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 July 31, 2005
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 of other jurisdiction of (I.R.S. Employer
Incorporation or organization) 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 an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES |X| NO |_|
Number of shares of the Registrant's Common Stock outstanding on July 31,
2005: 25,367,647.
C&D TECHNOLOGIES, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets - July 31, 2005 and January 31, 2005 3
Consolidated Statements of Operations - Three and Six
Months Ended July 31, 2005 and 2004 5
Consolidated Statements of Cash Flows - Six Months Ended
July 31, 2005 and 2004 6
Consolidated Statements of Comprehensive Income (Loss) -
Three and Six Months Ended July 31, 2005 and 2004 8
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
Item 3 Quantitative and Qualitative Disclosures about Market Risk 33
Item 4 Controls and Procedures 34
Part II OTHER INFORMATION
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 4 Submission of Matters to a Vote of Security Holders 35
Item 6 Exhibits 36
SIGNATURES 37
EXHIBIT INDEX 38
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
(UNAUDITED)
July 31, January 31,
2005 2005*
=========================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 20,915 $ 26,855
Accounts receivable, less allowance for doubtful accounts
of $2,385 and $2,018 75,710 73,621
Inventories, net 81,329 77,272
Deferred income taxes 14,298 14,481
Prepaid taxes 5,928 1,644
Other current assets 2,083 2,008
- ---------------------------------------------------------------------------------------
Total current assets 200,263 195,881
Property, plant and equipment, net 98,671 104,130
Deferred income taxes 287 287
Intangible and other assets, net 80,363 83,863
Goodwill 95,725 97,247
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $475,309 $481,408
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,699 $ 1,874
Accounts payable 40,742 34,808
Book overdrafts 1,099 8,674
Accrued liabilities 24,695 24,254
Other current liabilities 13,888 10,374
- ---------------------------------------------------------------------------------------
Total current liabilities 82,123 79,984
Deferred income taxes 11,746 12,216
Long-term debt 127,609 135,004
Other liabilities 37,952 36,705
- ---------------------------------------------------------------------------------------
Total liabilities 259,430 263,909
- ---------------------------------------------------------------------------------------
3
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands, except par value)
(UNAUDITED)
July 31, January 31,
2005 2005*
======================================================================================================
Commitments and contingencies (see Note 7)
Minority interest 8,180 8,171
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares
authorized; 28,749,978 and 28,714,973 shares issued, respectively 287 287
Additional paid-in capital 72,105 71,956
Treasury stock, at cost 3,382,331 and 3,368,676 shares, respectively (47,148) (47,151)
Accumulated other comprehensive income 4,852 5,275
Retained earnings 177,603 178,961
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 207,699 209,328
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 475,309 $ 481,408
=====================================================================================================
* Reclassified for comparative purposes.
The accompanying notes are an integral part of these statements.
4
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(UNAUDITED)
Three months ended Six months ended
July 31, July 31,
2005 2004 2005 2004
=================================================================================================================
NET SALES $ 123,076 $ 93,627 $ 245,897 $ 179,432
- -----------------------------------------------------------------------------------------------------------------
COST OF SALES 99,639 74,106 200,709 143,370
- -----------------------------------------------------------------------------------------------------------------
GROSS PROFIT 23,437 19,521 45,188 36,062
OPERATING EXPENSES:
Selling, general and administrative expenses 14,345 9,667 31,024 19,701
Research and development expenses 6,311 3,187 12,524 5,856
- -----------------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,781 6,667 1,640 10,505
- -----------------------------------------------------------------------------------------------------------------
Interest expense, net 2,309 807 4,313 1,094
Other (income) expense, net (258) 499 56 1,059
- -----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 730 5,361 (2,729) 8,352
- -----------------------------------------------------------------------------------------------------------------
(Benefit) provision for income taxes (256) 2,132 (1,907) 3,239
- -----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST 986 3,229 (822) 5,113
- -----------------------------------------------------------------------------------------------------------------
Minority interest (64) 23 (163) (97)
- -----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,050 $ 3,206 $ (659) $ 5,210
=================================================================================================================
Net income (loss) per common share - basic $ 0.04 $ 0.13 $ (0.03) $ 0.21
=================================================================================================================
Net income (loss) per common share - diluted $ 0.04 $ 0.13 $ (0.03) $ 0.20
=================================================================================================================
Dividends per share $ 0.01375 $ 0.02750 $ 0.02750 $ 0.04125
=================================================================================================================
The accompanying notes are an integral part of these statements.
5
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
Six months ended
July 31,
2005 2004
================================================================================================
Cash flows from operating activities:
Net (loss) income $ (659) $ 5,210
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Minority interest (163) (97)
Depreciation and amortization 11,883 11,209
Deferred income taxes (256) 1,407
Loss (gain) on disposal of assets 214 (59)
Changes in assets and liabilities:
Accounts receivable (2,570) (3,991)
Inventories (4,421) (5,110)
Other current assets (122) (54)
Accounts payable 6,492 4,183
Accrued liabilities 375 1,147
Income taxes payable (4,199) (1,899)
Other current liabilities 3,590 (867)
Other liabilities 911 1,183
Other long-term assets 906 788
Other, net 1,701 659
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,682 13,709
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of business, net -- (75,024)
Acquisition of property, plant and equipment (4,136) (5,534)
Proceeds from disposal of property, plant and equipment 71 121
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,065) (80,437)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of debt (7,014) (75)
Proceeds from new borrowings -- 68,269
(Decrease) increase in book overdrafts (7,575) 1,305
Financing cost of long-term debt (735) (263)
Proceeds from issuance of common stock, net 47 773
Purchase of treasury stock (154) (2,661)
Payment of common stock dividends (349) (698)
Payment of minority interest dividends -- (10)
- ------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (15,780) 66,640
- ------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 223 (77)
- ------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (5,940) (165)
Cash and cash equivalents, beginning of period 26,855 12,306
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 20,915 $ 12,141
================================================================================================
6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(UNAUDITED)
Six months ended
July 31,
2005 2004
=============================================================================================
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquired businesses:
Estimated fair value of assets acquired $ -- $ 41,692
Goodwill and identifiable intangible assets -- 54,638
Cash paid, net of cash acquired -- (75,024)
- ---------------------------------------------------------------------------------------------
Liabilities assumed $ -- $ 21,306
=============================================================================================
(Decrease) increase in property, plant, and equipment acquisitions
in accounts payable $ (440) $ 421
Annual retainer to Board of Directors paid by the issuance
of common stock $ 199 $ 147
Tax effect of options exercised $ 7 $ 208
Dividend declared, but not paid $ 350 $ 349
The accompanying notes are an integral part of these statements.
7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(UNAUDITED)
Three months ended Six months ended
July 31, July 31,
2005 2004 2005 2004
================================================================================================
NET INCOME (LOSS) $ 1,050 $ 3,206 $ (659) $ 5,210
Other comprehensive (loss) income, net of tax:
Net unrealized (loss) gain on derivative
instruments (453) 157 (190) 340
Foreign currency translation adjustments (183) 762 (233) (211)
- ------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 414 $ 4,125 $(1,082) $ 5,339
================================================================================================
The accompanying notes are an integral part of these statements.
8
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 consolidated financial statements of C&D
Technologies, Inc. (together with its operating subsidiaries, the "Company")
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's Annual Report to Stockholders for the
fiscal year ended January 31, 2005. The January 31, 2005, amounts were derived
from the Company's audited financial statements. The consolidated financial
statements presented herein are unaudited but, in the opinion of management,
include all necessary adjustments (which comprise only normal recurring items)
required for a fair statement of the consolidated financial position as of July
31, 2005, and the related consolidated statements of operations and
comprehensive income (loss) for the three and six months ended July 31, 2005 and
2004, and the related consolidated statements of cash flows for the six months
ended July 31, 2005 and 2004. However, interim results of operations may not be
indicative of results for the full fiscal year. The accompanying interim
consolidated financial statements of the Company have been prepared in
conformity with accounting principles generally accepted in the United States of
America. The January 31, 2005, Consolidated Balance Sheet has been reclassified
to conform to the July 31, 2005, presentation.
2. STOCK-BASED COMPENSATION
Under Accounting Principles Board ("APB") Opinion No. 25, if the exercise
price of the Company's employee stock options equals or exceeds the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
As the exercise price of all options granted under the Company's stock
option plans was equal to the market price of the underlying common stock on the
grant date, no stock-based employee compensation cost is recognized in net
income (loss). The following table illustrates the effect on net income (loss)
and net income (loss) per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standard ("SFAS")
No. 123, "Accounting for Stock-Based Compensation" as amended, to options
granted under the stock option plans. For purposes of this pro forma disclosure,
the estimated value of the options is amortized to expense over the options'
vesting periods. The pro forma disclosure reflects an acceleration of most of
the Company's outstanding options on March 1, 2005. Because the estimated value
is determined as of the date of grant, the actual value ultimately realized by
the employee may be significantly different.
Three months ended Six months ended
July 31, July 31,
2005 2004 2005 2004
================================================================================================================
Net income (loss)- as reported $ 1,050 $ 3,206 $ (659) $ 5,210
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effect 1,364 1,028 3,673 1,943
- ----------------------------------------------------------------------------------------------------------------
Net (loss) income - pro forma $ (314) $ 2,178 $(4,332) $ 3,267
================================================================================================================
Net income (loss) per common share - basic - as reported $ 0.04 $ 0.13 $ (0.03) $ 0.21
Net (loss) income per common share - basic - pro forma $ (0.01) $ 0.09 $ (0.17) $ 0.13
Net income (loss) per common share - diluted - as reported $ 0.04 $ 0.13 $ (0.03) $ 0.20
Net (loss) income per common share - diluted - pro forma $ (0.01) $ 0.09 $ (0.17) $ 0.13
Weighted-average fair value of options granted during the year $ 3.46 $ 8.02 $ 3.46 $ 9.08
9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
SFAS No. 123 requires the use of option pricing models that were not
developed for use in valuing employee stock options. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including the option's expected life and the
price volatility of the underlying stock. Because changes in the subjective
input assumptions can materially affect the fair value estimate, the existing
models may not provide a reliable single measure of the fair value of employee
stock options.
On March 1, 2005, the Company's Compensation Committee authorized the
vesting of all outstanding non-vested options then held by employees of the
Company and any of its subsidiaries, which were granted by the Corporation under
the 1996 and 1998 Stock Option Plans. In accordance with SFAS No. 123R, which is
effective for the first annual period after December 15, 2005, the Company will
be required to apply the expense recognition provisions under SFAS No. 123R
beginning February 1, 2006. The reason that the Company accelerated the vesting
of the identified stock options was to reduce the Company's compensation charge
in periods subsequent to adoption of SFAS No. 123R. Of the 3,130,228 stock
options outstanding on March 1, 2005, 2,501,985 were vested and 628,243 were
non-vested. Of the 628,243 options which were non-vested, 604,445 were
accelerated and 23,798, which were granted under the U.K. Stock Options Plan,
were not accelerated. During the second quarter of fiscal year 2006, the Company
issued 649,866 options. All of these options were granted with immediate
vesting.
3. NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs, an amendment of Accounting Research Bulletin No.
43, Chapter 4," which adopts wording from the International Accounting Standards
Board's ("IASB") International Accounting Standard ("IAS") No. 2 "Inventories"
in an effort to improve the comparability of cross-border financial reporting.
The FASB and IASB both believe the standards have the same intent; however, an
amendment was adopted to avoid inconsistent application. The new standard
indicates that abnormal freight, handling costs and wasted materials (spoilage)
are required to be treated as current period charges rather than as a portion of
inventory cost. Additionally, the standard clarifies that fixed production
overhead should be allocated based on the normal capacity of a production
facility. The statement is effective for the Company beginning in fiscal year
2007. Adoption is not expected to have a material impact on the Company's
consolidated operations, financial position or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" (SFAS No. 123R), which replaces SFAS No. 123 and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values beginning with the first annual period beginning after
December 15, 2005. The pro forma disclosures previously permitted under SFAS No.
123 no longer will be an alternative to financial statement recognition. The
Company is required to adopt SFAS No. 123R in the first quarter of fiscal year
2007. SFAS No. 123R permits public companies to adopt these requirements using
one of two methods:
o A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123R for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS
No. 123 for all awards granted to employees prior to the effective
date of SFAS No. 123R that remain unvested on the effective date.
o A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures.
10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The Company is evaluating the impact of adoption of the provisions of SFAS
No. 123R as well as the impact of the Security and Exchange Commission's ("SEC")
Staff Accounting Bulletin ("SAB") No. 107 "Share-Based Payment." SAB 107 was
issued by the SEC in March 2005 and provides supplemental SFAS No. 123R
application guidance based on the views of the SEC. The Company currently
expects to apply the provisions of SFAS No. 123R utilizing the modified
prospective method. In anticipation of the implementation of SFAS No. 123R, the
Company has accelerated the vesting of all stock options granted under the 1996
and 1998 Stock Option Plans as of March 1, 2005.
4. INVENTORIES
Inventories consisted of the following:
July 31, January 31,
2005 2005
================================================================================
Raw materials $33,604 $31,558
Work-in-process 13,829 13,084
Finished goods 33,896 32,630
- ------------------------------------------------------------------------------
Total $81,329 $77,272
==============================================================================
11
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
5. INCOME TAXES
Six months ended
July 31,
2005 2004
================================================================================
(Benefit) provision for income taxes $(1,907) $ 3,239
Effective income tax rate 69.9% 38.8%
The effective income tax rate is computed based on the (benefit) provision
for income taxes as a percentage of (loss) income before income taxes and
minority interest. The Company's effective income tax rate in the first six
months of fiscal year 2006 was impacted by: (i) a net loss before income taxes
in the first six months of fiscal year 2006 compared to income before taxes in
the same period of the prior year along with a shift in the (loss) income
components between United States and foreign operations; (ii) an increase in the
relative size of the valuation allowance in the current year related to the
United States foreign tax credits for unremitted earnings of a controlled
foreign subsidiary compared to the prior year including the impact of a change
in the tax laws of a foreign jurisdiction in the second quarter of fiscal year
2006; and (iii) the tax effect of the resolution of state tax matters in the
first six months of fiscal years 2006 and 2005.
The Company's effective tax rate for the fiscal year ended January 31,
2005, was 26.4%. In addition to the aforementioned factors that impacted the
second quarter of fiscal year 2006, the primary factor impacting the effective
tax rate for the fiscal year ended January 31, 2005, was the tax effect of the
goodwill impairment recorded in the fourth quarter of fiscal year 2005.
6. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is based on the weighted-average number
of shares of Common Stock outstanding. Net income (loss) per common share -
diluted reflects the potential dilution that could occur if stock options were
exercised. Weighted-average common shares and common shares - diluted were as
follows:
Three months ended Six months ended
July 31, July 31,
2005 2004 2005 2004
====================================================================================================
Weighted-average shares of common stock 25,358,907 25,305,795 25,352,534 25,351,724
Assumed conversion of stock options,
net of shares assumed reacquired 112,319 118,608 -- 152,437
- ----------------------------------------------------------------------------------------------------
Weighted-average common shares - diluted 25,471,226 25,424,403 25,352,534 25,504,161
====================================================================================================
During the three months ended July 31, 2005 and 2004, there were 2,970,228
and 2,760,731 outstanding employee stock options, respectively, that were
out-of-the-money and, therefore, excluded from the calculation of diluted
earnings per share because their inclusion would have been anti-dilutive. During
the six months ended July 31, 2004, there were 1,513,444 outstanding employee
stock options that were out-of-the-money and, therefore, excluded from the
calculation of diluted earnings per share because their inclusion would have
been anti-dilutive. These stock options could be dilutive in the future. Due to
a net loss in the six months ended July 31, 2005, 65,844 of dilutive securities
issuable in connection with stock option plans have been excluded from the
diluted loss per share calculation because their effect would reduce the loss
per share.
12
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
7. CONTINGENT LIABILITIES
Legal:
In March 2003, the Company was sued in an action captioned United States
of America v. C&D Technologies, Inc., in the United States District Court for
the Southern District of Indiana, for alleged violations of the Clean Water Act
by virtue of alleged violations of permit effluent and pretreatment discharge
limits at our plant in Attica, Indiana. The complaint requests injunctive relief
and civil penalties of up to the amounts provided by statute. The parties are in
the process of negotiating a resolution of the matter, failing which we intend
to aggressively defend the matter.
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;
(iv) the reduction of hazardous chemical substances in certain products; and (v)
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, 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 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").
The Company, along with numerous other parties, has been requested to
provide information to the United States Environmental Protection Agency (the
"EPA") in connection with investigations of the source and extent of
contamination at three lead smelting facilities (the "Third Party Facilities")
to which the Company had made scrap lead shipments for reclamation prior to the
date of the Acquisition Agreement.
The Company and four other potentially responsible parties ("PRPs") agreed
upon a cost sharing arrangement for the design and remediation phases of a
project related to one of the Third Party Facilities, the former NL Industries
site in Pedricktown, New Jersey, acting pursuant to a Consent Decree. The PRPs
identified and sued additional PRPs for contribution. In April 2002, one of the
original four 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. This resulted in a
prorata increase in the liabilities of the other PRPs, including the Company,
for which the Company's allocated share rose from 5.25% to 7.79%.
The Company also responded to requests for information from the EPA and
the state environmental agency with regard to another Third Party Facility, the
"Chicago Site," in October 1991.
13
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 Industries, Inc. ("NL") and
Norfolk Southern Railway Company have been conducting a removal action on the
site, preliminary to remediation. The Company, along with other PRPs, has
entered into a tolling agreement and is currently in negotiations with NL with
respect to this site regarding its share of the allocated liability, which the
Company expects will not have a material adverse effect on its business,
financial condition or results of operations.
The Company is also aware of the existence of contamination at its
Huguenot, New York battery manufacturing 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 amounts that exceed state groundwater
standards. In July 2005, NYSDEC issued a preliminary Record of Decision for the
soil remediation portion of the site. Additional site data submitted by the
Company in July 2005 is now under review by NYSDEC, and a remediation plan for
affected ground water has not yet been finalized with or approved by the agency.
In February 2000, C&D filed suit against the prior owner of the site, Avnet,
Inc. ("Avnet"), and in August 2005, the Company reached tentative settlement
through mediated negotiation with Avnet to bear allocated shares of the costs
associated with remediation of soil and groundwater contamination on the site at
issue, among other costs and expenses. The parties are in the process of
documenting their agreement. Should the parties fail to reach final agreement,
and unless an alternative resolution can be achieved, NYSDEC may conduct the
remediation and seek recovery from the parties.
The Company, together with Johnson Controls, Inc. ("JCI"), is conducting
an assessment and remediation of contamination at and near its facility in
Milwaukee, Wisconsin. The on-site soil remediation portion of this project was
completed as of October 2001. Under the purchase agreement with JCI, the Company
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 liability for the
off-site environmental 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 is currently in
negotiation with JCI regarding the allocation of costs for assessment and
remediation of certain off-site chlorinated volatile organic compounds ("CVOCs")
in groundwater.
In January 1999, the Company received notification from the 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 Department of
Justice through March 2003 regarding a potential resolution of this matter. The
government filed suit against the Company in March 2003 for alleged violations
of the Clean Water Act. The complaint requests injunctive relief and civil
penalties of up to the amounts provided by statute. The Company anticipates that
the matter will result in a penalty assessment and compliance obligations. The
Company and the EPA are in active negotiation. The Company will continue to seek
a negotiated or mediated resolution, failing which it would vigorously defend
the action.
In October 2004, the Company accrued estimated environmental clean-up and
decontamination charges of $3,881 related to potentially impaired equipment at
its Leola, Pennsylvania, and Huguenot, New York, facilities, the timing for
which has not been ascertained.
14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
In February 2005, the Company received a verbal 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. A formal claim has not been made against the Company. The
scope of this potential exposure is not presently defined. At this time, the
Company has no reason to believe this matter will have a material adverse effect
on the Company's business, financial condition or results of operations.
The Company accrues reserves for liabilities in the Company's 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 July 31, 2005, and January 31,
2005, accrued environmental reserves totaled $7,242 and $6,570, respectively,
consisting of $3,043 and $2,362 in other current liabilities and $4,199 and
$4,208 in other liabilities, respectively. Based on currently available
information, management of the Company believes that appropriate reserves have
been established with respect to the foregoing contingent liabilities and
potential liabilities are not expected to have a material adverse effect on the
Company's business, financial condition or results of operations.
8. OPERATIONS BY REPORTABLE SEGMENT
The Company has the following three reportable business segments:
The Standby Power Division manufactures and markets integrated reserve
power systems and components for the standby power market, which includes
telecommunications, uninterruptible power supplies ("UPS"), cable and utilities.
Integrated reserve power systems monitor and regulate electric power flow and
provide backup power in the event of a primary power loss or interruption. The
Standby Power Division also produces the individual components of these systems,
including reserve batteries, power rectifiers, system monitors, power boards and
chargers. Major applications of these products include wireless and wireline
telephone infrastructure, cable television ("CATV") signal powering, corporate
data center powering and computer network backup for use during power outages.
The Power Electronics Division manufactures and markets custom, standard
and modified-standard electronic power supply systems, including DC to DC
converters, for large original equipment manufacturers ("OEMs") of
telecommunications and networking equipment, as well as office and industrial
equipment. In addition, the division also manufactures power conversion products
sold into military and CATV applications as well as digital panel meters and
data acquisition components.
The Motive Power Division manufactures complete systems and individual
components (including power electronics and batteries) to power, monitor, charge
and test the batteries used in electric industrial vehicles, including fork-lift
trucks, automated guided vehicles and airline ground support equipment. These
products are marketed to end users in a broad array of industries, dealers of
fork-lift trucks and other material handling vehicles and, to a lesser extent,
OEMs.
15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
Summarized financial information related to the Company's business
segments for the three and six months ended July 31, 2005 and 2004, is shown
below. All sales between business segments have been eliminated.
Standby Power Motive
Three months ended July 31, 2005 Power Electronics Power Consolidated
===========================================================================================
Net sales $ 66,743 $ 43,667 $ 12,666 $123,076
Operating income (loss) $ 3,696 $ 1,601 $ (2,516) $ 2,781
Three months ended July 31, 2004
===========================================================================================
Net sales $ 61,494 $ 19,049 $ 13,084 $ 93,627
Operating income (loss) $ 5,761 $ 2,935 $ (2,029) $ 6,667
Six months ended July 31, 2005
===========================================================================================
Net sales $127,280 $ 92,028 $ 26,589 $245,897
Operating income (loss) $ 5,888 $ 683 $ (4,931) $ 1,640
Six months ended July 31, 2004
===========================================================================================
Net sales $122,384 $ 30,222 $ 26,826 $179,432
Operating income (loss) $ 11,153 $ 3,226 $ (3,874) $ 10,505
Some of the Company's facilities are utilized by more than one business
segment. Therefore, it is not practical to disclose asset information (assets,
expenditures for long-lived assets) on a segment basis.
9. DERIVATIVE INSTRUMENTS
The Company is exposed to various market risks. The primary financial
risks include fluctuations in interest rates, 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 securities for speculative
purposes, but does enter 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. 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).
16
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The following table provides the fair value of the Company's derivative
contracts which include interest rate swaps, foreign exchange contracts and
forward commodity contracts. The interest rate swaps and commodity forwards are
designated as cash flow hedges and; therefore, changes in their fair value, net
of tax, are recorded in accumulated other comprehensive income. At July 31,
2005, and January 31, 2005, the Company has effectively changed $50,000 and
$30,000 in floating rate debt to fixed rate debt at an average rate of 4.55% and
4.94%, respectively. The Company has chosen not to apply hedge accounting to its
currency contracts. Changes in the fair value of the currency contracts are
recorded in other (income) expense, net.
Fair Value at Fair Value at
July 31, January 31,
2005 2005
================================================================================
Interest rate swaps $ 210 $ (644)
Foreign currency contracts $ (114) $ 78
Commodity forward contracts $(1,039) $ --
During the first quarter of fiscal year 2006, the Company began to enter
into financial derivatives to hedge the fluctuation in the price of lead, which
is the primary raw material component in our batteries. The Company expects to
continue to use financial instruments as appropriate to mitigate this risk.
17
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
10. 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:
Six months ended
July 31,
2005 2004
===============================================================================
Balance at beginning of period $ 8,303 $ 9,759
Opening balance sheet liability of acquired companies -- 393
Current year provisions 2,884 2,557
Expenditures (3,363) (2,842)
Effect of foreign currency translation (6) --
- -------------------------------------------------------------------------------
Balance at end of period $ 7,818 $ 9,867
===============================================================================
As of July 31, 2005, accrued warranty obligations of $7,818 include $4,168
in current liabilities and $3,650 in other liabilities. As of January 31, 2005,
accrued warranty obligations of $8,303 include $4,958 in current liabilities and
$3,345 in other liabilities.
11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company follows SFAS No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This standard requires the
disclosure of the components of net periodic benefit cost recognized during
interim periods.
Postretirement Postretirement
Pension Benefits Benefits Pension Benefits Benefits
------------------ ------------------ ------------------ ------------------
Three months Three months Six months Six months
ended ended ended ended
July 31, July 31, July 31, July 31,
2005 2004 2005 2004 2005 2004 2005 2004
===============================================================================================================================
Components of net periodic benefit cost:
Service cost $ 436 $ 384 $ 45 $ 25 $ 936 $ 859 $ 106 $ 78
Interest cost 1,019 976 64 40 2,050 1,946 129 103
Expected return on plan assets (1,285) (1,222) -- -- (2,571) (2,435) -- --
Amortization of prior service costs 5 4 (7) 27 10 9 22 57
Recognized actuarial loss (gain) 443 373 -- (3) 878 744 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 618 $ 515 $ 102 $ 89 $ 1,303 $ 1,123 $ 257 $ 238
===============================================================================================================================
Assuming that the actual return on plan assets is consistent with the
expected rate of 8.25% for the domestic plans for fiscal year 2006, and that
interest rates remain constant for calendar year (plan year) 2005, the Company
would not be required to make any contributions to its domestic pension plans
for fiscal year 2006. The Company expects to either make discretionary
contributions totaling approximately $8,342 to three of its domestic pension
plans by December 31, 2005, or incur a charge to equity which, net of tax, could
be in excess of $16,000. Additionally, the Company plans to make contributions
of approximately $42 to its Japanese plan for fiscal year 2006. In the six-month
period ended July 31, 2005, the Company made contributions of $20 to its
Japanese pension plan.
The Company also expects to make contributions totaling approximately $261
to the two Company sponsored postretirement benefit plans for fiscal year 2006.
18
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
12. ACQUISITIONS
On May 27, 2004, the Company acquired Celab Limited ("Celab") for
approximately $10,500 net of approximately $4,700 in cash acquired, plus
additional acquisition related costs of approximately $400, primarily related to
legal fees and due diligence. Celab, based in Hampshire, United Kingdom, is a
provider of power conversion products, predominantly sold into military, CATV
and telecommunications applications in Europe. This acquisition was funded with
the Company's working capital and its existing credit agreement.
On June 30, 2004, the Company acquired Datel Holding Corporation and its
subsidiaries ("Datel") for an aggregate purchase price of approximately $74,800
plus additional acquisition related costs of approximately $800, primarily
related to legal fees, audit fees, due diligence and appraisals. The purchase
price consisted of an approximately $66,400 cash payment as well as the
assumption of approximately $8,400 in debt. Cash acquired in the Datel
acquisition was approximately $3,100. Datel is a Mansfield, Massachusetts-based
manufacturer of primarily DC to DC converters, with additional product offerings
in data acquisition components and digital panel meters. The appraisal of the
acquired Datel tangible and intangible assets included technology of $11,200
with an 11-year expected useful life, customer relationships of $8,900 with a
20-year expected useful life, trade names of $2,400 with a 25-year expected
useful life, and acquired in-process research and development of $440, which
lastly, resulted in a charge to research and development expense of this amount
in the year ended January 31, 2005. The acquisition was funded with the
Company's expanded revolving credit facility.
On September 30, 2004, the Company acquired the Power Systems division of
Celestica, Inc., which the Company now operates as "CPS," a Toronto,
Ontario-based manufacturer, for approximately $52,400 plus additional
acquisition related costs of approximately $1,050, primarily related to legal
fees, consulting fees, audit fees, due diligence and appraisals. CPS develops DC
to DC converters and AC to DC power supplies which are sold on a direct basis to
large computing and communications OEMs. The appraisal of the acquired CPS
tangible and intangible assets included technology of $3,760 with a weighted
average 5-year expected useful life, customer relationships of $18,500 with a
20-year expected useful life, and acquired in-process research and development
of $340, which resulted in a charge of the same amount to research and
development expense of this in the year ended January 31, 2005. This acquisition
was funded with the Company's expanded revolving credit facility.
The results of operations of these businesses are included in the
Company's consolidated financial statements from their respective dates of
acquisition.
19
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The following unaudited pro forma financial information combines the
consolidated results of operations as if the Celab, Datel and CPS acquisitions
had occurred as of the beginning of the periods presented. Pro forma adjustments
include only the effects of events directly attributed to a transaction that are
factually supportable. The pro forma adjustments contained in the table below
include amortization of intangibles, depreciation adjustments due to the
write-up of property, plant and equipment to estimated fair market value,
interest expense on the acquisition debt and related income tax effects.
Three months Six months
ended ended
July 31, 2004 July 31, 2004
==============================================================================
Net sales $131,903 $263,955
Net loss $ (1,060) $ (111)
Net (loss) income per common share - basic $ (0.04) $ 0.00
Net (loss) income per common share - diluted $ (0.04) $ 0.00
The pro forma financial information does not necessarily reflect the
operating results that would have occurred had the acquisitions been consummated
as of the beginning of the periods presented, nor is such information indicative
of future operating results.
20
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
13. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the amount of probable credit losses in the Company's existing
accounts receivable. The Company determines the allowance based on historical
write-off experience by industry and regional economic data. The Company reviews
its allowance for doubtful accounts quarterly. Past due balances over 90 days
and over a specified amount are reviewed individually for collectibility. All
other balances are reviewed on a pooled basis by age and type of receivable.
Account balances are charged off against the allowance when the Company believes
it is probable the receivable will not be recovered. The Company does not have
any off-balance-sheet credit exposure related to its customers.
Receivables consist of the following at July 31, 2005, and January 31,
2005.
July 31, January 31,
2005 2005
================================================================================
Trade receivables $ 73,261 $ 72,680
Notes receivables 660 500
Other 4,174 2,459
Allowance for doubtful accounts (2,385) (2,018)
- ------------------------------------------------------------------------------
Total receivables $ 75,710 $ 73,621
==============================================================================
Following are the changes in the allowance for doubtful accounts during
the periods ended:
Six months ended
July 31,
2005 2004
===============================================================================
Balance at beginning of period $ 2,018 $ 1,476
Accrual additions (reductions) 411 (11)
(Write-offs) net of recoveries (32) (96)
Translation adjustment (12) (2)
Opening balance sheet of acquired companies -- 186
- -------------------------------------------------------------------------------
Balance at end of period $ 2,385 $ 1,553
===============================================================================
14. DEBT
On June 30, 2004, the Company entered into an amended and restated
revolving credit agreement ("Credit Agreement" or "Facility"), with a maturity
date of June 30, 2009. The financing was arranged by Banc of America Securities
LLC. Under the Credit Agreement, the amount of the Facility was increased to
$175,000 from $100,000 with the option, under certain conditions to increase the
Facility to $200,000. The Facility was increased to $200,000 on August 3, 2004,
at the Company's request.
The Credit Agreement includes a $50,000 sub limit for loans in certain
foreign currencies. The interest rates are determined by the Company's leverage
ratio and, subject to the second amendment discussed below, are available at
LIBOR plus 1% to LIBOR plus 2.75% or Prime, to Prime plus 1.25%. The rates may
be adjusted based on the leverage ratio calculated after the conclusion of each
quarter. The Credit Agreement requires the Company to pay a fee of .25% to .50%
per annum of any unused portion of the Facility, based on the leverage ratio.
21
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The Credit Agreement includes a letter of credit facility, not to exceed
$25,000. The Credit Agreement contains certain restrictive covenants that
require the Company to maintain minimum ratios such as fixed charge coverage and
leverage ratios as well as minimum consolidated net worth. These covenants
permit the Company to pay dividends so long as there are no defaults under the
Credit Agreement. The Company was not in compliance with its leverage ratio
covenant at January 31, 2005. The Company obtained a waiver of this violation on
February 28, 2005. The Company entered into the second amendment to the Credit
Agreement to modify this ratio through the remaining term of the agreement. The
second amendment requires that the Company pledge certain assets as collateral
on a going forward basis. The interest rates determined by the Company's
leverage ratio were changed as a result of this second amendment. The second
amendment also modified other provisions of the Credit Agreement such that it
permits the Company to exclude from certain covenant calculations: (i) the write
down of up to $85,000 of goodwill, (ii) up to $2,500 in severance costs in
fiscal year 2006 and, (iii) all future non-cash stock option or restricted stock
expense. Additionally, the second amendment required the Company to maintain
minimum levels of trailing earnings before interest, taxes, depreciation and
amortization as calculated quarterly through fiscal year 2006. On April 29,
2005, the Company entered into the third amendment to the Credit Agreement to
correct and revise the definitional term "Consolidated EBITDA." The Company was
in compliance with its Credit Agreement covenants at July 31, 2005. However, we
expect that it may be difficult to meet certain of the Credit Agreement
covenants at October 31, 2005. Therefore, we have begun the process of pursuing
financing alternatives. We expect to conclude this process by October 31, 2005.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 2.
Executive Overview
Within the following discussion, unless otherwise stated, "quarter" and
"six-month period," refer to the second quarter of fiscal year 2006 and the six
months ended July 31, 2005. All comparisons are with the corresponding period in
the prior year, unless otherwise stated.
Three acquisitions occurred during fiscal year 2005. On May 27, 2004, we
acquired Celab, based in Hampshire, United Kingdom, a provider of power
conversion products, predominately sold into military, CATV and
telecommunications applications in Europe. On June 30, 2004, we acquired Datel,
a Mansfield, Massachusetts-based manufacturer of DC to DC converters, data
acquisition components and digital meters. On September 30, 2004, we acquired
the Power Systems division of Celestica, Inc., which we now operate as "CPS," a
Toronto, Ontario-based company. CPS develops DC to DC converters and AC to DC
power supplies which are sold on a direct basis to large computing and
communications OEMs. For reporting purposes, these three acquisitions are part
of the Power Electronics Division.
During the second quarter of fiscal 2006, C&D announced that Dr. Jeffrey
Graves had been hired to serve as President and Chief Executive Officer.
Additionally, Dr. Graves was appointed to our Board of Directors. Dr. Graves
replaced George MacKenzie, a member of C&D's Board of Directors who had served
as interim President and Chief Executive Officer since March 24, 2005,
subsequent to the resignation of Wade H. Roberts, Jr. C&D entered into an
employment agreement with Dr. Graves effective as of June 21, 2005, pursuant to
which he commenced employment on July 5, 2005. Also on August 11, 2005, James D.
Dee was appointed Vice President, General Counsel and Corporate Secretary of C&D
effective September 6, 2005. Mr. Dee succeeds to that position from Linda R.
Hansen, who in March 2005 notified the Company of her planned retirement as an
officer of C&D effective August 31, 2005. Finally, on August 17, 2005, C&D
announced the resignation of Stephen E. Markert, Jr., Vice President, Finance
and Chief Financial Officer. Mr. Markert's resignation will take effect
following a transition period ending no earlier than October 14, 2005, and no
later than December 10, 2005. C&D has begun an executive search to find Mr.
Markert's replacement.
Three Months Ended July 31, 2005, Compared to July 31, 2004
Net sales for the second quarter of fiscal year 2006 increased $29,449 or
31% to $123,076 from $93,627 in the second quarter of fiscal year 2005. This
increase resulted primarily from the aforementioned acquisitions, coupled with
increased sales in our Standby Power Division and the legacy portion of our
Power Electronics Division, partially offset by a decline in sales in our Motive
Power Division. Sales of the Power Electronics Division increased $24,618 or
129%, primarily due to an increase in net sales of $23,582 recorded by the
entities acquired during fiscal year 2005. The second quarter of fiscal year
2005 includes two months of results for Celab and one month of results for
Datel. CPS was acquired during the third quarter of fiscal year 2005. The legacy
portion of the Power Electronics Division had a sales increase of $1,036 or 9%.
Sales by the Standby Power Division increased $5,249 or 9%, primarily due to an
increase in sales to the telecommunications industry. Sales by the Motive Power
Division decreased $418 or 3%.
The following table sets forth information on our sales by division as a
percentage of total sales:
Three months ended Three months ended
July 31, 2005 July 31, 2004
------------------------------------------------------
Revenue % of Total Revenue % of Total
========================================================================================
Standby Power Division $ 66,743 54.2% $ 61,494 65.7%
Power Electronics Division 43,667 35.5% 19,049 20.3%
Motive Power Division 12,666 10.3% 13,084 14.0%
- -------------------------------------------------------------------------------------
Total $123,076 100.0% $ 93,627 100.0%
=====================================================================================
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Gross profit for the second quarter of fiscal year 2006 increased $3,916
or 20% to $23,437 from $19,521. Gross margins decreased from 20.8% to 19.0%.
Gross profit in the Power Electronics Division increased $5,446 or 79% to
$12,339 from $6,893, primarily due to the results of the acquisitions, partially
offset by lower gross profit within the legacy portion of the Power Electronics
Division. Gross profit in the Standby Power Division declined $1,081 or 9% to
$11,097 from $12,178. Gross profit in the Motive Power Division decreased $449
or 100% to $1 from $450.
Selling, general and administrative expenses for the second quarter of
fiscal year 2006 increased $4,678 or 48% to $14,345 from $9,667. This increase
was primarily due to an increase in selling, general and administrative expenses
of $2,865 incurred by the fiscal year 2005 acquisitions. Excluding the acquired
companies, selling, general and administrative expenses increased $1,813. This
increase was primarily due to increases in compensation costs in the amount of
$883, higher costs related to Sarbanes-Oxley Act Section 404 internal control
compliance in the amount of $502 and higher audit fees (not including audit fees
related to Sarbanes-Oxley) in the amount of $425.
Research and development expenses for the second quarter of fiscal year
2006 increased $3,124 or 98% to $6,311 from $3,187. As a percentage of sales,
research and development expenses increased from 3.4% during the second quarter
of fiscal year 2005 to 5.1% during the second quarter of fiscal year 2006. The
increase was primarily the result of a $3,189 increase in research and
development expenses incurred by the companies acquired in fiscal year 2005.
Operating income for the second quarter of fiscal year 2006 decreased
$3,886 or 58% to $2,781 from $6,667 in the comparable quarter of the prior
fiscal year.
Below is a summary of key items affecting operating income (loss) for the
second quarter of fiscal year 2006:
Analysis of Change in Operating Income (Loss)
Second Quarter of Fiscal Year 2006 vs. Second Quarter of Fiscal Year 2005
Standby Power Motive
Power Electronics Power
Division Division Division Consolidated
======================================================================================================
Operating income (loss) - three-months ended
July 31, 2004 $ 5,761 $ 2,935 $(2,029) $ 6,667
Lead - increased costs (2,007) -- (579) (2,586)
Increase in Sarbanes-Oxley costs (188) (263) (51) (502)
Operations of acquired companies -- (319) -- (319)
Fiscal year 2005 Reynosa transition costs 400 -- 707 1,107
Increased environmental accruals (112) -- (539) (651)
Other (158) (752) (25) (935)
- ---------------------------------------------------------------------------------------------------
Operating income (loss) - three-months
ended July 31, 2005 $ 3,696 $ 1,601 $(2,516) $ 2,781
===================================================================================================
Interest expense, net, for the second quarter of fiscal year 2006
increased $1,502 or 186% to $2,309 from $807 in the second quarter of fiscal
year 2005, primarily due to higher average debt balances outstanding during the
period as a result of funds borrowed to finance the Celab, Datel and CPS
acquisitions.
An income tax benefit of $256 was recorded in the second quarter of fiscal
year 2006 compared to income tax expense of $2,132 in the second quarter of
fiscal year 2005. The tax benefit or provision is computed on a year-to-date
basis in accordance with SFAS 109, "Accounting for Income Taxes." See the
following section titled "Six Months Ended July 31, 2005, Compared to July 31,
2004" for a discussion of the change in the effective tax rate from the prior
year.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Minority interest reflects the 33% ownership interest in the joint venture
battery business located in Shanghai, China, that is not owned by us. The joint
venture had a net loss during the second quarter of fiscal year 2006 compared to
income during second quarter of fiscal year 2005.
As a result of all of the above, net income in the amount of $1,050 was
recorded in the second quarter of fiscal year 2006 as compared to net income of
$3,206 in the comparable period of the prior fiscal year. On a per share basis
there was net income of $0.04 - basic and diluted compared to net income of
$0.13 - basic and diluted for the second quarters of fiscal years 2006 and 2005,
respectively.
Six Months Ended July 31, 2005, Compared to July 31, 2004
Net sales for the six months ended July 31, 2005, increased $66,465 or 37%
to $245,897 from $179,432 in the six months ended July 31, 2004. This increase
resulted primarily from the aforementioned acquisitions, coupled with increased
sales in our Standby Power Division and the legacy portion of our Power
Electronics Division, partially offset by a decline in sales in our Motive Power
Division. Sales of the Power Electronics Division increased $61,806 or 205%,
primarily due to an increase in net sales of $61,091 recorded by the entities
acquired during fiscal year 2005. The six months ended July 31, 2005, includes
two months of results for Celab and one month of results for Datel. The legacy
portion of the Power Electronics Division had a sales increase of $715 or 3%.
Sales by the Standby Power Division increased $4,896 or 4%, while sales by the
Motive Power Division decreased $237 or 1%.
The following table sets forth information on our sales by division as a
percentage of total sales:
Six months ended Six months ended
July 31, 2005 July 31, 2004
------------------------------------------------------
Revenue % of Total Revenue % of Total
======================================================================================
Standby Power Division $127,280 51.8% $122,384 68.2%
Power Electronics Division 92,028 37.4% 30,222 16.8%
Motive Power Division 26,589 10.8% 26,826 15.0%
- -----------------------------------------------------------------------------------
Total $245,897 100.0% $179,432 100.0%
===================================================================================
Gross profit for the first half of fiscal year 2006 increased $9,126 or
25% to $45,188 from $36,062. Gross margins decreased from 20.1% to 18.4%. Gross
profit in the Power Electronics Division increased $13,088 or 130% to $23,121
from $10,033, primarily due to the results of the acquisitions, partially offset
by lower gross profit within the legacy portion of the Power Electronics
Division. Gross profit in the Standby Power Division decreased $3,364 or 14% to
$21,369 from $24,733. Gross profit in the Motive Power Division declined $598 or
46% to $698 from $1,296.
Selling, general and administrative expenses for the six months ended July
31, 2005, increased $11,323 or 57% to $31,024 from $19,701. This increase was
primarily due to an increase in selling, general and administrative expenses of
$7,183 incurred by the fiscal year 2005 acquisitions. Excluding the acquired
companies, selling, general and administrative expenses increased $4,140. This
increase was primarily due to increases in compensation costs in the amount of
$2,288, which included severance accruals in the amount of $2,078 for former
executive officers incurred during the first quarter of fiscal 2006, higher
costs related to Sarbanes-Oxley Act Section 404 internal control compliance in
the amount of $1,446.
Research and development expenses for the first half of fiscal year 2006
increased $6,668 or 114% to $12,524 from $5,856. As a percentage of sales,
research and development expenses increased from 3.3% during the six months
ended July 31, 2004 to 5.1% during the six months ended July 31, 2005. The
increase was primarily the result of a $6,740 increase in research and
development expenses incurred by the companies we acquired in fiscal year 2005.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Operating income for the first half of fiscal year 2006 decreased $8,865
or 84% to $1,640 from $10,505 in the comparable period of the prior fiscal year.
Below is a summary of key items affecting operating income for the six
month ended July 31, 2005, as compared with the six months ended July 31, 2004:
Analysis of Change in Operating Income (Loss)
First Half of Fiscal Year 2006 vs. First Half of Fiscal Year 2005
Standby Power Motive
Power Electronics Power
Division Division Division Consolidated
======================================================================================================
Operating income (loss) - six-months
ended July 31, 2004 $ 11,153 $ 3,226 $ (3,874) $ 10,505
Lead - increased costs (4,332) -- (1,075) (5,407)
Executive Severance - CEO (898) (709) (229) (1,836)
Executive Severance - General Manager -- -- (242) (242)
Increase in Sarbanes-Oxley costs (708) (584) (154) (1,446)
Operations of acquired companies -- 240 -- 240
Fiscal year 2005 Reynosa transition costs 425 -- 736 1,161
Increased environmental accruals (96) -- (539) (635)
Other 344 (1,490) 446 (700)
- ----------------------------------------------------------------------------------------------------
Operating income (loss) - six-months
ended July 31, 2005 $ 5,888 $ 683 $ (4,931) $ 1,640
====================================================================================================
Interest expense, net, for the first six months of fiscal 2006 increased
$3,219 or 294% to $4,313 from $1,094 in the comparable period of the prior
fiscal year, primarily due to higher average debt balances outstanding during
the period as a result of funds borrowed to finance the Celab, Datel and CPS
acquisitions.
An income tax benefit of $1,907 was recorded in the first half of fiscal
year 2006 compared to income tax expense of $3,239 in the comparable period of
the prior fiscal year. The effective tax rate is the (benefit) provision for
income taxes as a percentage of the (loss) income before income taxes and
minority interest. The effective tax rate for the six months ended July 31,
2005, was 69.9% compared to 38.8% in the six months ended July 31, 2004. The
primary factors impacting the effective tax rate in the first half of fiscal
2006 were a loss before income taxes in the first six months of fiscal 2006
compared to income before taxes in the comparable period of the prior year along
with a shift in the income (loss) components between United States and foreign
operations, an increase in the relative size of the valuation allowance in the
current year relating to the United States foreign tax credits for the
unremitted earnings of a controlled foreign subsidiary compared to the prior
year including the impact of a change in the tax laws of a foreign jurisdiction
in the second quarter of fiscal year 2006 and the favorable tax effects of the
resolution of state tax matters in the first six months of fiscal years 2006 and
2005.
Minority interest reflects the 33% ownership interest in the joint venture
battery business located in Shanghai, China, that is not owned by us. The joint
venture had a larger net loss during the first half of fiscal year 2006 as
compared to the first half of fiscal year 2005.
As a result of all of the above, a net loss in the amount of $(659) was
recorded during the six months ended July 31, 2005, as compared to net income of
$5,210 in the comparable period of the prior fiscal year. On a per share basis
there was net loss of $(0.03) - basic and diluted compared to net income of
$0.21 - basic and $0.20 diluted for the six months ended July 31, 2005 and 2004,
respectively.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Future Outlook
We expect growth in backlog and order rates from customers through the
third quarter of fiscal year 2006 and beyond. However, factors such as higher
raw material pricing and operational execution issues continue to negatively
impact operating results. We continue to deal with increased lead costs through
prudent hedging of a portion of our future lead requirements. We expect to
record special charges in the third quarter, including a $1,500 charge related
to continued integration efforts within the Power Electronics Division and also
expect to spend approximately $700 for capital related integration expenditures.
In addition, we have recently initiated an assessment of our intangible assets
and expect to complete our assessment in the third quarter. Pending the
completion of our assessment, impairment charges may be required related to
certain intangible assets. As a result, before special charges, potential
impairment charges and assuming lead pricing remains stable, we are forecasting
modest sequential increases for revenues and operating profits in the third and
fourth quarters of fiscal year 2006. Other integration charges, yet to be
identified, may be required in the future related to the Power Electronics
Division.
27
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 operating activities decreased $27 or 0.2% to $13,682
for the six-month period ended July 31, 2005, compared to $13,709 in the same
period of the prior fiscal year. This decrease in net cash provided by operating
activities was primarily due to: (i) a net loss in the first half of fiscal year
2006 as compared to net income in the first half of fiscal year 2005; and (ii) a
larger net increase in our tax liability (current and deferred) in the six
months ended July 31, 2005, than in the six months ended July 31, 2004. These
changes, resulting in lower net cash provided by operating activities, were
partially offset by: (i) an increase in other current liabilities in the
six-month period ended July 31, 2005, compared to a decrease in other current
liabilities in the comparable period of the prior fiscal year; and (ii) a larger
increase in accounts payable in the first half of fiscal year 2006 compared to
the first half of fiscal year 2005.
Net cash used by investing activities decreased $76,372 or 95% to $4,065
in the six months ended July 31, 2005, as compared to $80,437 in the six months
ended July 31, 2004. The primary reason for this differential was the purchases
of Celab and Datel in the second quarter of fiscal year 2005.
In the first half of fiscal year 2006, we had net cash used in financing
activities in the amount of $15,780. This consisted primarily of a decrease in
book overdrafts and repayment of debt. In the first half of fiscal year 2005, we
had net cash provided by financing activities in the amount of $66,640,
primarily consisting of proceeds from new borrowings used to finance our
acquisitions.
Our Credit Agreement contains restrictive covenants that require us to
maintain minimum ratios such as fixed charge coverage and leverage ratios as
well as minimum consolidated net worth. We were not in compliance with our
leverage ratio covenant at January 31, 2005. We obtained a waiver of this
violation on February 28, 2005. We entered into the second amendment to the
Credit Agreement to modify this ratio through the remaining term of the
agreement. The second amendment required us to pledge certain assets as
collateral on a going forward basis. The second amendment also modified other
provisions of the Credit Agreement such that it permitted us to exclude, from
certain covenant calculations, (i) the write down of up to $85,000 of goodwill,
(ii) up to $2,500 in severance costs in fiscal year 2006; and (iii) all future
non-cash stock option or restricted stock expense. Further, the second amendment
required us to maintain minimum levels of trailing earnings before interest,
taxes, depreciation and amortization ("EBITDA") as calculated quarterly through
fiscal year 2006. On April 29, 2005, we entered into the third amendment to the
Credit Agreement to correct and revise the definitional term "Consolidated
EBITDA."
Capital expenditures during fiscal year 2005 were incurred to fund cost
reduction programs, normal maintenance and regulatory compliance. Fiscal year
2006 capital expenditures are expected to be approximately $20,000 primarily for
the construction of and relocation to our new Shanghai joint-venture facility
(of which approximately $15,547 has already been received from the Chinese
government to fund construction), upgrades to our Reynosa, Mexico, facility and
other items expended for similar purposes as fiscal year 2005.
The availability under the Credit Agreement is expected to be sufficient
to meet our ongoing cash needs for working capital requirements, debt service
and capital expenditures provided we meet our Credit Agreement covenants. The
restrictive covenants under our credit agreement permit us to pay dividends so
long as there is no default under the Credit Agreement. We were in compliance
with our Credit Agreement covenants at July 31, 2005. However, we expect that it
may be difficult to meet certain of the credit agreement covenants at October
31, 2005. Therefore, we have begun the process of pursuing financing
alternatives. We expect to conclude this process by October 31, 2005.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," which adopts wording from the IASB's IAS
No. 2 "Inventories" in an effort to improve the comparability of cross-border
financial reporting. The FASB and IASB both believe the standards have the same
intent; however, an amendment was adopted to avoid inconsistent application. The
new standard indicates that abnormal freight, handling costs and wasted
materials (spoilage) are required to be treated as current period charges rather
than as a portion of inventory cost. Additionally, the standard clarifies that
fixed production overhead should be allocated based on the normal capacity of a
production facility. The statement is effective for us beginning in fiscal year
2007. Adoption is not expected to have a material impact on our consolidated
operations, financial position or cash flows.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment" (SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values
beginning with the first annual period beginning after December 15, 2005. The
pro forma disclosures previously permitted under SFAS No. 123 no longer will be
an alternative to financial statement recognition. We are required to adopt SFAS
No. 123R in the first quarter of fiscal year 2007. SFAS No. 123R permits public
companies to adopt these requirements using one of two methods:
o A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123R for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS
No. 123 for all awards granted employees prior to the effective date
of SFAS No. 123R that remain unvested on the effective date.
o A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures.
We are evaluating the impact of adoption of the provisions of SFAS No.
123R as well as the impact of the SEC's SAB No. 107 "Share-Based Payment." SAB
107 was issued by the SEC in March 2005 and provides supplemental SFAS No. 123R
application guidance based on the views of the SEC. We currently expect to apply
the provisions of SFAS No. 123R utilizing the modified prospective method. In
anticipation of the implementation of SFAS No. 123R, we accelerated the vesting
of all stock options granted under the 1996 and 1998 Stock Option Plans as of
March 1, 2005; therefore, these options will not be expensed in future periods.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
FORWARD-LOOKING STATEMENTS
Statements and information contained in this Quarterly Report on Form 10-Q
that are not historical facts are "forward-looking" statements made pursuant to
the safe-harbor provisions of the Private Securities Litigation Act of 1995.
Forward-looking statements may be identified by their use of words like "plans,"
"expects," "will," "anticipates," "intends," "may," "projects," "estimates,"
"believes" or other words of similar meaning. All statements that address
expectations or projections about the future, including, but not limited to,
statements about our strategy for growth, goals, trends, product development,
market position, market conditions, expenditures, sales and financial results,
are forward-looking statements. Forward-looking statements are based on certain
assumptions and expectations of future events and involve a number of risks and
uncertainties. We cannot guarantee that these assumptions and expectations are
accurate or will occur. We caution readers not to place undue reliance on these
forward-looking statements. These statements speak only as of the date of this
Quarterly Report on Form 10-Q, and we undertake no obligation to update or
revise these statements to reflect events or circumstances occurring after the
date of this Quarterly Report on Form 10-Q.
o We operate worldwide and derive a portion of our revenue from sales
outside the United States. Changes in the laws or policies of
governmental and quasi-governmental agencies, as well as social and
economic conditions, in the countries in which we operate (including
the United States) could affect our business and our results of
operations. In addition, economic factors (including inflation and
fluctuations in interest rates and foreign currency exchange rates)
and competitive factors (such as price competition and business
combinations or reorganizations of competitors) or a decline in
industry sales or cancelled or delayed orders due to economic
weakness or changes in economic conditions, either in the United
States or other countries in which we conduct business, could affect
our results of operations.
o Terrorist acts or acts of war, whether in the United States or
abroad, could cause damage or disruption to our operations, our
suppliers, channels to market or customers, or could cause costs to
increase, or create political or economic instability, any of which
could have a material adverse effect on our results of operations.
o Our results of operations could be adversely affected by conditions
in the domestic and global economies or the markets in which we
conduct business, such as telecommunications, UPS, CATV, switchgear
and control, material handling and military.
o Our operating results could be adversely affected by increases in
the cost of raw materials, particularly lead, the primary component
cost of our battery products, or other product parts or components.
We may not be able to fully offset the effects of higher costs of
raw materials through price increases to customers or productivity
improvements. A significant increase in the price of one or more raw
materials, parts or components could have a material adverse effect
on results of operations.
o Our ability to meet customer demand depends, in part, on our ability
to obtain timely and adequate supply and delivery of raw materials,
including lead, which is the primary component cost of our battery
products, or other product parts or components from our suppliers
and internal manufacturing capacity. Although we work closely with
both our internal and external suppliers (and, as to the continuing
availability of lead, our industry associations) to avoid
encountering unavailability or shortages, there can be no assurance
that we will not encounter them in the future. The cessation,
reduction or interruption of supply of raw materials (including
lead), product parts or components, could have a material adverse
effect on our operations. The loss of a key supplier or the
inability to obtain certain key products or components could cause
delays or reductions in shipments of our products or increase our
costs.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
o Our growth objectives are largely dependent on our ability to renew
our pipeline of new products and to bring these products to market.
This ability may be adversely affected by difficulties or delays in
product development, such as the inability to: introduce viable new
products; successfully complete research and development projects or
integrate or otherwise capitalize upon purchased or licensed
technology; obtain adequate intellectual property protection;
maintain or improve product quality; or gain market acceptance of
the new products. Our growth could also be affected by competitive
products and technologies.
o Our ability to implement our business strategies may be hindered or
delayed. As part of our strategy for growth, we have made and may
continue to make acquisitions, and in the future, may make
divestitures and form strategic alliances. There can be no assurance
that these will be completed or beneficial to us. Acquisitions
present significant challenges and risks relating to the integration
of the business into our Company, including substantial management
time and financial and other resources, and there can be no
assurance that we will manage acquisitions successfully.
o We have undertaken and may continue to undertake productivity
initiatives, including, among others, re-organizations, including
the shut down or sale of portions of our business, and facility
rationalizations to improve performance or generate cost savings. In
addition, we may from time to time relocate or consolidate one or
more of our operations. There can be no assurance that any planned
performance improvements or cost savings from such activities will
be realized or that delays or other interruptions in production or
delivery of products will not occur as the result of any
rationalization, relocation or consolidation. A rationalization,
relocation or consolidation could also cause asset impairments
and/or trigger environmental remediation obligations. Further, there
can be no assurance that any of these initiatives will be completed
or beneficial to us.
o Our facilities are subject to a broad array of environmental laws
and regulations. The costs of complying with complex environmental
laws and regulations, as well as participation in voluntary
programs, are significant and will continue to be so for the
foreseeable future. We are also subject to potentially significant
fines and penalties for non-compliance with applicable laws and
regulations. Our accruals for such costs and liabilities may not be
adequate since the estimates on which the accruals are based depend
on a number of factors including, but not limited to, the nature of
the problem, the complexity of the issues, the nature of the remedy,
the outcome of discussions with regulatory agencies and/or the
government or third parties and, as applicable, other PRPs at
multi-party sites, the number and financial viability of other PRPs,
and risks associated with litigation and the availability, or lack
thereof, of insurance coverage.
o We are exposed to the credit risk of our customers, including risk
of insolvency and bankruptcy. Although we have programs in place to
monitor and mitigate the associated risk, there can be no assurance
that such programs will be effective in reducing our credit risks or
risks associated with potential bankruptcy of our customers.
o Our business, results of operations and financial condition could be
affected by significant pending and future litigation or claims
adverse to us. These could potentially include, but are not limited
to, the following: product liability, contract, employment-related,
labor relations, personal injury or property damage, intellectual
property, stockholder claims and claims arising from any injury or
damage to persons, property or the environment from hazardous
substances used, generated or disposed of in the conduct of our
business (or that of a predecessor to the extent we are not
indemnified for those liabilities).
o We are a party to time-limited supply agreements with certain of our
customers. There is no assurance that these contracts will be
renewed or, if renewed, that they will be renewed on as favorable
terms to us as existing agreements.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
o Our performance depends on our ability to attract and retain
qualified personnel. We cannot assure that we will be able to
continue to attract or retain qualified personnel. A portion of our
workforce is unionized. From time to time, we engage in collective
bargaining negotiations with the unions that represent them. If we
are unable to reach agreement with any of our unionized work groups
on future negotiations regarding the terms of their collective
bargaining agreements, or if additional segments of our workforce
become unionized, we may be subject to work interruptions or
stoppages. Strikes or labor disputes with our employees may
adversely affect our ability to conduct our business.
o Our credit facility and covenants under our credit facility restrict
our operational and financial flexibility and impose significant
interest and financing costs. Also, our credit facility permits
dividends to be paid on our Common Stock as long as there is no
default under that agreement. Subject to that restriction and the
provisions of Delaware law, future dividends will depend on our
earnings, financial condition and other factors.
o Our overall profitability may not meet expectations if our products,
customers or geographic mix are substantially different than
anticipated. Our profit margins vary among products, customers and
geographic markets. Consequently, if our mix of any of these is
substantially different from what is anticipated in any particular
period, our earnings could be lower than anticipated.
o In spite of having a disaster recovery plan in place, infrastructure
failures could have a material adverse effect on our business. We
are highly dependent on our systems infrastructure in order to
achieve our business objectives. If we experience a problem that
impairs our infrastructure, such as a power outage, computer virus,
intentional disruption of information technology systems by a third
party, equipment failure or computer or telephone system failure,
the resulting disruptions could impede our ability to book or
process orders, manufacture and ship products in a timely manner or
otherwise carry on our business in the ordinary course. Any such
events could cause us to lose significant customers or revenue and
could require us to incur significant expense to eliminate these
problems and address related security concerns.
o In response to the European Union's "Restriction on Use of Hazardous
Substances in Electrical and Electronic Equipment," or ("RoHS,") we
established a schedule for compliance. We will continue to strive
for elimination, and seek to have our component part suppliers
eliminate prohibited hazardous substances consistent with
legislative requirements. We will continue to actively monitor
decisions around environmental legislation and align our compliance
with those decisions and the needs of our customers. There is no
assurance that these efforts will be successful or timely completed,
the failure of either of which could have an adverse effect on our
results of operations.
o We have begun the process of seeking financing alternatives as we
believe we may have difficulty meeting certain of our Credit
Agreement covenants at October 31, 2005. There can be no assurance
that we will conclude this process successfully. If we are
unsuccessful in obtaining alternative financing, we will attempt to
acquire either waivers or amendments to achieve compliance with our
Credit Agreement. There can be no assurance that this will be
successful.
o Assessment of the potential impairment of property, plant and
equipment, goodwill and other identifiable intangible assets is an
integral part of our normal ongoing review of operations. Testing
for potential impairment of long-lived assets is significantly
dependent on numerous assumptions and reflects our best estimates at
a particular point in time. The economic environments in which our
businesses operate and key economic and business assumptions with
respect to projected selling prices, market growth and inflation
rates, can significantly affect the outcome of impairment tests.
Estimates based on these assumptions may differ significantly from
actual results. Changes in factors and assumptions used in assessing
potential impairments can have a significant impact on both the
existence and magnitude of impairments, as well as the time at which
such impairments are recognized. Future changes in the environment
and the economic outlook for the assets being evaluated could also
result in additional impairment charges.
The foregoing list of important factors is not all-inclusive, or
necessarily in order of importance.
32
Item 3. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to various market risks. The primary financial risks
include fluctuations in interest rates, certain commodity prices, and changes in
currency exchange rates. We manage these risks through normal operating and
financing activities and when appropriate through the use of derivative
instruments. We do not invest in derivative securities for speculative purposes,
but do enter into hedging arrangements in order to reduce our exposure to
fluctuations in interest rates, the price of lead, as well as to fluctuations in
exchange rates.
Our financial instruments that are subject to interest rate risk consist
of debt instruments and interest rate swap contracts. The debt instruments are
subject to variable rate interest; therefore, the market value is not sensitive
to interest rate movements. Interest rate swap contracts are used to manage our
exposure to fluctuations in interest rates on our underlying variable rate debt
instruments.
We enter into forward contracts to hedge our exposure to certain foreign
currencies and effective in the first quarter of this fiscal year we have
adopted a lead hedging policy and have entered into non-deliverable forward
contracts to manage the risk associated with changes in the price of lead.
Additional disclosure regarding our various market risks were set forth in
our fiscal year 2005 Annual Report on Form 10-K filed with the SEC.
33
Item 4. Controls and Procedures:
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our 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, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our controls and procedures are
effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by us in the reports that we file or
submit under the Exchange Act.
Internal Control over Financial Reporting:
There have not been any changes in our 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, our internal
control over financial reporting.
34
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities:
Total Number of Maximum Number
Shares Purchased (or Approximate
as Part of Publicly Dollar Value) of
Total Number Announced Shares that May Yet
of Shares Average Price Plans Be Purchased Under the
Period Purchased Paid per Share or Programs Plans or Programs
============================================================================================================
May 1 - May 31, 2005 97 $6.44 -- 1,000,000
June 1 - June 30, 2005 20,153 $7.01 -- 1,000,000
July 1 - July 31, 2005 193 $9.87 -- 1,000,000
- ----------------------------------------- ------
Total 20,443 --
========================================= ======
On September 30, 2004, our Board of Directors authorized a new stock
repurchase program. Under the program, the Company is permitted to repurchase up
to 1,000,000 shares of C&D Technologies common stock having a total purchase
price of no greater than $25,000,000. This program entirely replaces and
supersedes all previously authorized stock repurchase programs. All of the
shares purchased were purchased pursuant to deferred compensation plans.
Restrictions on Dividends:
The Company's Credit Agreement contains certain restrictive covenants that
require the Company to maintain minimum ratios such as fixed charge coverage and
leverage ratios as well as minimum consolidated net worth. These covenants
permit the Company to pay dividends so long as there is no default under the
Credit Agreement.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders of C&D on June 6, 2005, the
stockholders voted on two proposals: the election of eight directors for
one-year terms and a proposal to ratify the appointment of
PricewaterhouseCoopers LLP as the independent registered public accounting firm
for C&D for the fiscal year ended January 31, 2006.
Proposal 1 - Election of Directors
Nominee Votes for Votes Withheld
========================================================================
William Harral, III 22,941,098 259,483
Kevin P. Dowd 22,994,369 206,212
Robert I. Harries 22,941,623 258,958
Pamela Lewis 22,967,169 233,412
George MacKenzie 22,792,955 407,626
John A. H. Shober 22,942,361 258,220
Stanley W. Silverman 22,941,628 258,953
Ellen C. Wolf 22,971,499 229,082
Proposal 2 - Ratification of the appointment of PricewaterhouseCoopers LLP
as the independent registered public accounting firm for the fiscal year ending
January 31, 2006.
For Against Abstain
========================================================================
23,099,220 99,969 1,392
35
Item 6. Exhibits.
10.1 Employment Agreement dated June 21, 2005, between C&D Technologies,
Inc. and Dr. Jeffrey A. Graves (filed herewith).
10.2 Amendment dated May 6, 2005, to the Employment Agreement between C&D
Technologies, Inc. and Linda R. Hansen (incorporated by reference to
Exhibit 10.1 to C&D's Quarterly Report on Form 10-Q for quarter
ended April 30, 2005).
10.3 Amendment dated May 6, 2005, to the C&D Technologies, Inc. Amended
and Restated Supplemental Executive Retirement Plan (incorporated by
reference to Exhibit 10.2 to C&D's Quarterly Report on Form 10-Q for
quarter ended April 30, 2005).
31.1 Rule 13a-14(a)/15d-14(a) Certification of the President and Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Vice President and
Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Section 1350 Certification of the President and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith).
32.2 Section 1350 Certification of the Vice President and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith).
36
SIGNATURES
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.
September 8, 2005 By: /s/ Jeffrey A. Graves
---------------------------------
Jeffrey A. Graves
President, Chief Executive
Officer and Director
(Principal Executive Officer)
September 8, 2005 By: /s/ Stephen E. Markert, Jr.
---------------------------------
Stephen E. Markert, Jr.
Vice President Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
37
EXHIBIT INDEX
10.1 Employment Agreement dated June 21, 2005, between C&D Technologies,
Inc. and Dr. Jeffrey A. Graves.
31.1 Rule 13a-14(a)/15d-14(a) Certification of the President and Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Vice President and
Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Section 1350 Certification of the President and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Section 1350 Certification of the Vice President and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
38