	—		$	165,495		$	1,031		—
Net income		—		—			—			—			23,403			—			23,403
Dividends ($0.33 per share)		—		—			—			—			(4,012		)	—			—
Common stock issued		99		49			1,257			—			—			—			—
Tax benefit from exercise of stock options		—		—			358			—			—			—			—
Deferred compensation from stock appreciation rights		—		—			3,873			(3,873		)	—			—			—
Amortization of deferred compensation		—		—			—			861			—			—			—
Translation adjustment		—		—			—			—			—			5,710			5,710
Balance at October 31, 2004		12,201		$	6,100		$	16,599		$	(3,012	)	$	184,886		$	6,741		$	29,113

 

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

 

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CASCADE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited—in thousands)

 

		For the Nine Months Ended
		October 31
		2004			2003
Cash flows from operating activities:
Net income		$	23,403		$	16,207
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		10,672			9,202
Amortization of deferred compensation		861			-
Deferred income taxes		(331		)	736
Gain on disposition of assets		(76		)	(71		)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(11,212		)	(10,044		)
Inventories		(3,704		)	622
Prepaid expenses and other		(859		)	108
Accounts payable and accrued expenses		3,149			988
Current income taxes payable and receivable		3,957			3,954
Other liabilities		2,922			2,814
Net cash provided by operating activities		28,782			24,516
Cash flows from investing activities:
Capital expenditures		(9,710		)	(8,835		)
Purchase of marketable securities, net		(2,384		)	(17,228		)
Proceeds from sale of investment		1,044			-
Business acquisitions		(4,710		)	(11,173		)
Proceeds from sale of assets		275			819
Other assets		269			(377		)
Proceeds from notes receivable		—			9,556
Net cash used in investing activities		(15,216		)	(27,238		)
Cash flows from financing activities:
Cash dividends paid		(4,012		)	(3,606		)
Payments on long-term debt and capital leases		(338		)	(63		)
Notes payable to banks, net		(766		)	(130		)
Common stock issued under stock option plan		1,306			1,094
Net cash used in financing activities		(3,810		)	(2,705		)
Effect of exchange rate changes		(357		)	1,499
Change in cash and cash equivalents		9,399			(3,928		)
Cash and cash equivalents at beginning of period		25,584			29,501
Cash and cash equivalents at end of period		$	34,983		$	25,573

 

Supplemental disclosure of noncash information:

See Note 10 to consolidated financial statements.

 

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

 

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CASCADE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Description of Business

 

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

 

Note 2—Interim Financial Information

 

                The accompanying consolidated financial statements for the interim periods ended October 31, 2004 and 2003 are unaudited. In the opinion of management, the accompanying consolidated financial statements reflect normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for those interim periods. Results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year, and these financial statements do not contain the detail or footnote disclosures concerning accounting policies and other matters that would be included in full fiscal year financial statements. Therefore, these statements should be read in conjunction with our audited financial statements included on Form 10-K in our Annual Report for the fiscal year ended January 31, 2004.

 

Note 3—Segment Information

 

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

 

For the three months ended October 31, 2004
		North America			Europe			Asia Pacific			Eliminations			Consolidated
Sales to unaffliated customers		$	53,898		$	27,614		$	14,830		$	—		$	96,342
Transfers between areas		4,571			203			16			(4,790		)	—
Net sales		$	58,469		$	27,817		$	14,846		$	(4,790	)	$	96,342
Operating income		$	11,299		$	(487	)	$	2,904					$	13,716
Property, plant and equipment		$	36,418		$	40,337		$	4,853					$	81,608
For the three months ended October 31, 2003
Sales to unaffliated customers		$	44,167		$	19,443		$	12,162		$	—		$	75,772
Transfers between areas		4,327			475			5			(4,807		)	—
Net sales		$	48,494		$	19,918		$	12,167		$	(4,807	)	$	75,772
Operating income (loss)		$	6,928		$	(478	)	$	2,451					$	8,901
Property, plant and equipment		$	35,737		$	31,428		$	4,406					$	71,571

 

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For the nine months ended October 31, 2004
		North America			Europe			Asia Pacific			Eliminations			Consolidated
Sales to unaffliated customers		$	153,520		$	84,517		$	44,209		$	—		$	282,246
Transfers between areas		15,637			1,515			49			(17,201		)	—
Net sales		$	169,157		$	86,032		$	44,258		$	(17,201	)	$	282,246
Operating income		$	29,343		$	483		$	8,325					$	38,151
For the nine months ended October 31, 2003
Sales to unaffliated customers		$	129,977		$	57,123		$	33,238		$	—		$	220,338
Transfers between areas		12,382			1,182			20			(13,584		)	—
Net sales		$	142,359		$	58,305		$	33,258		$	(13,584	)	$	220,338
Operating income		$	20,951		$	20		$	5,662					$	26,633

 

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

 

		October 31			January 31
		2004			2004
North America		$	60,593		$	56,612
Europe		10,823			9,154
Other		3,152			3,149
		$	74,568		$	68,915

 

Note 4—Marketable Securities

 

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

 

Note 5—Gain on Sale of Investment

 

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

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Note 6—Inventories

 

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

 

		October 31			January 31
		2004			2004
Finished goods and components		$	28,403		$	23,490
Work in process		745			1,251
Raw materials		12,513			11,612
		$	41,661		$	36,353

 

Note 7—Stock-Based Compensation

 

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

 

                Our shareholders approved the Cascade Corporation Stock Appreciation Rights Plan (SARS Plan) in May 2004. The SARS Plan provides for the award of stock appreciation rights (SARS) to key executives and directors. The SARS provide the holder the right to receive an amount, payable in our common shares, equal to the excess of the market value of our common shares on the date of exercise over the base price established by our Board of Directors’ Compensation Committee at the time the right was granted. The base price may not be less than the market price of our common shares on the date of grant.

 

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

 

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

 

		Three Months Ended October 31						Nine Months Ended October 31
		2004			2003			2004			2003
Net income applicable to common shareholders - as reported		$	8,691		$	5,092		$	23,403		$	16,177
Add: SARS amortization, net of income taxes of $184 and $305		$	336		—			$	556		—
Net income excluding SARS amortization		9,027			5,092			23,959			16,177
Deduct: total stock-based compensation, net of income taxes of $116, $97, $348 and $122,determined under fair value based method		(297		)	(180		)	(891		)	(247		)
Net income applicable to common shareholders - pro forma		$	8,730		$	4,912		$	23,068		$	15,930
Basic earnings per share - as reported		$	0.71		$	0.42		$	1.93		$	1.36
Basic earnings per share - pro forma		$	0.72		$	0.41		$	1.90		$	1.34
Diluted earnings per share - as reported		$	0.68		$	0.41		$	1.84		$	1.31
Diluted earnings per share - pro forma		$	0.68		$	0.39		$	1.82		$	1.29

 

Note 8—Contingencies

 

Environmental Matters

 

                We are subject to environmental laws and regulations, which include obligations to remove or mitigate environmental effects of past disposal and release of certain wastes and substances at various sites. We record liabilities for affected sites when environmental assessments indicate probable cleanup will be required and the costs can be reasonably estimated. Our liabilities for environmental costs, other than for costs of assessments themselves, are generally determined after the completion of investigations and studies or our commitment to a formal plan of action, such as an approved remediation plan, and are based on our best estimate of undiscounted future costs using currently available technology, applying current regulations, as well as our own historical experience regarding environmental cleanup costs. The reliability and precision of the loss estimates are affected by numerous factors, such as different stages of site evaluation and reevaluation of the degree of remediation required. We adjust our liabilities as new remediation requirements are defined, as information becomes available permitting reasonable estimates to be made and to reflect new and changing facts.

 

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

 

                Our specific environmental matters consist of the following:

 

Fairview, Oregon

 

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

 

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liability for the ongoing remediation activities at our Fairview facility of $7.7 million and $8.3 million at October 31, 2004 and January 31, 2004, respectively.

 

Springfield, Ohio

 

                In 1994, we entered into a consent order with the Ohio Environmental Protection Agency, which required the installation of remediation systems for the cleanup of groundwater contamination at our Springfield, Ohio facility. The current estimate is that the remediation activities will continue through 2010. We have a liability for ongoing remediation activities at our Springfield facility of $1.1 and $1.1 million at October 31, 2004 and January 31, 2004, respectively.  During the three months ended October 31, 2004, we recorded $155,000 of additional environmental expenses related to changes in remediation activities.  These changes were based on a reevaluation of the prior remediation plan after regularly scheduled meetings with the Ohio Environmental Protection Agency.

 

Insurance Litigation

 

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

 

Legal Proceedings

 

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

 

Lease Guarantee

 

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

 

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Note 9—Earnings Per Share

 

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

 

		Three Months Ended October 31						Nine Months Ended October 31
		2004			2003			2004			2003
Basic earnings per share:
Net income		$	8,691		$	5,092		$	23,403		$	16,207
Preferred stock dividends		—			—			—			(30		)
Net income available to common shareholders		$	8,691		$	5,092		$	23,403		$	16,177
Weighted average shares of common stock outstanding		12,195			12,054			12,149			11,882
		$	0.71		$	0.42		$	1.93		$	1.36
Diluted earnings per share:
Net income applicable to common shareholders		$	8,691		$	5,092		$	23,403		$	16,177
Preferred stock dividends		—			—			—			30
Net income		8,691			5,092			23,403			16,207
Weighted average shares of common stock outstanding		12,195			12,054			12,149			11,882
Assumed conversion of exchangeable preferred stock		—			—			—			135
Dilutive effect of stock options and appreciation rights		604			480			556			318
Diluted weighted average shares of common stock outstanding		12,799			12,534			12,705			12,335
		$	0.68		$	0.41		$	1.84		$	1.31

 

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

 

Note 10—Supplemental Cash Flow Information

 

		2004			2003
Cash paid during period for:
Interest		$	1,892		$	3,541
Income taxes		$	8,851		$	2,766
Business acquisitions:
Accounts receivable		$	—		$	5,079
Inventories		—			4,677
Plant and equipment		4,949			4,171
Goodwill and intangible assets		—			4,193
Accounts payable assumed		—			(5,662		)
Notes payable assumed		—			(1,285		)
Other liabilities		(239		)	—
		$	4,710		$	11,173
Supplemental disclosure of noncash information:
Conversion of exchangeable preferred stock to common stock		$	—		$	8,530
Deferred compensation from stock appreciation rights		$	3,873		$	—

 

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Note 11—Benefit Plans

 

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

 

		Three months ended						Three months ended
		October 31						October 31
		Defined Benefit						Postretirement Benefit
		2004			2003			2004			2003
Components of net periodic benefit cost:
Service cost		84			50			$	32		$	41
Interest cost		112			107			116			157
Expected return on plan assets		(103		)	(98		)	—			—
Recognized net actuarial loss		29			56			99			113
Net periodic benefit cost		$	122		$	115		$	247		$	311
		Nine months ended						Nine months ended
		October 31						October 31
		Defined Benefit						Postretirement Benefit
		2004			2003			2004			2003
Service cost		$	251		$	150		$	106		$	124
Interest cost		337			321			390			472
Expected return on plan assets		(309		)	(294		)	—			—
Recognized net actuarial loss		88			168			389			338
Net periodic benefit cost		$	367		$	345		$	885		$	934

 

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

 

Note 12—Recent Accounting Pronouncements

 

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

 

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

 

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

 

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

 

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Note 13—Warranty Obligations

 

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

 

		2004			2003
Beginning obligation, January 31		$	1,610		$	1,322
Accruals for warranties issued during the period		1,228			673
Accruals for pre-existing warranties		33			-
Settlements during the quarter		(877		)	(429		)
Ending obligation, October 31		$	1,994		$	1,566

 

 

Note 14—Accumulated Other Comprehensive Income (Loss)

 

 

		Accumulated Other Comprehensive Income (Loss)
		Translation Adjustment			Minimum Pension Liability Adjustment			Total
Balance at January 31, 2004		$	3,340		$	(2,309	)	$	1,031
Translation adjustment		5,706			—			5,706
Balance at October 31, 2004		$	9,046		$	(2,309	)	$	6,737

 

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