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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2008.
OR
¨ | 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 1-9389
C&D TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware | 13-3314599 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1400 Union Meeting Road, Blue Bell, Pennsylvania | 19422 | |
(Address of principal executive office) | (Zip Code) |
(215) 619-2700
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accepted filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Number of shares of the Registrant’s Common Stock outstanding on April 30, 2008: 25,666,477
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AND SUBSIDIARIES
FORM 10-Q
INDEX
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Item 1. | Financial Statements |
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
(UNAUDITED)
April 30, 2008 | January 31, 2008 | |||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 6,274 | $ | 6,536 | ||
Restricted cash | 1,740 | 4,383 | ||||
Accounts receivable, less allowance for doubtful accounts of $1,200 and $1,148 | 63,523 | 62,946 | ||||
Inventories | 79,495 | 85,832 | ||||
Prepaid taxes | 838 | 800 | ||||
Other current assets | 993 | 835 | ||||
Assets held for sale | 450 | 450 | ||||
Total current assets | 153,313 | 161,782 | ||||
Property, plant and equipment, net | 80,894 | 79,782 | ||||
Deferred income taxes | 32 | 32 | ||||
Intangible and other assets, net | 15,841 | 16,091 | ||||
Goodwill | 59,920 | 59,870 | ||||
TOTAL ASSETS | $ | 310,000 | $ | 317,557 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Short-term debt | $ | 5,724 | $ | 5,568 | ||
Accounts payable | 41,564 | 51,382 | ||||
Accrued liabilities | 16,191 | 15,593 | ||||
Other current liabilities | 7,712 | 9,767 | ||||
Total current liabilities | 71,191 | 82,310 | ||||
Deferred income taxes | 10,147 | 10,020 | ||||
Long-term debt | 124,556 | 124,133 | ||||
Other liabilities | 19,769 | 20,568 | ||||
Total liabilities | 225,663 | 237,031 | ||||
The accompanying notes are an integral part of these statements.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands, except par value)
(UNAUDITED)
April 30, 2008 | January 31, 2008 | |||||||
Commitments and contingencies (see Note 9) | ||||||||
Minority interest | 11,492 | 11,418 | ||||||
Stockholders’ equity: | ||||||||
Common stock, $.01 par value, 75,000,000 shares authorized; 29,081,110 and 29,081,110 shares issued, respectively | 291 | 291 | ||||||
Additional paid-in capital | 75,108 | 74,995 | ||||||
Treasury stock, at cost, 3,414,633 and 3,414,633 shares, respectively | (47,243 | ) | (47,243 | ) | ||||
Accumulated other comprehensive income | (21,223 | ) | (24,270 | ) | ||||
Retained earnings | 65,912 | 65,335 | ||||||
Total stockholders’ equity | 72,845 | 69,108 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 310,000 | $ | 317,557 | ||||
The accompanying notes are an integral part of these statements.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(UNAUDITED)
Three months ended April 30, | ||||||||
2008 | 2007 | |||||||
NET SALES | $ | 93,776 | $ | 77,479 | ||||
COST OF SALES | 80,084 | 67,056 | ||||||
GROSS PROFIT | 13,692 | 10,423 | ||||||
OPERATING EXPENSES: | ||||||||
Selling, general and administrative expenses | 9,655 | 8,532 | ||||||
Research and development expenses | 1,691 | 1,531 | ||||||
Gain on sale of Shanghai, China plant | — | (15,162 | ) | |||||
OPERATING INCOME FROM CONTINUING OPERATIONS | 2,346 | 15,522 | ||||||
Interest expense, net | 2,266 | 2,177 | ||||||
Other (income), net | (373 | ) | (631 | ) | ||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST | 453 | 13,976 | ||||||
Income tax provision from continuing operations | 134 | 94 | ||||||
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST | 319 | 13,882 | ||||||
Minority interest | (258 | ) | 4,528 | |||||
NET INCOME FROM CONTINUING OPERATIONS | 577 | 9,354 | ||||||
LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES | — | (3,108 | ) | |||||
Income tax provision from discontinued operations | — | 2,116 | ||||||
LOSS FROM DISCONTINUED OPERATIONS | — | (5,224 | ) | |||||
NET INCOME | $ | 577 | $ | 4,130 | ||||
Income per share: | ||||||||
Basic: | ||||||||
Net income from continuing operations | $ | 0.02 | $ | 0.36 | ||||
Net loss from discontinued operations | $ | — | $ | (0.20 | ) | |||
Net income | $ | 0.02 | $ | 0.16 | ||||
Diluted: | ||||||||
Net income from continuing operations | $ | 0.02 | $ | 0.24 | ||||
Net loss from discontinued operations | $ | — | $ | (0.11 | ) | |||
Net income | $ | 0.02 | $ | 0.13 | ||||
The accompanying notes are an integral part of these statements.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
Three months ended April 30, | ||||||||
2008 | 2007 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 577 | $ | 4,130 | ||||
Net loss from discontinued operations | — | (5,224 | ) | |||||
Net income from continuing operations | 577 | 9,354 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Minority interest | (258 | ) | 4,528 | |||||
Share-based compensation | 113 | 110 | ||||||
Depreciation and amortization | 3,011 | 2,864 | ||||||
Amortization of debt acquisition costs | 424 | 386 | ||||||
Deferred income taxes | 127 | 1,351 | ||||||
Loss (gain) on disposal of assets | 6 | (15,203 | ) | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (334 | ) | (4,519 | ) | ||||
Inventories | 6,547 | (419 | ) | |||||
Other current assets | (152 | ) | (306 | ) | ||||
Accounts payable | (9,164 | ) | (2,451 | ) | ||||
Accrued liabilities | 519 | 959 | ||||||
Income taxes payable | (10 | ) | 615 | |||||
Other current liabilities | (1,955 | ) | (339 | ) | ||||
Other liabilities | (701 | ) | 1,663 | |||||
Funds provided to discontinued operations | — | (2,216 | ) | |||||
Other long-term assets | (15 | ) | 143 | |||||
Other, net | 1,879 | (3,762 | ) | |||||
Net cash provided by (used in) continuing operating activities | 614 | (7,242 | ) | |||||
Net cash provided by discontinued operating activities | — | 1,082 | ||||||
Net cash provided by (used in) operating activities | 614 | (6,160 | ) | |||||
Cash flows from investing activities: | ||||||||
Acquisition of property, plant and equipment | (3,599 | ) | (1,549 | ) | ||||
Proceeds from disposal of property, plant and equipment | — | 1,893 | ||||||
Decrease in restricted cash | 2,643 | — | ||||||
Net cash provided by (used in) continuing investing activities | (956 | ) | 344 | |||||
Net cash provided by discontinued investing activities | — | 39 | ||||||
Net cash provided by (used in) investing activities | (956 | ) | 383 | |||||
The accompanying notes are an integral part of these statements.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(UNAUDITED)
Three months ended April 30, | ||||||||
2008 | 2007 | |||||||
Cash flows from financing activities: | ||||||||
Repayment of debt | (21 | ) | — | |||||
Proceeds from new borrowings | — | 7,597 | ||||||
(Decrease) increase in book overdrafts | 58 | (313 | ) | |||||
Financing cost of long term debt | — | (781 | ) | |||||
Purchase of treasury stock | — | (2 | ) | |||||
Net cash provided by continuing financing activities | 37 | 6,501 | ||||||
Net cash provided by discontinued financing activities | — | 78 | ||||||
Net cash provided by financing activities | 37 | 6,579 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 43 | 24 | ||||||
Decrease in cash and cash equivalents from continuing operations | (262 | ) | (373 | ) | ||||
Cash and cash equivalents, beginning of period | 6,536 | 5,968 | ||||||
Cash and cash equivalents, end of period | $ | 6,274 | $ | 5,595 | ||||
SUPPLEMENTAL CASH FLOW DISCLOSURES | ||||||||
Cash paid during the year for: | ||||||||
Interest paid, net | $ | 125 | $ | — | ||||
Income taxes (received) paid, net | $ | 51 | $ | — |
The accompanying notes are an integral part of these statements.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
(UNAUDITED)
Three months ended April 30, | |||||||
2008 | 2007 | ||||||
NET INCOME | $ | 577 | $ | 4,130 | |||
Other comprehensive income, net of tax: | |||||||
Net unrealized gain (loss) on derivative instruments | 2,267 | (734 | ) | ||||
Adjustment to recognize pension liability and net periodic pension cost | 78 | 439 | |||||
Foreign currency translation adjustments | 702 | 303 | |||||
Total comprehensive income | $ | 3,624 | $ | 4,138 | |||
The accompanying notes are an integral part of these statements.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
1. | INTERIM STATEMENTS |
The accompanying interim unaudited consolidated financial statements of C&D Technologies, Inc (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all the information and notes required for complete financial statements. In the opinion of management, the interim unaudited consolidated financial statements include all adjustments considered necessary for the fair presentation of statements of the financial position, results of operations and cash flows for the interim periods presented. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2008 Annual Report on Form 10-K dated April 10, 2008.
On September 7, 2007 the Company announced the change of method of accounting for its inventory from the last-in, first-out (“LIFO”) to the first-in, first-out (“FIFO”) method. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 154, “Accounting Changes and Error Corrections”, the Company has retrospectively applied this change in method of inventory costing to all prior periods.
2. | DISCONTINUED OPERATIONS |
In fiscal year 2008 the Company sold its Power Electronics Division and certain assets of its Motive Power Division. As a result, activity in fiscal year 2008 related to these divisions has been reclassified as discontinued operations in the interim unaudited consolidated financial statements.
3. | STOCK-BASED COMPENSATION |
The Company granted stock option awards of 5,000 shares and 279,334 shares during the three months ended April 30, 2008 and 2007, respectively. Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, the Company recorded $75 and $64 of stock compensation related to stock option awards in its unaudited consolidated statements of operations for the three months ended April 30, 2008 and 2007, respectively. The impact on earnings per share for the three months ended April 30, 2008 and 2007 was less than $0.01.
On March 12, 2007, the Company granted 84,600 restricted stock awards and 84,600 performance shares to selected executives and other key employees under the Company’s 2007 Stock Incentive Plan. The restricted stock awards vest ratably over four years and the expense is recognized over the vesting period. Compensation expense associated with restricted stock in the three months ended April 30, 2008 and 2007 was $38 and $28, respectively. The performance shares vest at the end of the performance period upon the achievement of pre-established financial objectives. No compensation expense has been recorded for the performance related awards since the Company does not believe that the performance criteria established will be met.
The following table summarizes information about the stock options outstanding at April 30, 2008:
OPTIONS OUTSTANDING | OPTIONS EXERCISABLE | |||||||||||||
Range of | Number Outstanding | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Number Exercisable | Weighted- Average Contractual Life | Weighted- Average Exercise Price | ||||||||
$ 4.25 - $ 6.26 | 385,834 | 6.6 Years | $ | 5.27 | 55,668 | 8.0 Years | $ | 5.96 | ||||||
$ 6.81 - $ 9.12 | 488,755 | 6.8 Years | $ | 7.55 | 472,421 | 6.8 Years | $ | 7.56 | ||||||
$ 9.80 - $ 14.50 | 161,656 | 4.0 Years | $ | 11.48 | 161,656 | 4.0 Years | $ | 11.48 | ||||||
$ 14.94 - $ 22.31 | 523,149 | 3.1 Years | $ | 18.93 | 523,149 | 3.1 Years | $ | 18.93 | ||||||
$ 26.76 - $ 35.00 | 125,480 | 2.2 years | $ | 32.12 | 125,480 | 2.2 Years | $ | 32.12 | ||||||
$ 49.44 - $ 55.94 | 35,000 | 1.4 Years | $ | 55.02 | 35,000 | 1.4 Years | $ | 55.02 | ||||||
Total | 1,719,874 | 4.9 Years | $ | 13.63 | 1,373,374 | 4.5 Years | $ | 15.74 | ||||||
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The estimated fair value of the options granted was calculated using the Black Scholes Merton option pricing model (“Black Scholes”). The Black Scholes model incorporates assumptions to value stock-based awards. The risk-free rate of interest for periods within the estimated life of the option is based on U.S. Government Securities Treasury Constant Maturities over the contractual term of the equity instrument. Expected volatility is based on the historical volatility of the Company’s stock. The Company uses the shortcut method described in Staff Accounting Bulletin No. 107 to determine the expected life assumption.
The fair value of stock options granted during the three months ended April 30, 2008 and 2007 was estimated on the grant date using the Black-Scholes option pricing model with the following average assumptions.
Three months ended April 30, | 2008 | 2007 | ||
Risk-free interest rate | 2.58% | 4.45%-4.78% | ||
Dividend yield | 0% | 0% | ||
Volatility factor | 50.90% | 49.25%-49.30% | ||
Expected lives | 5-5.5 Years | 5-5.5 Years |
4. | NEW ACCOUNTING PRONOUNCEMENTS |
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements”, which establishes a framework for measuring fair value in accordance with generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. On February 12, 2008 FASB issued Staff Position (FSP) FAS 157-2. This FSP permits a delay in the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS 157 for financial assets and liabilities did not have a material impact on the Company’s condensed consolidated financial statements. See Note 14 for information and related disclosures regarding the Company’s fair value measurements.
In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities,”which expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We have adopted SFAS No. 159 and determined it has no impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, which improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. To achieve this goal, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of SFAS No. 141(R) on its financial position and results of operations. The impact of adopting SFAS No. 141(R) will depend on the nature, terms and size of any business combination completed after the effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. In addition, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of SFAS No. 160 on its financial position and results of operations.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”, which improves financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS No. 161 on its financial position, results of operations and cash flows.
In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources for generally accepted accounting principles (GAAP) in the U.S. and lists the categories in descending order. An entity should follow the highest category of GAAP applicable for each of its accounting transactions. The adoption will not have a material effect on the Company’s consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position (“FSP”) No. APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlements)” (previously FSP APB 14-a), which will change the accounting treatment for convertible securities which the issuer may settle fully or partially in cash. Under the final FSP, cash settled convertible securities will be separated into their debt and equity components. The value assigned to the debt component will be the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature, and the difference between the proceeds for the convertible debt and the amount reflected as a debt liability will be recorded as additional paid-in capital. As a result, the debt will be recorded at a discount reflecting its below market coupon interest rate. The debt will subsequently be accreted to its par value over its expected life, with the rate of interest that reflects the market rate at issuance being reflected on the income statement. This change in methodology will affect the calculations of net income and earnings per share for many issuers of cash settled convertible securities. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of FSP No. APB 14-1 on the Company’s consolidated financial statements.
5. | INVENTORIES |
Inventories consisted of the following:
April 30, 2008 | January 31, 2008 | |||||
Raw materials | $ | 21,741 | $ | 22,041 | ||
Work-in-process | 19,060 | 22,215 | ||||
Finished goods | 38,694 | 41,576 | ||||
Total | $ | 79,495 | $ | 85,832 | ||
6. | GAIN ON SALE OF SHANGHAI, CHINA PLANT |
During fiscal year 2005, the Company received $15,547 (which was included in other current liabilities at January 31, 2007) from the Chinese government as partial payment for the Company’s old joint venture battery facility located in Shanghai. The Company used these funds for the construction of a new battery manufacturing facility in Shanghai, which was completed during the first quarter of fiscal year 2008. This payment, along with a final payment of $1,850 received during the first quarter of fiscal year 2008, was recognized as income, net of the book value of assets disposed and other exit costs, when the old facility was transferred to the Chinese government during the first quarter of fiscal year 2008. During the first quarter of fiscal year 2008 the Company recognized a gain of $15,162 on this transaction.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
7. | INCOME TAXES |
Three months ended April 30, | ||||||||
2008 | 2007 | |||||||
Provision for income taxes continuing operations | $ | 134 | $ | 94 | ||||
Effective income tax rate | 29.5 | % | 0.6 | % | ||||
Provision for income taxes discontinued operations | $ | — | $ | 2,116 | ||||
Effective income tax rate | — | 68.1 | % |
Effective tax rates from continuing operations were 29.5% and 0.6% for the three months ended April 30, 2008 and 2007, respectively. Tax expense for the three months ended April 30, 2008 is due to tax expense in certain profitable foreign subsidiaries and no tax benefit recognized in certain jurisdictions where the Company incurred a loss, net of the release of the valuation allowance against certain domestic deferred tax assets as a result of pre-tax domestic book income in the current period. Additionally, the tax expense in the current quarter was reduced by $59 as a result of the expiration of the statute of limitations for uncertain tax positions and interest.
8. | EARNINGS PER SHARE |
Basic earnings per common share was computed using net income and the weighted average number of common shares outstanding during the period. Diluted earnings per common share was computed using net income and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of stock options and assumed vesting of restricted stock awards using the treasury stock method, as well as the assumed conversion of debt using the if-converted method.
The following table sets forth the computation of basic and diluted earnings (losses) per common share:
Three months ended April 30, | ||||||
2008 | 2007 | |||||
Denominator: | ||||||
Denominator for basic earnings per common share- weighted average common share | 25,666,477 | 25,650,623 | ||||
Effect of dilutive securities: | ||||||
Convertible Notes | — | 20,120,932 | ||||
Employee stock awards | 42,696 | 31 | ||||
Employees stock options | — | 102 | ||||
Dilutive potential common shares | 42,696 | 20,121,065 | ||||
Denominator for diluted earnings per common share- adjusted weighted average common shares and assumed conversions | 25,709,173 | 45,771,688 | ||||
Basic earnings per common share - continuing operations | $ | 0.02 | $ | 0.36 | ||
Diluted earnings from common share - continuing operations | $ | 0.02 | $ | 0.24 | ||
The Company has excluded dilutive securities of 20,120,932 issuable in connection with convertible bonds from the diluted income per share calculation for the three months ended April 30, 2008, because their effect would be anti-dilutive. During the three months ended April 30, 2008 and 2007, there were 1,419,374 and 2,479,597, respectively, of outstanding employee stock options that were out-of-the-money and therefore excluded from the calculation of the dilutive effect of employee stock options.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
9. | CONTINGENT LIABILITIES |
Legal
In January 1999, the Company received notification from the U.S. Environmental Protection Agency (“EPA”) of alleged violations of permit effluent and pretreatment discharge limits at its plant in Attica, Indiana. The Company submitted a compliance plan to the EPA in April 2002. The Company engaged in negotiations with both the EPA and U.S. Department of Justice (“DOJ”) through March 2003 regarding a potential resolution of this matter. The government filed suit against the Company in March 2003 in the United States District Court for the Southern District of Indiana for alleged violations of the Clean Water Act. The parties have reached a settlement, and agreed to the terms of a Consent Decree, with an agreed civil penalty of $1,600. The Court entered the Consent Decree on November 20, 2006. In addition to payment of the civil penalty, the Consent Decree requires the Company to implement a Compliance Work Plan for completing implementation of certain compliance measures set forth in the Consent Decree. These compliance measures are required to be implemented by the Company in accordance with a schedule approved by the EPA. The Compliance Work Plan and schedule are fully enforceable parts of the Consent Decree. The Consent Decree also requires certain pretreatment compliance measures, including the continued operation of a wastewater pretreatment system, which was previously installed at the Attica facility. The Consent Decree further requires certain National Pollution Discharge Elimination System (NPDES) compliance measures, including testing, sampling and reporting requirements relating to a NPDES storm water monitoring system at the facility. Additionally, the Consent Decree provides for stipulated penalties for noncompliance with the requirements of the Consent Decree. The Company does not expect that the Consent Decree will have a material adverse effect on its business, financial condition or results of operations.
Environmental
The Company is subject to extensive and evolving environmental laws and regulations regarding the clean-up and protection of the environment, worker health and safety and the protection of third parties. These laws and regulations include, but are not limited to (i) requirements relating to the handling, storage, use and disposal of lead and other hazardous materials in manufacturing processes and solid wastes; (ii) record keeping and periodic reporting to governmental entities regarding the use and disposal of hazardous materials; (iii) monitoring and permitting of air emissions and water discharge; and (iv) monitoring worker exposure to hazardous substances in the workplace and protecting workers from impermissible exposure to hazardous substances, including lead, used in our manufacturing process.
Notwithstanding the Company’s efforts to maintain compliance with applicable environmental requirements, if injury or damage to persons or the environment arises from hazardous substances used, generated or disposed of in the conduct of the Company’s business (or that of a predecessor to the extent the Company is not indemnified therefor), the Company may be held liable for certain damages, the costs of investigation and remediation, and fines and penalties, which could have a material adverse effect on the Company’s business, financial condition, or results of operations. However, under the terms of the purchase agreement with Allied Corporation (“Allied”) for the acquisition (the “Acquisition”) of the Company (the “Acquisition Agreement”), Allied was obligated to indemnify the Company for any liabilities of this type resulting from conditions existing at January 28, 1986, that were not disclosed by Allied to the Company in the schedules to the Acquisition Agreement. These obligations have since been assumed by Allied’s successor in interest, Honeywell (“Honeywell”).
C&D is participating in the investigation of contamination at several lead smelting facilities (“Third Party Facilities”) to which C&D allegedly made scrap lead shipments for reclamation prior to the date of the acquisition.
Pursuant to a 1996 Site Participation Agreement, as later amended in 2000, the Company and several other potentially responsible parties (“PRP”s) agreed upon a cost sharing allocation for performance of remedial activities required by the United States EPA Administrative Order Consent Decree entered for the design and remediation phases at the former NL Industries, Inc. (“NL”) site in Pedricktown, New Jersey, Third Party Facility. In April 2002, one of the original PRPs, Exide Technologies (Exide), filed for relief under Chapter 11 of Title 11 of the United States Code. In August 2002, Exide notified the PRPs that it would no longer be taking an active role in any further action at the site and discontinued its financial participation, resulting in a pro rata increase in the cost participation of the other PRPs, including the Company, for which the Company’s allocated share rose from 5.25% to 7.79%.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
In August 2002, the Company was notified of its involvement as a PRP at the NL Atlanta, Northside Drive Superfund site. NL and Norfolk Southern Railway Company have been conducting a removal action on the site, preliminary to remediation. The Company, along with other PRPs, continues to negotiate with NL at this site regarding the Company’s share of the allocated liability.
The Company has terminated operations at its Huguenot, New York, facility, and has completed facility decontamination and disposal of chemicals and hazardous wastes remaining at the facility following termination of operations in accordance with applicable regulatory requirements. The Company is also aware of the existence of soil and groundwater contamination at the Huguenot, New York, facility, which is expected to require expenditures for further investigation and remediation. The site is listed by the New York State Department of Environmental Conservation (“NYSDEC”) on its registry of inactive hazardous waste disposal sites due to the presence of fluoride and other contaminants in and underlying a lagoon used by the former owner of this site, Avnet, Inc., for disposal of wastewater. Contamination is present at concentrations that exceed state groundwater standards. In 2002, the NYSDEC issued a Record of Decision (“ROD”) for the soil remediation portion of the site. A ROD for the ground water portion has not yet been issued by the NYSDEC. In 2005, the NYSDEC also requested that the parties engage in a Feasibility Study, which the parties are conducting in accordance with a NYSDEC approved work plan. In February 2000, the Company filed suit against Avnet, Inc., and in December 2006, the parties executed a settlement agreement which provides for a cost sharing arrangement with Avnet bearing a majority of the future costs associated with the investigation and remediation of the lagoon-related contamination.
C&D, together with Johnson Controls, Inc. (“JCI”), is conducting an assessment and remediation of contamination at and near its facility in Milwaukee, Wisconsin. The majority of the on-site soil remediation portion of this project was completed as of October 2001. Under the purchase agreement with JCI, C&D is responsible for (i) one-half of the cost of the on-site assessment and remediation, with a maximum liability of $1,750 (ii) any environmental liabilities at the facility that are not remediated as part of the ongoing cleanup project and (iii) environmental liabilities for any new claims made after the fifth anniversary of the closing, i.e. March 2004, that arise from migration from a pre-closing condition at the Milwaukee facility to locations other than the Milwaukee facility, but specifically excluding liabilities relating to pre-closing offsite disposal. JCI retained the environmental liability for the off-site assessment and remediation of lead. In March 2004, the Company entered into an agreement with JCI to continue to share responsibility as set forth in the original purchase agreement. The Company continues to negotiate with JCI regarding the allocation of costs for assessment and remediation of certain off-site chlorinated volatile organic compounds (“CVOC”s) in groundwater.
In February 2005, the Company received a request from the EPA to conduct exploratory testing to determine if the historical municipal landfill located on the Company’s Attica, Indiana, property is the source of elevated levels of trichloroethylene detected in two city wells downgradient of the Company’s property. The EPA advised that it believes the former landfill is subject to remediation under the RCRA corrective action program. The Company conducted testing in accordance with an investigation work plan and submitted the test results to the EPA. The EPA thereafter notified the Company that they also wanted the Company to embark upon a more comprehensive RCRA investigation to determine whether there have been any releases of other hazardous waste constituents from its Attica facility and, if so, to determine what corrective measure may be appropriate. In January 2007, the Company agreed to an Administrative Order on Consent with EPA to investigate, and remediate if necessary, site conditions at the facility. Site investigation work has been conducted and the results of this investigation indicate limited soils and groundwater contamination at the site.
The Company has conducted site investigations at its Conyers, Georgia facility, and has detected chlorinated solvents in groundwater and lead in soil both onsite and offsite. The Company has recently initiated remediation of the chlorinated solvents in accordance with a Corrective Action Plan, which was approved by the Georgia Department of Natural Resources in January 2007. Additionally, the Company is conducting remediation of lead impacted soils identified in the site investigations. In September 2005, an adjoining landowner filed suit against the Company alleging, among other things, that it was allowing lead contaminated stormwater runoff to leave its property and contaminate the adjoining property. The parties entered an agreement to settle the litigation in March 2007 with the Company agreeing to purchase a parcel of land between its property and plaintiff’s property and to use the transferred parcel to construct a bioremediation area to prevent potential future lead contamination to plaintiff’s property. In July 2007, the plaintiff provided notice that it is withdrawing from the settlement agreement alleging additional unknown contamination had been discovered. The Company believes the allegation is without merit and intends to vigorously defend the lawsuit.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The Company accrues reserves for liabilities in its consolidated financial statements and periodically reevaluates the reserved amounts for these liabilities in view of the most current information available in accordance with SFAS No. 5, “Accounting for Contingencies.” As of April 30, 2008 and January 31, 2008, accrued environmental reserves totaled $1,531 and $1,496, respectively, consisting of $831 and $796 in other current liabilities and $700 and $700 in other liabilities. Based on currently available information, the Company believes that appropriate reserves have been established with respect to the foregoing contingent liabilities and that they are not expected to have a material adverse effect on its business, financial condition or results of operations.
10. | DERIVATIVE INSTRUMENTS |
The Company is exposed to various market risks. The primary financial risks include fluctuations in certain commodity prices and changes in currency exchange rates. The Company manages these risks through normal operating and financing activities and when appropriate through the use of derivative instruments.
The Company does not invest in derivative instruments for speculative purposes, but does enter into hedging arrangements in order to reduce its exposure to fluctuations in the price of lead as well as to fluctuations in exchange rates. The Company applies hedge accounting in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” whereby the Company designates each derivative as a hedge of (i) the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge); or (ii) the variability of anticipated cash flows of a forecasted transaction or the cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). From time to time, however, the Company may enter into derivatives that economically hedge certain of its risks, even though hedge accounting is not allowed by SFAS No. 133 or is not applied by the Company. In these cases, there generally exists a natural hedging relationship in which changes in fair value of the derivative, that are recognized currently in earnings, act as an economic offset to changes in the fair value of the underlying hedged item(s).
The following table provides the fair value of the Company’s derivative contracts which include forward commodity contracts.
April 30, 2008 | January 31, 2008 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Commodity hedges | $ | (1,020 | ) | $ | (1,020 | ) | $ | (1,503 | ) | $ | (1,503 | ) |
The commodity forwards are designated as cash flow hedges. Therefore, changes in their fair value, net of tax, are recorded in accumulated other comprehensive income and released to earnings in the period the hedged item is recognized.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
11. | WARRANTY |
The Company provides for estimated product warranty expenses when the related products are sold. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties follows:
Three months ended April 30, | ||||||||
2008 | 2007 | |||||||
Balance at beginning of period | $ | 11,276 | $ | 7,760 | ||||
Current year provisions | 819 | 1,987 | ||||||
Expenditures | (2,106 | ) | (1,417 | ) | ||||
Effect of foreign currency translation | 4 | 6 | ||||||
Balance at end of period | $ | 9,993 | $ | 8,336 | ||||
As of April 30, 2008, accrued warranty obligations of $9,993 include $3,612 in current liabilities and $6,381 in other liabilities. As of January 31, 2008, accrued warranty obligations of $11,276 include $4,072 in current liabilities and $7,204 in other liabilities.
Certain warranty costs associated with the discontinued operations were not assumed by the buyer and are included in the table above. The current year provisions include $0 and $1,374 related to discontinued operations in the first fiscal quarters 2009 and 2008, respectively. Expenditures include $1,359 and $1,090 related to discontinued operations in the first fiscal quarters 2009 and 2008, respectively.
12. | PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS |
Effective in fiscal year 2009, the Company changed the measurement date for its employee benefit plans from December 31 to January 31 in accordance with the measurement date provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment to FASB Statements No. 87, 88, 106 and 132(R).” The Company has elected to use the “13-month” approach to proportionally allocate the transition adjustment required under SFAS No. 158. The Company anticipates there will be a charge recorded to retained earning of approximately $100 in the fourth quarter.
The components of net periodic benefit cost consisted of the following for the interim periods:
Pension Benefits | Postretirement Benefits | |||||||||||||||
Three months ended April 30, | Three months ended April 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Components of net periodic benefit cost: | ||||||||||||||||
Service cost | $ | 261 | $ | 440 | $ | 18 | $ | 38 | ||||||||
Interest cost | 1,083 | 1,095 | 30 | 65 | ||||||||||||
Expected return on plan assets | (1,261 | ) | (1,219 | ) | — | — | ||||||||||
Amortization of prior service costs | — | 3 | (201 | ) | (5 | ) | ||||||||||
Recognized actuarial loss/(gain) | 289 | 439 | (2 | ) | (1 | ) | ||||||||||
Net periodic benefit cost | $ | 372 | $ | 758 | $ | (155 | ) | $ | 97 | |||||||
The Company made no contributions to the plan in the first quarter of fiscal year 2009. The Company expects to make contributions of approximately $1,500 to its plan during fiscal year 2009. The Company also expects to make contributions totaling approximately $125 to the Company sponsored postretirement benefit plan during fiscal year 2009.
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
13. | RESTRUCTURING |
During fiscal year 2007, the Company implemented organizational and operational changes to streamline and rationalize its structure in an effort to simplify the organization and eliminate redundant costs.
On April 16, 2007 the Company announced its decision to close its Standby Power Division manufacturing facility in Conyers, Georgia and the transfer of its production to Leola, Pennsylvania. As a result of this action, the Company recorded severance charges of $557 in its financial statements for fiscal year 2008. These charges were included in the cost of sales on the consolidated statement of operations. In addition, the Company incurred approximately $200 of special pension termination benefits and approximately $2,200 of other costs relating to the closure of Conyers.
On October 24, 2007, the Company announced the sale of certain assets of its Motive Power Division. As a result of this decision, the Company recorded severance accruals for the year of $723 in its consolidated statement of operations. These charges relate to workforce reductions of approximately 168 employees.
As a result of the divestitures of the Power Electronics Division and Motive Power Division, the Company took additional actions to reduce selling, general and administrative expenses. The Company recorded severance accruals in the third quarter of fiscal year 2008 of $524 in its consolidated statement of operations. These charges relate to workforce reductions of approximately 30 employees.
A reconciliation of the beginning and ending liability and related activity is shown below.
Balance at January 31, 2008 | Provision Additions | Expenditures | Balance at April 30, 2008 | |||||||||
Severance | $ | 694 | $ | — | $ | 238 | $ | 456 | ||||
14. | FAIR VALUE MEASUREMENT |
As discussed in Note 4, we adopted SFAS 157 on February 1, 2008, which among other things, requires enhanced disclosures about assets and liabilities measured at fair value. Our adoption of SFAS 157 was limited to financial assets and liabilities, which primarily relates to our derivative contracts. We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. SFAS 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
Level 1 | Inputs are quoted prices in active markets for identical assets or liabilities. | |
Level 2 | Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. | |
Level 3 | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
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C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The following table represents our liabilities measured at fair value on a recurring basis as of April 30, 2008 and the basis for that measurement:
Total Fair Value Measurement April 30, 2008 | Quoted Priced in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
Commodity hedges | $ | (1,020 | ) | $ | — | $ | (1,020 | ) | $ | — | ||||
Investments held for deferred compensation plan | 437 | 437 | — | — |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 2.
Three Months Ended April 30, 2008, compared to Three Months Ended April 30, 2007
Continuing Operations
Within the following discussion, unless otherwise stated, “quarter” and “three-month” period” refer to the first quarter of fiscal year 2009. All comparisons are with the corresponding period in the prior fiscal year, unless otherwise stated.
Net sales in the first quarter of fiscal year 2009 increased $16,297 or 21% to $93,776 from $77,479 in the first quarter of fiscal year 2008. This increase was primarily due to increased unit sales and pricing in the UPS and telecommunications markets.
Gross profit in the first quarter of fiscal year 2009 increased $3,269 or 31% to $13,692 from $10,423. Margins increased from 13% in the first quarter of fiscal year 2008 to 15% in the first quarter of fiscal year 2009. Margins increased significantly from the most recent fourth quarter of fiscal 2008 which were 8%. Price increases and benefits from the Company’s cost reduction programs were offset by higher raw material costs, principally lead, resins, copper and steel. Average London Metal Exchange (“LME”) prices increased from an average of $0.86 per pound in the first quarter of fiscal year 2008 to $1.35 per pound in the first quarter of fiscal year 2009. Lead prices traded on the LME have continued to be volatile, having traded down to $0.90 per pound on May 26, 2008. First quarter fiscal year 2008 results included severance costs associated with the closure of the division’s Conyers, Georgia facility of $218.
Selling, general and administrative expenses in the first quarter of fiscal year 2009 increased $1,123 or 13.2% to $9,655 from $8,532. The increase is primarily due to compensation and fringe benefits and higher warranty expense. As a percentage of sales, selling, general and administrative expenses decreased 11.0% in the first quarter of fiscal 2008 to 10.3% in the first quarter of fiscal 2009.
Research and development expenses in the first quarter of fiscal year 2009 increased $160 or 10% to $1,691 from $1,531. As a percentage of sales, research and development expenses decreased from 2.0% in the first quarter of fiscal year 2008 to 1.8% in the first quarter of fiscal year 2009.
During the first quarter of fiscal year 2008, the Company recognized a gain of $15,162 from the sale of its old joint venture manufacturing facility in Shanghai, China.
The Company had operating income in the first quarter of fiscal year 2009 of $2,346 compared to operating income of $15,522 in the first quarter of fiscal year 2008. The change is mainly due to the gain on the sale in China with the difference reflecting the increase in gross profit compared to the first quarter of fiscal 2008.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Analysis of Change in Operating Income from continuing operations for the 1st quarter of fiscal year 2009 vs. fiscal year 2008.
Fiscal Year 2009 vs. 2008 | ||||
Operating income 1Q 08 | $ | 15,522 | ||
Lead costs, net | (14,021 | ) | ||
Price / volume | 14,206 | |||
Gain on sale of Shanghai, China plant | (15,162 | ) | ||
Conyers severance | 218 | |||
Other net, including cost reduction programs | 1,583 | |||
Operating income 1Q 09 | $ | 2,346 | ||
Interest expense, net in the first quarter of fiscal year 2009 increased $89 or 4.0% to $2,266 from $2,177 in the first quarter of fiscal year 2008, primarily due to higher borrowings on the Company’s credit line in China in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008.
Other income was $373 in the first quarter of fiscal year 2009 compared to other income of $631 in the first quarter of fiscal year 2008. Fiscal year 2009 other income was primarily due to royalty income related to the divested Motive Power Division. The first quarter of fiscal year 2008 included approximately $620 of foreign exchange gains.
Income tax expense of $134 was recorded in the first quarter of fiscal year 2009, compared to $94 in the first quarter of fiscal year 2008. Tax expense in the first quarter of both fiscal years 2009 and 2008, is primarily due to a combination of tax expense in profitable foreign subsidiaries, principally the United Kingdom.
Minority interest reflects the 33% ownership interest in the joint venture battery business located in Shanghai, China, that is not owned by the Company. Approximately, $5,000 of the decrease in minority interest was the result of the $15,162 of gain recognized on the sale of our old manufacturing plant in Shanghai, China during the first quarter of fiscal 2008.
As a result of the above, net income from continuing operations of $577 was recorded in the first quarter of fiscal year 2009 compared to $9,354 in the prior year. Basic earnings per share were $0.02 and $0.36 in the first quarter of fiscal year 2009 and 2008, respectively, and diluted earnings per share were $0.02 and $0.24 in the first quarter of fiscal 2009 and 2008, respectively.
Other Comprehensive Income
Other comprehensive income decreased by $514 in the first quarter of fiscal year 2009 to $3,624 from $4,138 in the first quarter of fiscal year 2008. This decrease was due to a decrease in net income from $4,130 in the first quarter of fiscal 2008 to $577 in the first quarter of fiscal year 2009 coupled with an unrealized gain on derivative instruments of $2,267 in the first quarter of fiscal year 2009 compared to a loss of $734 in first quarter of fiscal year 2008 and foreign currency translation adjustments increased to $702 in fiscal year 2009 from $303 in fiscal year 2008. In addition, in fiscal year 2008 there was an adjustment to pension liabilities of $439 compared to $78 in 2009.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Liquidity and Capital Resources
Net cash provided by continuing operating activities was $614 for the three months ended April 30, 2008, compared to a use of $7,242 in the comparable period of the prior fiscal year. The improvement is a result of i) higher net income in fiscal 2009 than 2008 excluding the $15,162 gain on sale of the old plant in China; ii) disposition of the Power Electronics Division and certain assets of the Motive Power Division in the prior year which used $2,216 of cash from continuing operations; and iii) a reduction in inventory of $6,547 compared to an increase in $419 in fiscal 2008. These increases were partially offset by a decrease in accounts payable of $9,164 compared with a decrease of $2,451 in the prior fiscal year. Accounts receivable constituted a use of cash in fiscal year 2009 of $334 compared with $4,519 in fiscal year 2008 principally due to timing of monthly shipments and sales.
Net cash used in continuing investing activities was $956 in the first quarter of fiscal year 2009 as compared to cash provided by continuing investing activities of $344 in the first quarter of fiscal year 2008. During the first three months of fiscal year 2009, we had purchases of property, plant and equipment of $3,599 compared with purchases of $1,549 in the prior year. The increase in capital is principally in support of our cost reduction activities and future new product development. This was partially offset by a reduction of restricted cash of $2,643 related to lead hedging activities in the first quarter of fiscal 2009. In addition, in fiscal year 2008 we had proceeds from the disposal of property, plant and equipment in the amount of $1,893.
Net cash provided by continuing financing activities decreased $6,464 to $37 for the three months ended April 30, 2008, compared to $6,501 in the comparable period of the prior fiscal year. Proceeds from borrowings under the Company’s revolving credit facility were the primary source of cash provided by financing activities in fiscal year 2008. The primary purpose of the new borrowings in the prior fiscal year was to fund operations.
Cash from operations and availability under the amended Credit Facility is expected to be sufficient to meet our ongoing cash needs for working capital requirements, restructuring, capital expenditures and debt service for at least the next twelve months. Capital expenditures during the first three months of fiscal year 2009 were primarily for a new more efficient production line being installed in one of our facilities. We estimate capital spending for the full fiscal year 2009 to be in the range of $18,000 to $21,000. As of April 30, 2008, the maximum availability calculated under the borrowing base was $52,995, of which $0 was funded, and $14,117 was utilized for letters of credit. As provided under the Credit Facility, excess borrowing capacity will be available for future working capital needs and general corporate purposes.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Contractual Obligations and Commercial Commitments
The following tables summarize our contractual obligations and commercial commitments as of April 30, 2008:
Payments Due by Period | |||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1 - 3 years | 4 - 5 years | After 5 years | ||||||||||
Debt | $ | 135,224 | $ | 5,724 | $ | — | $ | — | $ | 129,500 | |||||
Interest payable on notes | 126,094 | 6,935 | 13,870 | 13,870 | 91,419 | ||||||||||
Operating leases | 7,968 | 1,889 | 3,163 | 590 | 2,326 | ||||||||||
Projected – lead purchases* | 305,000 | 105,000 | 125,000 | 75,000 | — | ||||||||||
Equipment | 4,450 | 3,800 | 650 | — | — | ||||||||||
Total contractual cash obligations | $ | 578,736 | $ | 123,348 | $ | 142,683 | $ | 89,460 | $ | 223,245 | |||||
* | Amounts are based on the cash price of lead at April 30, 2008 which was $1.22. Prices are significantly lower as of the end of May. |
Amount of Commitment Expiration per Period | |||||||||||||||
Other Commercial Commitments | Total Amount Committed | Less than 1 year | 1 - 3 years | 4 - 5 years | After 5 years | ||||||||||
Standby letters of credit | $ | 14,117 | $ | 13,559 | $ | 558 | $ | — | $ | — | |||||
Total commercial commitments | $ | 14,117 | $ | 13,559 | $ | 558 | $ | — | $ | — | |||||
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements we make. We may, from time to time, make written or verbal forward-looking statements. Generally, the inclusion of the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “guidance,” “forecast,” “plan,” “outlook” and similar expressions in filings with the Securities and Exchange Commission (“SEC”), in our press releases and in oral statements made by our representatives, identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and are intended to come within the safe harbor protection provided by those sections. The forward-looking statements are based upon management’s current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
By their nature, forward-looking statements involve risk and uncertainties that could cause our actual results to differ materially from anticipated results. Examples of forward-looking statements include, but are not limited to:
• | projections of revenues, cost of raw materials, income or loss, earnings or loss per share, capital expenditures, growth prospects, dividends, the effect of currency translations, capital structure and other financial items; |
• | statements of plans, strategies and objectives made by our management or board of directors, including the introduction of new products, cost savings initiatives or estimates or predictions of actions by customers, suppliers, competitors or regulating authorities; |
• | statements of future economic performance; and |
• | statements regarding the ability to obtain amendments under our debt agreements. |
We caution you not to place undue reliance on these forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, those factors discussed under Item 1A—Risk Factors, Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations and Item 8 – Financial Statements and Supplementing Data, and the following general factors:
• | our ability to implement and fund based on current liquidity, business strategies and restructuring plans; |
• | our substantial debt and debt service requirements, which may restrict our operational and financial flexibility, as well as impose significant interest and financing costs; |
• | restrictive loan covenants may impact our ability to operate our business and pursue business strategies; |
• | the litigation and regulatory proceedings to which we are subject, the results of which could have a material adverse effect on us and our business; |
• | our exposure to fluctuations in interest rates on our variable debt; |
• | the realization of the tax benefits of our net operating loss carry forwards, which is dependent upon future taxable income; |
• | the fact that lead, a major constituent in most of our products, experiences significant fluctuations in market price and is a hazardous material that may give rise to costly environmental and safety claims; |
• | our ability to successfully pass along increased material costs to our customers; |
• | unanticipated warranty and quality problems associated with our products; |
• | failure of our customers to renew supply agreements; |
• | competitiveness of the battery markets in North America and Europe; |
• | the substantial management time and financial and other resources needed for our consolidation and rationalization of acquired entities; |
• | delays in production and product qualification due to the relocation of our Shanghai facility; |
• | political, economic and social changes, or acts of terrorism or war; |
• | successful collective bargaining with our unionized workforce; |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
• | risks involved in our foreign operations such as disruption of markets, changes in import and export laws, currency restrictions, currency exchange rate fluctuations and possible terrorist attacks against the United States interests; |
• | our ability to maintain and generate liquidity to meet our operating needs; |
• | we may have additional impairment charges; |
• | our ability to acquire goods and services and/or fulfill labor needs at budgeted costs; |
• | economic conditions or market changes in certain market sectors in which we conduct business; |
• | our success or timing of new product development; |
• | changes in our product mix; |
• | success of productivity initiatives, including rationalizations, relocations or consolidations; |
• | impact of changes in our management; |
• | costs of our compliance with environmental laws and regulations and resulting liabilities; and |
• | our ability to protect our proprietary intellectual property and technology; |
The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” included in the Company’s Form 10-K annual report for the year ended January 31, 2008.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Item 3. | Quantitative and Qualitative Disclosure about Market Risk |
The Company is exposed to various market risks. The primary financial risks include fluctuations in interest rates, certain raw material commodity prices, and changes in currency exchange rates. The Company manages these risks through normal operating and financing activities and when appropriate through the use of derivative instruments. It does not invest in derivative instruments for speculative purposes, but enters into hedging arrangements in order to reduce its exposure to fluctuations in interest rates, the price of lead, as well as to fluctuations in exchange rates.
On occasion, the Company has entered into non-deliverable forward contracts with certain financial counterparties to hedge our exposure to the fluctuations in the price of lead, the primary raw material component used by the Company. The Company employs hedge accounting in the treatment of these contracts. Changes in the value of the contracts are marked to market each month and the gains and losses are recorded in other comprehensive loss until they are released to the income statement through cost of goods sold in the same period as is the hedged item (lead).
Additional disclosure regarding various market risks were set forth in the Company’s fiscal year 2008 Annual Report on Form 10-K filed with the SEC.
Item 4. | Controls and Procedures: |
Management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by it in the reports that it files or submits under the Exchange Act and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding timely disclosures.
Internal Control over Financial Reporting:
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities:
NONE
On September 30, 2004, the Board of Directors authorized a new stock repurchase program. Under the program, the Company is permitted to repurchase up to 1 million shares of C&D Technologies common stock having a total purchase price of no greater than $25 million. This program entirely replaces and supersedes all previously authorized stock repurchase programs. No shares were purchased during the first quarter of fiscal year 2009 under this program.
Restrictions on Dividends and Treasury Stock Purchases:
Our Credit Facility limits restricted payments including dividends and Treasury Stock purchases to no more than $250,000 for Treasury Stock in any one calendar year and $1,750,000 for dividends for any one calendar year subject to adjustments of up to $400,000 per year in the case of the conversion of debt to stock per the terms of our convertible offerings. These restricted payments can only occur with prior notice to the lenders and provided that there is a minimum of $30,000,000 in excess availability for a period of thirty days prior to the dividend. The Company may declare and pay a dividend provided these conditions are met and there does not exist an event of default.
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Item 6. | Exhibits. |
Incorporated by Reference | ||||||||||
Exhibit | Exhibit Description | Form | Date | Exhibit Number | Filed Herewith | |||||
31.1 | Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | ||||||||
31.2 | Certification of the Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | ||||||||
32.1 | Certification of the President and Chief Executive Officer and Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
C&D TECHNOLOGIES, INC. | ||||
June 5, 2008 | By: | /s/ Jeffrey A. Graves | ||
Jeffrey A. Graves | ||||
President, Chief Executive Officer and Director | ||||
(Principal Executive Officer) | ||||
June 5, 2008 | By: | /s/ Ian J. Harvie | ||
Ian J. Harvie | ||||
Vice President Finance and Chief Financial Officer | ||||
(Principal Financial Officer) | ||||
June 5, 2008 | By: | /s/ Neil E. Daniels | ||
Neil E. Daniels | ||||
Vice President & Corporate Controller | ||||
(Principal Accounting Officer) |
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31.1 | Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of the President and Chief Executive Officer and Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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