UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 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 October
31, 2005: 25,406,893.
C&D TECHNOLOGIES, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets - October 31, 2005 and January 31, 2005 3
Consolidated Statements of Operations - Three and Nine
Months Ended October 31, 2005 and 2004 5
Consolidated Statements of Cash Flows - Nine Months Ended
October 31, 2005 and 2004 6
Consolidated Statements of Comprehensive Loss -
Three and Nine Months Ended October 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 27
Item 3 Quantitative and Qualitative Disclosures about Market Risk 38
Item 4 Controls and Procedures 39
Part II OTHER INFORMATION
Item 1A Risk Factors 40
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 47
Item 4 Submission of Matters to a Vote of Security Holders 48
Item 6 Exhibits 49
SIGNATURES 50
EXHIBIT INDEX 51
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)
October 31, January 31,
2005 2005*
============================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 26,391 $ 26,855
Accounts receivable, less allowance for doubtful accounts
of $2,527 and $2,018 77,479 73,621
Inventories 81,843 77,272
Deferred income taxes -- 14,481
Prepaid taxes 162 1,644
Other current assets 3,365 2,008
- ------------------------------------------------------------------------------------------
Total current assets 189,240 195,881
Property, plant and equipment, net 93,378 104,130
Deferred income taxes -- 287
Intangible and other assets, net 59,490 83,863
Goodwill 81,256 97,247
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $423,364 $481,408
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,078 $ 1,874
Accounts payable 44,438 34,808
Book overdrafts 963 8,674
Accrued liabilities 28,263 24,254
Other current liabilities 12,877 10,374
- ------------------------------------------------------------------------------------------
Total current liabilities 87,619 79,984
Deferred income taxes 9,183 12,216
Long-term debt 130,412 135,004
Other liabilities 38,325 36,705
- ------------------------------------------------------------------------------------------
Total liabilities 265,539 263,909
- ------------------------------------------------------------------------------------------
3
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands, except par value)
(UNAUDITED)
October 31, January 31,
2005 2005*
=============================================================================================================
Commitments and contingencies (see Note 7)
Minority interest 8,354 8,171
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares
authorized; 28,788,128 and 28,714,973 shares issued, respectively 288 287
Additional paid-in capital 72,347 71,956
Treasury stock, at cost 3,381,235 and 3,368,676 shares, respectively (47,125) (47,151)
Accumulated other comprehensive income 6,691 5,275
Retained earnings 117,270 178,961
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 149,471 209,328
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 423,364 $ 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 Nine months ended
October 31, October 31,
2005 2004 2005 2004
==============================================================================================================
NET SALES $ 126,966 $ 112,732 $ 372,863 $ 292,164
COST OF SALES 109,167 103,824 309,876 247,194
- --------------------------------------------------------------------------------------------------------------
GROSS PROFIT 17,799 8,908 62,987 44,970
OPERATING EXPENSES:
Selling, general and administrative expenses 15,582 12,844 46,606 32,545
Research and development expenses 6,329 5,463 18,853 11,319
Identifiable intangible asset impairment 20,045 -- 20,045 --
Goodwill impairment 13,674 -- 13,674 --
- --------------------------------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (37,831) (9,399) (36,191) 1,106
- --------------------------------------------------------------------------------------------------------------
Interest expense, net 2,568 1,894 6,881 2,988
Other (income) expense, net (23) 202 33 1,261
- --------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (40,376) (11,495) (43,105) (3,143)
- --------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes 19,613 (4,126) 17,706 (887)
- --------------------------------------------------------------------------------------------------------------
LOSS BEFORE MINORITY INTEREST (59,989) (7,369) (60,811) (2,256)
- --------------------------------------------------------------------------------------------------------------
Minority interest (6) (16) (169) (113)
- --------------------------------------------------------------------------------------------------------------
NET LOSS $ (59,983) $ (7,353) $ (60,642) $ (2,143)
==============================================================================================================
Net loss per common share - basic $ (2.36) $ (0.29) $ (2.39) $ (0.08)
==============================================================================================================
Net loss per common share - diluted $ (2.36) $ (0.29) $ (2.39) $ (0.08)
==============================================================================================================
Dividends per share $ 0.01375 $ -- $ 0.04125 $ 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)
Nine months ended
October 31,
2005 2004*
================================================================================================
Cash flows from operating activities:
Net loss $ (60,642) $ (2,143)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Minority interest (169) (113)
Depreciation and amortization 17,520 17,730
Impairment of fixed assets 2,160 9,602
Impairment of goodwill 13,674 --
Impairment of identifiable intangible assets 20,045 --
Deferred income taxes 11,764 (3,497)
Write-off of acquired in-process research and development -- 440
Loss (gain) on disposal of assets 208 (66)
Annual retainer to Board of Directors 199 156
Changes in assets and liabilities:
Accounts receivable (4,209) (1,918)
Inventories (4,884) (5,655)
Other current assets (1,405) (205)
Accounts payable 10,075 7,763
Accrued liabilities 4,657 4,383
Income taxes payable 1,556 (1,511)
Other current liabilities 2,555 1,074
Other liabilities 1,246 1,314
Other long-term assets 467 814
Other, net 2,963 1,672
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,780 29,840
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of business, net -- (128,301)
Acquisition of property, plant and equipment (5,101) (8,734)
Proceeds from disposal of property, plant and equipment 74 15,703
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,027) (121,332)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of debt (4,225) (438)
Proceeds from new borrowings -- 106,190
(Decrease) increase in book overdrafts (7,711) 1,809
Financing cost of long-term debt (955) (753)
Proceeds from issuance of common stock, net 307 913
Purchase of treasury stock (158) (2,983)
Payment of common stock dividends (699) (1,047)
Payment of minority interest dividends -- (10)
- ------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (13,441) 103,681
- ------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 224 72
- ------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (464) 12,261
Cash and cash equivalents, beginning of period 26,855 12,306
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 26,391 $ 24,567
================================================================================================
* Reclassified for comparative purposes.
The accompanying notes are an integral part of these statements.
6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(UNAUDITED)
Nine months ended
October 31,
2005 2004*
===================================================================================
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquired businesses:
Estimated fair value of assets acquired $ -- $ 76,969
Goodwill and identifiable intangible assets -- 74,598
Identifiable intangible assets -- 22,112
Purchase in-process research and development -- 440
Cash paid, net of cash acquired -- (128,301)
- -----------------------------------------------------------------------------------
Liabilities assumed $ -- $ 45,818
===================================================================================
Decrease in property, plant and equipment acquisitions
in accounts payable $ (353) $ (32)
Tax effect of options exercised $ -- $ 261
Dividend declared, but not paid $ 350 $ --
* Reclassified for comparative purposes.
The accompanying notes are an integral part of these statements.
7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
(UNAUDITED)
Three months ended Nine months ended
October 31, October 31,
2005 2004 2005 2004
================================================================================================================
NET LOSS $(59,983) $ (7,353) $(60,642) $ (2,143)
Other comprehensive income (loss) net of tax:
Net unrealized gain (loss) on derivative instruments 2,200 (40) 2,010 300
Foreign currency translation adjustments (361) 822 (594) 611
- ----------------------------------------------------------------------------------------------------------------
Total comprehensive loss $(58,144) $ (6,571) $(59,226) $ (1,232)
================================================================================================================
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
October 31, 2005, and the related consolidated statements of operations and
comprehensive loss for the three and nine months ended October 31, 2005 and
2004, and the related consolidated statements of cash flows for the nine months
ended October 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 October 31, 2005, presentation.
2. STOCK-BASED COMPENSATION
Under Accounting Principles Board (APB) 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 loss.
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards (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 Nine months ended
October 31, October 31,
2005 2004 2005 2004
===================================================================================================================
Net loss - as reported $(59,983) $ (7,353) $(60,642) $ (2,143)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effect 2,756 920 6,429 2,863
- -------------------------------------------------------------------------------------------------------------------
Net loss - pro forma $(62,739) $ (8,273) $(67,071) $ (5,006)
===================================================================================================================
Net loss per common share - basic - as reported $ (2.36) $ (0.29) $ (2.39) $ (0.08)
Net loss per common share - basic - pro forma $ (2.47) $ (0.33) $ (2.64) $ (0.20)
Net loss per common share - diluted - as reported $ (2.36) $ (0.29) $ (2.39) $ (0.08)
Net loss per common share - diluted - pro forma $ (2.47) $ (0.33) $ (2.64) $ (0.20)
Weighted-average fair value of options granted during the period $ 4.86 $ 9.24 $ 3.58 $ 9.09
9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
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. 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
third quarter of fiscal year 2006, the Company issued 58,000 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. The Company is currently assessing the impact SFAS No. 151 will have on
its consolidated operations, financial position and 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 March 2005, the FASB issued FASB Interpretation (FIN) No. 47,
"Accounting for Conditional Asset Retirement Obligations--an Interpretation of
FASB Statement No. 143." This Interpretation clarifies that the term conditional
asset retirement obligation as used in SFAS No. 143 refers to a legal obligation
to perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. The obligation to perform the asset retirement activity
is unconditional even though uncertainty exists about the timing and/or method
of settlement. Thus, the timing and/or method of settlement may be conditional
on a future event. Accordingly, an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated. The fair value of a
liability for the conditional asset retirement obligation should be recognized
when incurred--generally upon acquisition, construction, or development and/or
through the normal operation of the asset. Uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. SFAS No. 143 acknowledges that in some cases, sufficient information may
not be available to reasonably estimate the fair value of an asset retirement
obligation. This Interpretation also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. This Interpretation is effective for the Company in the
fourth quarter of fiscal year 2006. The Company is currently assessing the
impact FIN No. 47 may have on its financial position and results of operations.
4. INVENTORIES
Inventories consisted of the following:
October 31, January 31,
2005 2005
================================================================================
Raw materials $32,254 $31,558
Work-in-process 14,352 13,084
Finished goods 35,237 32,630
- --------------------------------------------------------------------------------
Total $81,843 $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
Nine months ended
October 31,
2005 2004
================================================================================
Provision (benefit) for income taxes $17,706 $ (887)
Effective income tax rate (41.1)% 28.2%
Consistent with Company policy, the Company evaluates the realizability of
all of its tax assets each quarter. As a result of this review, in the third
quarter, the Company recorded a charge of $14,662 in tax expense to write off or
place a valuation allowance against deferred tax assets that existed as of
January 31, 2005 due to negative evidence regarding realizability. This negative
evidence includes the significant losses recognized in the fiscal year ended
January 31, 2005 and the nine months ended October 31, 2005. The charge consists
of the following items:
o A write-off of $7,318 in deferred tax assets related to the investment in
foreign subsidiaries due to the lack of evidence regarding the realization
of these assets in the foreseeable future.
o The establishment of a valuation allowance and tax reserves of $6,692
against U.S. federal and state deferred tax assets due to the lack of
positive evidence related to C&D's ability to generate sufficient taxable
income to realize these assets.
o An increase of $652 in the deferred tax liability of investment in foreign
subsidiaries as a result of the elimination of the benefit for U.S. foreign
tax credits related to undistributed earnings.
The remainder of the tax expense in the nine months ended October 31, 2005
is due to a combination of tax expense in certain profitable foreign
subsidiaries and the lack of tax benefit recognized in certain jurisdictions
where C&D incurs a loss including the lack of tax benefit recognized for the
impairments recorded in the third quarter of fiscal 2006. These are the primary
reasons for the tax expense in the current period when a pretax loss was
recorded resulting in a negative effective income tax rate.
The Company's effective tax rate for the fiscal year ended January 31,
2005, was 26.4%. 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 LOSS PER COMMON SHARE
Net loss per common share is based on the weighted-average number of
shares of Common Stock outstanding. Net loss per common share - diluted reflects
the potential dilution that could occur if stock options were exercised.
Weighted-average common shares - basic and diluted were as follows:
Three months ended Nine months ended
October 31, October 31,
2005 2004 2005 2004
================================================================================================
Weighted-average common shares -
basic and diluted 25,380,480 25,348,104 25,361,952 25,350,509
================================================================================================
The dilutive effect of stock options outstanding at October 31, 2005 and
2004 was not included in the calculation of diluted loss per share for the
three- and nine-month periods ended October 31, 2005 and 2004 because to do so
would have had an anti-dilutive effect, as the Company had a net loss for each
of these periods. The weighted average number of shares excluded from the
diluted loss per share computation was 2,997,463 and 1,519,266 for the
three-month periods ended October 31, 2005 and 2004, respectively, and 2,948,563
and 1,519,266 for the nine-month periods ended October 31, 2005 and 2004,
respectively.
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 the Company
intends 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 the Company's 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.
The Company is not indemnified for certain environmental matters,
discussion of which follows.
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
(NL) 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. There has been no communication between the
Company and the aforementioned agencies regarding this Facility since that time.
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 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.
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. In October 2005, the NYSDEC
requested that the parties conduct a Feasibility Study that will provide an
effective remedy for the affected area. The Feasibility Study will be conducted
as soon as an acceptable work plan is developed.
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. JCI is currently negotiating
site remediation work with adjacent landowners. 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 (VOC) in
groundwater. The Company is currently waiting for approval from the Wisconsin
Department of Natural Resources to conduct a pilot sparge system study,
utilizing Perozone technology, at the on-site zone with the highest VOC
groundwater contamination to determine its effectiveness.
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.
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 October 31, 2005, and January
31, 2005, accrued environmental reserves totaled $7,146 and $6,570,
respectively, consisting of $2,946 and $2,362 in other current liabilities and
$4,200 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 lead-acid batteries
and standby power systems that integrate lead-acid batteries with other
electronic components, which are used to provide backup or standby power for
electrical equipment in the event of power loss from the primary power source.
Its broad product offering includes: flooded lead-acid batteries;
valve-regulated lead-acid (VRLA) batteries; and power rectifiers and other
related power distribution and monitoring equipment. Standby power systems are
used in uninterruptible power supply (UPS) systems, wireless and wireline
telecommunications, cable television systems, utilities and other applications.
The Power Electronics Division manufactures and markets custom, standard
and modified-standard power supply and conversion products. Power supply and
conversion products are utilized in almost all electronic products to convert
available AC or DC voltage to the required level and quality of DC voltage to
power the associated equipment. Its products incorporate advanced technology and
are designed for reliable operation within the host device. Specific products
include DC to DC converters, AC to DC power supplies, digital panel meters, data
acquisition components, transformers and inductors. These product families are
used in a wide variety of applications, with outputs ranging from sub-one watt
to several kilowatts. Customers include original equipment manufacturers (OEMs)
of telecommunications equipment, computer and networking equipment, office
equipment, military equipment, industrial automation systems and test
instrumentation. Power Electronics products are marketed and sold under the
Celab, Datel and C&D product brand names.
The Motive Power Division manufactures and markets lead-acid batteries and
systems used to power, monitor, charge and test the batteries used in electric
material handling vehicles, including forklift trucks, automated guided vehicles
and airline ground support equipment. Components of these systems include
lead-acid batteries, battery charging equipment and related specialty equipment
and parts, which are also sold individually. Customers include end users in a
broad array of industries, dealers of forklift trucks and other material
handling vehicles and, to a lesser extent, OEMs of forklift trucks and material
handling vehicles. Through its direct sales force and distributor network, it
sells to end users in industrial manufacturing, retail distribution and airline
ground support.
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 nine months ended October 31, 2005 and 2004, is shown
below. All sales between business segments have been eliminated.
Standby Power Motive
Three months ended October 31, 2005 Power Electronics Power Consolidated
================================================================================================
Net sales $ 69,897 $ 43,292 $ 13,777 $ 126,966
Operating income (loss) $ 4,766 $ (40,753) $ (1,844) $ (37,831)
Three months ended October 31, 2004
================================================================================================
Net sales $ 62,225 $ 35,571 $ 14,936 $ 112,732
Operating (loss) income $ (5,300) $ 1,169 $ (5,268) $ (9,399)
Nine months ended October 31, 2005
================================================================================================
Net sales $ 197,177 $ 135,320 $ 40,366 $ 372,863
Operating income (loss) $ 10,654 $ (40,070) $ (6,775) $ (36,191)
Nine months ended October 31, 2004
================================================================================================
Net sales $ 184,609 $ 65,793 $ 41,762 $ 292,164
Operating income (loss) $ 5,853 $ 4,395 $ (9,142) $ 1,106
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.
Fair Value at Fair Value at
October 31, January 31,
2005 2005
================================================================================
Interest rate swaps $ 656 $(644)
Foreign currency contracts $ (96) $ 78
Commodity forward contracts $ 591 $ --
The interest rate swaps and commodity forwards are designated as cash flow
hedges. Therefore, changes in their fair value, net of tax, are recorded in
accumulated other comprehensive income. As of October 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.
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 its batteries. The Company expects to
continue to use financial instruments as appropriate to mitigate this risk.
During November 2005, the Company terminated $30,000 of its interest rate
swaps. A gain of approximately $600 will be recognized in the fourth quarter of
fiscal year 2006. See Note 16 of Notes to Consolidated Financial Statements.
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:
Nine months ended
October 31,
2005 2004
===============================================================================
Balance at beginning of period $ 8,303 $ 9,759
Opening balance sheet liability of acquired companies -- 393
Current year provisions 3,882 3,376
Expenditures (5,404) (4,214)
Effect of foreign currency translation 3 --
- -------------------------------------------------------------------------------
Balance at end of period $ 6,784 $ 9,314
===============================================================================
As of October 31, 2005, accrued warranty obligations of $6,784 include
$2,975 in current liabilities and $3,809 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.
18
Pension Benefits Postretirement Benefits
-------------------- -----------------------
Three months ended Three months ended
October 31, October 31,
2005 2004 2005 2004
=============================================================================================
Components of net periodic benefit cost:
Service cost $ 438 $ 430 $ 44 $ 40
Interest cost 1,020 974 64 52
Expected return on plan assets (1,285) (1,217) -- --
Amortization of prior service costs 2 5 (7) 29
Recognized actuarial loss (gain) 444 372 -- (1)
One-time charge for curtailment 29 -- -- --
- ---------------------------------------------------------------------------------------------
Net periodic benefit cost $ 648 $ 564 $ 101 $ 120
=============================================================================================
Pension Benefits Postretirement Benefits
-------------------- -----------------------
Nine months ended Nine months ended
October 31, October 31,
2005 2004 2005 2004
============================================================================================
Components of net periodic benefit cost:
Service cost $ 1,374 $ 1,289 $ 150 $ 118
Interest cost 3,070 2,920 193 155
Expected return on plan assets (3,856) (3,652) -- --
Amortization of prior service costs 12 14 15 86
Recognized actuarial loss (gain) 1,322 1,116 -- (1)
One-time charge for curtailment 29 -- -- --
- ------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1,951 $ 1,687 $ 358 $ 358
==========================================================================================
19
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The Company is not required to make any contributions to its pension plans
for fiscal 2006. In the nine month period ended October 31, 2005, the Company
made a discretionary contribution of $855 to one of its pension plans. Based
upon preliminary estimates, the Company expects to either make discretionary
contributions totaling approximately $6,500 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 $26,000. Additionally, the Company plans to make contributions
of approximately $42 to its Japanese plan for fiscal year 2006. In the
nine-month period ended October 31, 2005, the Company made contributions of $29
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.
As a result of workforce reductions occurring in 2004 and 2005 at the
Company's Leola, Pennsylvania, facility, 93 employees were laid off,
representing approximately 25% of the number of active employees covered under
the Company's Pension Plan for Hourly Employees (Plan). The unrecognized prior
service cost for the Plan at January 31, 2005 was $88. Approximately $29 of this
amount is attributable to the 93 employees laid off, and was recognized as a
one-time charge to earnings during the quarter ended October 31, 2005.
20
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 amount 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.
During the quarters ended January 31, 2005 and October 31, 2005, the
Company recorded charges for impairment of goodwill and other intangible assets
related to these acquisitions. See note 15 of Notes to Consolidated Financial
Statements.
21
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 Nine months
ended ended
October 31, October 31,
2004 2004
================================================================================
Net sales $128,483 $392,437
Net loss $(13,594) $ (9,533)
Net loss per common share - basic $ (0.54) $ (0.38)
Net loss per common share - diluted $ (0.54) $ (0.38)
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.
22
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 October 31, 2005, and January 31,
2005.
October 31, January 31,
2005 2005
================================================================================
Trade receivables $ 73,896 $ 72,680
Notes receivables 116 500
Other 5,994 2,459
Allowance for doubtful accounts (2,527) (2,018)
- ------------------------------------------------------------------------------
Total receivables $ 77,479 $ 73,621
==============================================================================
Following are the changes in the allowance for doubtful accounts during
the periods ended:
Nine months ended
October 31,
2005 2004
===============================================================================
Balance at beginning of period $ 2,018 $ 1,476
Accrual additions 555 26
(Write-offs) net of recoveries (42) (127)
Translation adjustment (4) --
Opening balance sheet of acquired companies -- 725
- -------------------------------------------------------------------------------
Balance at end of period $ 2,527 $ 2,100
===============================================================================
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 the
London Interbank Offered Rate (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.
23
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.
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 not in compliance with
its leverage ratio or minimum EBITDA covenants at October 31, 2005. The Company
obtained a waiver of the financial covenants under the Credit Agreement pursuant
to a fourth amendment in which the lenders have agreed to waive compliance with
the financial covenants for the quarter ended October 31, 2005. The amendment
also provides that the Company must repay, in full, all obligations under the
Credit Agreement no later than December 31, 2005.
On November 21, 2005, the Company sold $75,000 of Convertible Senior Notes
(Notes). On December 7, 2005, the Company replaced its existing Credit Agreement
with two credit facilities totaling $125,000. See Note 16 of Notes to
Consolidated Financial Statements.
15. ASSET IMPAIRMENTS:
During the quarter ended October 31, 2005, the Company identified facts
suggesting that long-lived assets and goodwill within the Power Electronics
Division (PED) may be impaired. These factors included the realization that for
each of the three quarters to date of fiscal year 2006, operating results in the
Power Electronics Division were below the results included in the financial
forecast used in the Company's annual impairment assessment performed at January
31, 2005. Additional forecasts indicated that this trend would continue. As a
result, in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company first completed an assessment of its
long-lived assets within the various asset groupings of PED and determined that
the carrying value of its long-lived assets within the Tucson and CPS asset
groupings exceeded their fair values. The fair value of these asset groupings
was determined based upon the cost and income approach, respectively. Upon
completion of the long-lived asset impairment analysis, the Company assessed the
carrying value of its PED goodwill using the two-step, fair-value based test in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." The first
step compared the fair value of the PED reporting unit to its carrying amount,
including goodwill. As the carrying amount of the PED reporting unit exceeded
its fair value, the second step was performed to determine if the implied fair
value of the goodwill was less than the carrying amount. An income approach was
utilized to determine the fair value of the PED reporting unit.
As a result of the impairment tests, the Company recorded a pre-tax charge
of $2,160 related to the fixed assets at its Tucson location. The charge was
included in Cost of Sales. In addition, the Company recorded pre-tax charges of
$20,045 and $13,674 for impairments of its identifiable intangible assets at CPS
and PED goodwill, respectively.
There were no impairment indicators with regard to fixed assets,
identifiable intangible assets and goodwill at any other division as of October
31, 2005.
24
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
During the third quarter of fiscal 2005, the Company substantially
completed the transition of its Motive Power V-Line(R) and former Standby Power
HD products (now replaced by the MSC and msEndur(TM)) to the Company's Reynosa,
Mexico facility. As a result of the completion of feasibility analyses and
successful product start-up testing, the Company recorded impairment charges
related to machinery and equipment of $9,488, consisting of $6,293 in Leola,
Pennsylvania (recorded in the Company's Standby Power Division) and $3,195 in
Huguenot, New York (recorded in the Company's Motive Power Division). These
charges are included in the cost of sales on the Consolidated Statement of
Operations. These impairment charges were primarily related to the equipment
associated with the HD product line in Leola and the V-Line products
manufactured in Huguenot. In general, older, excess and/or immovable
manufacturing equipment was replaced by more modern production equipment located
in the Company's Reynosa, Mexico facility. The Leola impairment charge also
included certain equipment related to the Round Cell product line, for which
sales have declined as a result of being displaced by the Company's other
flooded products manufactured at another facility. Additionally, one of the
Company's buildings in Leola has been reclassified as held for sale. This
building, which had a book value of $2,014 at October 31, 2004, has been written
down to $1,900, a loss of $114.
Goodwill by reportable segment was adjusted as follows:
Standby Power
Power Electronics Total
==========================================================================================
Goodwill, January 31, 2004 $ 59,662 $ 60,753 $ 120,415
Goodwill acquired -- 48,885 48,885
Effect of exchange rate changes on goodwill 49 2,131 2,180
Impairment of goodwill -- (74,233) (74,233)
- ------------------------------------------------------------------------------------------
Goodwill, January 31, 2005 $ 59,711 $ 37,536 $ 97,247
Purchase accounting adjustment -- (945) (945)
Effect of exchange rate changes on goodwill (42) (1,330) (1,372)
Impairment of goodwill -- (13,674) (13,674)
- ------------------------------------------------------------------------------------------
Goodwill, October 31, 2005 $ 59,669 $ 21,587 $ 81,256
==========================================================================================
Identifiable intangible assets were adjusted as follows:
Gross Accumulated
Amount Amortization Net
================================================================================================
Balance, January 31, 2005 $ 75,154 $(13,672) $ 61,482
Intangible asset additions 191 -- 191
Amortization -- (3,887) (3,887)
Impairments (21,977) 1,932 (20,045)
Effect of exchange rate changes on intangible assets 18 (19) (1)
- ------------------------------------------------------------------------------------------------
Balance, October 31, 2005 $ 53,386 $(15,646) $ 37,740
================================================================================================
25
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
16. SUBSEQUENT EVENTS:
On November 8, 2005, the Company obtained a waiver of the financial
covenants under the Credit Agreement pursuant to a fourth amendment in which the
lenders have agreed to waive compliance with the financial covenants for the
quarter ended October 31, 2005. The amendment also provided that the Company
must repay, in full, all obligations under the Credit Agreement no later than
December 31, 2005. On December 7, 2005, the Company completed the refinancing of
its debt with the closing of $125,000 of new credit facilities. The first
facility is a five year, $75,000 senior revolving line of credit (Revolver). The
availability under this is determined by a borrowing base. The Revolver is
secured by a first lien on certain assets and initially bears interest at LIBOR
plus 1.75%. Approximately $15 million of the Revolver was funded at closing, and
as provided under the terms of the agreement excess borrowing capacity will be
available for future working capital needs. The second facility is a $50,000
term note (Term Note), due in 2011, secured by a second lien on assets, and
bears interest at LIBOR plus 6.75%, and was fully funded at closing.
The Company used the proceeds of these facilities to terminate and pay in
full its existing revolving credit agreement.
On November 21, 2005, the Company sold $75,000 principal amount of 5.25%
Notes due 2025 to certain qualified institutional investors at par value. The
total size of the offering was $75,000. After expenses, the net proceeds to the
Company were $72,100. Interest is payable on the Notes semi-annually in arrears
beginning May 1, 2006.
During certain periods and subject to certain conditions, the $75,000 of
Notes will be convertible by holders into shares of common stock (or cash or a
combination of cash and shares of common stock, if the Company so elects) at an
initial conversion rate of 118.0638 shares of common stock per $1 principal
amount of notes, subject to adjustment; the conversion rate is based on an
initial conversion price of $8.47 per share of common stock. Upon conversion of
the Notes, the Company will, at its option, deliver to holders of the Notes cash
and/or shares of common stock to satisfy the conversion obligation. The Company
can redeem the notes at its election on and after November 1, 2010 and before
November 1, 2012, plus any accrued and unpaid interest, if certain conditions
are met. In addition, holders of the notes may require the Company to repurchase
the notes on November 1, 2012, 2015 and 2020 and upon certain specified events.
The Notes were not registered under the Securities Act of 1933, and were
sold to the Initial Purchasers on a private placement basis. The Company agreed
to file a shelf registration statement with the Securities and Exchange
Commission within 90 days after the original issuance of the Notes, covering
resales of the Notes and the Common Stock issuable upon conversion of the Notes.
In addition, the Company agreed to use its commercially reasonable efforts to
cause the shelf registration statement to become effective no later than June
19, 2006.
During November 2005, the Company terminated $30,000 of interest rate
swaps. The resulting gain of approximately $600 will be recorded in the fourth
quarter of fiscal year 2006.
26
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 "nine-month period" refer to the third quarter of fiscal year 2006 and the
nine months ended October 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, the Company 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, the Company
acquired Datel, a Mansfield, Massachusetts-based manufacturer of DC to DC
converters, data acquisition components and digital meters. On September 30,
2004, the Company acquired the Power Systems division of Celestica, Inc., which
is now operated 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.
Three Months Ended October 31, 2005, Compared to October 31, 2004
Net sales for the third quarter of fiscal year 2006 increased
$14,234 or 13% to $126,966 from $112,732 in the third quarter of fiscal year
2005. The increase was due to a $7,721 increase in Power Electronics sales, and
a $7,672 increase in Standby Power net sales, partially offset by a $1,159
decrease in Motive Power net sales. The increase in Power Electronics net sales
is primarily due to the acquisition of CPS, which was acquired on September 30,
2004. Therefore, there was one month of sales in the comparable quarter of
fiscal 2005. CPS sales were $9,056 higher and legacy sales were $1,847 higher in
the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005.
These increases were offset by lower sales for Celab and Datel in the third
quarter of fiscal 2006 compared to the third quarter of fiscal 2005. The
increase in Standby Power net sales was primarily due to higher sales to the
telecommunications market, partially offset by lower sales to the UPS market.
The Motive Power Division had lower sales of both batteries and chargers.
The following table sets forth information on sales by division as a
percentage of total sales:
Three months ended Three months ended
October 31, 2005 October 31, 2004
-------------------------------------------------
Revenue % of Total Revenue % of Total
================================================================================
Standby Power Division $ 69,897 55% $ 62,225 55%
Power Electronics Division 43,292 34% 35,571 32%
Motive Power Division 13,777 11% 14,936 13%
- --------------------------------------------------------------------------------
Total $126,966 100% $112,732 100%
================================================================================
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Gross profit for the third quarter of fiscal year 2006 increased $8,891 or
100% to $17,799 from $8,908. Gross margins increased from 7.9% to 14.0%. Gross
profit in the Standby Power Division increased $10,879 or 733% to $12,364 from
$1,485. Gross profit in the Motive Power Division increased $3,551 or 130% to
$821 from $(2,730). The increases in gross profit for the Standby Power and
Motive Power divisions are due primarily to the fixed asset impairments and
environmental clean-up charges incurred in the third quarter of the prior fiscal
year. Gross profit in the Power Electronics Division decreased $5,539 or 55% to
$4,614 from $10,153, primarily due to a charge for fixed asset impairments in
the third quarter of the current year, and the current year expenses incurred in
compliance with the European Union's "Restriction on Use of Hazardous Substances
in Electrical and Electronic Equipment" (RoHS).
Selling, general and administrative expenses for the third quarter of
fiscal year 2006 increased $2,738 or 21% to $15,582 from $12,844. This increase
was primarily due to increased selling, general and administrative expenses
attributed to CPS of $1,020, and increased compensation costs (primarily
severance) of $894 (not including CPS).
Research and development expenses for the third quarter of fiscal year
2006 increased $866 or 16% to $6,329 from $5,463. As a percentage of sales,
research and development expenses increased from 4.8% during the third quarter
of fiscal year 2005 to 5.0% during the third quarter of fiscal year 2006. The
increase was primarily the result of a $1,100 increase in research and
development expenses attributable to CPS, offset by modest decreases in the
other divisions.
During the third quarter of fiscal year 2006, the Company conducted
impairment tests of its goodwill and intangible assets due to the existence of
recurring realized and anticipated operating results below forecasted results in
the Power Electronics Division. The prior impairment test was conducted in the
fourth quarter of fiscal year 2005. As a result of the impairment test performed
during the third quarter of fiscal year 2006, the Company recorded charges to
expense for impairments of intangible assets and goodwill of $20,045 and
$13,674, respectively, in the quarter ended October 31, 2005.
Operating loss for the third quarter of fiscal year 2006 increased $28,432
or 303% to $37,831 from an operating loss of $9,399 in the comparable quarter of
the prior fiscal year.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Below is a summary of key items affecting operating loss for the third
quarter of fiscal year 2006:
Analysis of Change in Operating Income (Loss)
Third Quarter of Fiscal Year 2006 vs. Third Quarter of Fiscal Year 2005
Standby Power Motive
Power Electronics Power
Division Division Division Consolidated
=================================================================================================================
Operating (loss) income - three-months ended
October 31, 2004 $ (5,300) $ 1,169 $ (5,268) $ (9,399)
Lead increases (831) -- (413) (1,244)
Impairment of identifiable intangible assets -- (20,045) -- (20,045)
Impairment of goodwill -- (13,674) -- (13,674)
Impairment of fixed assets -- (2,160) -- (2,160)
Severance and related charges (487) (259) (82) (828)
Power Electronics Division
assimilation charges -- (770) -- (770)
RoHS compliance -- (2,434) -- (2,434)
Prior year environmental accruals and asset
impairment 8,888 -- 4,595 13,483
Operations of CPS -- (2,157) -- (2,157)
Product mix, pricing, other 2,496 (423) (676) 1,397
- -----------------------------------------------------------------------------------------------------------------
Operating income (loss) - three-months
ended October 31, 2005 $ 4,766 $(40,753) $ (1,844) $(37,831)
=================================================================================================================
Interest expense, net, for the third quarter of fiscal year 2006 increased
$674 or 36% to $2,568 from $1,894 in the third quarter of fiscal year 2005,
primarily due to the increase in debt associated with the acquisition of CPS
late in the third quarter of fiscal year 2005.
Income tax expense of $19,613 was recorded in the third quarter of fiscal
year 2006 compared to an income tax benefit of $(4,126) in the third 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 "Nine Months Ended October 31, 2005, Compared to
October 31, 2004" for a discussion of the change in the effective tax rate from
the prior year.
Minority interest reflects the 33% ownership interest in the joint venture
battery business located in Shanghai, China, that is not owned by the Company.
The joint venture had a decrease of $10 in the benefit of its minority interest
during the third quarter of fiscal year 2006 compared to the third quarter of
fiscal year 2005.
As a result of all of the above, a net loss in the amount of $59,983 was
recorded in the third quarter of fiscal year 2006 as compared to a net loss of
$7,353 in the comparable period of the prior fiscal year. On a per share basis
there was a net loss of $2.36 - basic and diluted compared to a net loss of
$0.29 - basic and diluted for the third quarters of fiscal years 2006 and 2005,
respectively.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Nine Months Ended October 31, 2005, Compared to October 31, 2004
Net sales for the nine months ended October 31, 2005, increased $80,699 or
28% to $372,863 from $292,164 in the nine months ended October 31, 2004. This
increase was due to a $69,527 increase in Power Electronics net sales, and a
$12,568 increase in Standby Power net sales, partially offset by a $1,396
decrease in Motive Power net sales. The increase in Power Electronics net sales
is primarily due to the acquisitions of Celab, Datel and CPS, which had
increased net sales of $66,965. As of October 31, 2004, the Company owned Celab
for five months, Datel for four months and CPS for one month. The increase in
Standby Power net sales was primarily due to the telecom market, partially
offset by lower sales to the UPS market. Motive Power sales decreased due to
lower sales of both batteries and chargers.
The following table sets forth information on sales by division as a
percentage of total sales:
Nine months ended Nine months ended
October 31, 2005 October 31, 2004
---------------------------------------------------------
Revenue % of Total Revenue % of Total
============================================================================================
Standby Power Division $197,177 53% $184,609 63%
Power Electronics Division 135,320 36% 65,793 23%
Motive Power Division 40,366 11% 41,762 14%
- --------------------------------------------------------------------------------------------
Total $372,863 100% $292,164 100%
============================================================================================
Gross profit for the nine months ended October 31, 2005 increased $18,017
or 40% to $62,987 from $44,970. Gross margins increased from 15.4% to 16.9%.
Gross profit in the Power Electronics Division increased $7,549 or 37% to
$27,735 from $20,186, primarily due to the results of the prior year
acquisitions, partially offset by the current year charges for fixed asset
impairments. Gross profit in the Standby Power Division increased $7,515 or 29%
to $33,733 from $26,218. Gross profit in the Motive Power Division increased
$2,953 or 206% to $1,519 from $(1,434). The increases in gross profit for the
Standby Power and Motive Power divisions are due primarily to the fixed asset
impairments and environmental clean-up charges incurred in the third quarter of
the prior fiscal year.
Selling, general and administrative expenses for the nine months ended
October 31, 2005, increased $14,061 or 43% to $46,606 from $32,545. This
increase is primarily due to increased selling, general and administrative
expenses of $7,436 incurred by the fiscal year 2005 acquisitions; increased
compensation costs (primarily severance) of $3,524; and timing of the
recognition of Sarbanes-Oxley (SOX) compliance costs of $1,469 (third quarter of
the current fiscal year compared to fourth quarter of the prior fiscal year).
Research and development expenses for the nine months ended October 31,
2005 increased $7,534 or 67% to $18,853 from $11,319. As a percentage of sales,
research and development expenses increased from 3.9% during the nine months
ended October 31, 2004 to 5.1% during the nine months ended October 31, 2005.
The increase was primarily the result of expenses incurred by the companies
acquired in fiscal year 2005.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
During the third quarter of fiscal year 2006, the Company conducted
impairment tests of its goodwill and intangible assets, due to the existence of
recurring realized and anticipated operating results below forecasted results in
the Power Electronics Division. The prior impairment test was conducted in the
fourth quarter of fiscal year 2005. As a result of the impairment test performed
during the third quarter of fiscal year 2006, the Company recorded charges to
expense for impairments of intangible assets and goodwill of $20,045 and
$13,674, respectively, in the quarter ended October 31, 2005.
The Company recorded an operating loss of $(36,191) for the nine months
ended October 31, 2005 compared to operating income of $1,106 in the comparable
period of the prior fiscal year, a decrease of $37,297.
Below is a summary of key items affecting operating income for the nine
month ended October 31, 2005, as compared with the nine months ended October 31,
2004:
Analysis of Change in Operating Income (Loss)
Nine Months Ended October 31, 2005 vs. Nine Months Ended October 31, 2004
Standby Power Motive
Power Electronics Power
Division Division Division Consolidated
==================================================================================================================
Operating income (loss) - nine-months
ended October 31, 2004 $ 5,853 $ 4,395 $ (9,142) $ 1,106
Lead - increased costs (5,097) -- (1,498) (6,595)
Impairment of identifiable intangible assets -- (20,045) -- (20,045)
Impairment of goodwill -- (13,674) -- (13,674)
Impairment of fixed assets -- (2,160) -- (2,160)
Severance and related charges (1,545) (1,087) (580) (3,212)
Power Electronics Division assimilation
charges -- (770) -- (770)
Timing of recognition of Sarbanes-Oxley costs (496) (869) (104) (1,469)
RoHS compliance -- (2,434) -- (2,434)
Increased environmental accruals (106) -- (539) (645)
Prior year environmental accruals and asset
impairment 8,888 -- 4,595 13,483
Prior year Reynosa transition costs 584 -- 783 1,367
Operations of acquired companies -- (1,048) -- (1,048)
Product mix, pricing, and other 2,573 (2,378) (290) (95)
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) - nine-months
ended October 31, 2005 $ 10,654 $(40,070) $ (6,775) $(36,191)
================================================================================================================
Interest expense, net, for the first nine months of fiscal 2006 increased
$3,893 or 130% to $6,881 from $2,988 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 provision of $17,706 was recorded in the nine months ended
October 31, 2005 compared to an income tax benefit of $887 in the comparable
period of the prior fiscal year. Consistent with Company policy, the Company
evaluated the realizability of all of its deferred tax assets, in the third
quarter of fiscal 2006. Based on this review, the Company wrote off a
significant portion of its deferred tax assets and recorded valuation allowances
against an additional portion of these deferred tax assets primarily due to the
significant losses recognized in the fiscal year ended January 31, 2005 and the
nine months ended October 31, 2005. This is the primary reason for the tax
expense in the current period when a pretax loss was recorded resulting in a
negative effective income tax rate of (41.1)% compared to 28.2% in the nine
months ended October 31, 2004.
31
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 an increase in the benefit of its minority interest of $56 during
the nine months ended October 31, 2005 as compared to the same period in the
prior year.
As a result of all of the above, a net loss in the amount of $60,642 was
recorded during the nine months ended October 31, 2005, as compared to a net
loss of $2,143 in the comparable period of the prior fiscal year. On a per share
basis there was a net loss of $2.39 - basic and fully diluted compared to a net
loss of $0.08 - basic and diluted for the nine months ended October 31, 2005 and
2004, respectively.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Future Outlook
The Company expects growth in backlog and order rates from customers
through the fourth quarter of fiscal year 2006 and into fiscal year 2007.
However, factors such as higher raw material pricing and operational execution
issues continue to negatively impact operating results. The Company continues to
deal with increased lead costs through prudent hedging of a portion of its
future lead requirements. The Standby Power Division announced a general price
increase of 5% on all 10- and 20-year battery products including hardware,
components and parts, effective with orders placed January 1, 2006. The Company
anticipates recording a charge of up to $1,500 in the fourth quarter related to
unamortized debt issuance costs related to the termination of its revolving
credit agreement, as well as a charge of $800 in the fourth quarter related to
continued integration efforts within the Power Electronics Division. It also
expects to spend approximately $700 for capital related integration
expenditures. Other integration charges, yet to be identified, may be required
in the future related to the Power Electronics Division.
33
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 $12,060 or 40% to
$17,780 for the nine-month period ended October 31, 2005, compared to $29,840 in
the same period of the prior fiscal year, primarily due to a higher net loss
after adjusting for non-cash impairment charges in both fiscal years. The
resulting decrease in net cash provided by operating activities was partially
offset by increases in income taxes payable, accounts payable and other current
liabilities in the current fiscal year compared to the prior fiscal year.
Net cash used by investing activities decreased $116,305 or 96% to $5,027
in the nine months ended October 31, 2005, as compared to $121,332 in the nine
months ended October 31, 2004. The primary reason for this differential was the
purchases of Celab, Datel and CPS in the second and third quarters of fiscal
year 2005, offset by the receipt of approximately $15,547 from the Chinese
government as partial payment for the Company's existing battery facility
location in Shanghai. The Company has begun construction of a new battery
manufacturing facility in Shanghai.
In the nine months ended October 31, 2005, the Company had net cash used
in financing activities in the amount of $13,441. This consisted primarily of a
decrease in book overdrafts and repayment of debt. In the first nine months of
fiscal year 2005, net cash provided by financing activities in the amount of
$103,681 primarily consisted of proceeds from new borrowings used to finance the
Company's acquisitions.
The Company's Credit Agreement contains restrictive covenants that require
the maintenance of minimum ratios such as fixed charge coverage and leverage
ratios as well as minimum consolidated net worth. The Company was not in
compliance with its leverage ratio covenant at January 31, 2005, and 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 required the Company 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 exclusion, from certain covenant calculations, of (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 maintenance of minimum levels of
trailing earnings before interest, taxes, depreciation and amortization (EBITDA)
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 not in compliance
with its leverage ratio or minimum EBITDA covenants at October 31, 2005. The
Company obtained a waiver of the financial covenants under the Credit Agreement
pursuant to a fourth amendment for the quarter ended October 31, 2005. The
amendment also provides that the Company must repay, in full, all obligations
under the Credit Agreement no later than December 31, 2005.
On November 21, 2005, the Company sold 5.25% Convertible Senior Notes due
2025 (Notes) to certain qualified institutional investors at par value. The
total size of the offering was $75,000. After expenses, the net proceeds to the
Company were $72,100. Interest is payable on the Notes semi-annually in arrears
beginning May 1, 2006. The proceeds were used to repay outstanding borrowings
under the existing senior secured credit facility.
On December 7, 2005, the Company entered into $125,000 of new senior credit
facilities. These facilities included a $75,000 line of credit (Revolver) and a
$50,000 term loan (Term Note). The proceeds of these facilities were used to
repay in full and terminate the existing senior secured credit facility. The
Company anticipates recording a non-cash charge of up to $1,500 of previously
unamortized issuance costs related to the termination of the previous revolving
credit agreement in the fourth quarter. The availability under the new credit
facilities is expected to be sufficient to meet the Company's ongoing cash needs
for working capital requirements, debt service and capital expenditures.
The Company is not required to make any contributions to its domestic
pension plans for fiscal year 2006. During the third quarter of the current
fiscal year, the Company made a discretionary contribution of $855 to one of its
pension plans. Based upon preliminary estimates, the Company expects to either
make discretionary contributions totaling approximately $6,500 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 $26,000.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
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 $10,000 primarily for
the construction of and relocation to our new Shanghai joint-venture facility
(of which $15,547 has already been received from the Chinese government to fund
construction), upgrades to the Reynosa, Mexico, facility and other items
expended for similar purposes as fiscal year 2005.
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 the Company beginning in
fiscal year 2007. The Company is currently assessing the impact SFAS No. 151
will have on its consolidated operations, financial position and 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 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.
The Company is 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. The Company currently
expects to apply the provisions of SFAS No. 123R utilizing the modified
prospective method.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations--an Interpretation of FASB Statement No. 143." This
Interpretation clarifies that the term conditional asset retirement obligation
as used in SFAS No. 143 refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and/or method of settlement.
Thus, the timing and/or method of settlement may be conditional on a future
event. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. The fair value of a liability for the
conditional asset retirement obligation should be recognized when
incurred--generally upon acquisition, construction, or development and/or
through the normal operation of the asset. Uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. SFAS No. 143 acknowledges that in some cases, sufficient information may
not be available to reasonably estimate the fair value of an asset retirement
obligation. This Interpretation also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. This Interpretation is effective for the Company in the
fourth quarter of fiscal year 2006. The Company is currently assessing the
impact FIN No. 47 may have on its financial position and results of operations.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
FORWARD-LOOKING STATEMENTS
The Company is furnishing information that contains certain statements that
are, or may be deemed to be, "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act. All statements, other than statements
of historical facts, included herein are forward-looking statements. Included
among forward-looking statements are, among other things:
o fluctuations in prices and availability of raw materials, particularly
lead;
o the success of integration of acquired businesses and the ability to make
additional acquisitions or form strategic alliances;
o economic conditions or market changes in certain market sectors in which
the Company conducts business;
o Changes in pricing environment;
o Success or timing of new product development;
o foreign operations;
o political, economic and social changes, or acts of terrorism or war;
o Success of productivity initiatives, including rationalizations,
relocations or consolidations;
o impact of changes in management;
o costs of complying with environmental laws and regulations and
liabilities;
o statements regarding the Company's business strategy, business plans or
any other plans, forecasts or objectives, any or all of which are subject
to change;
o statements regarding any SEC or other governmental, regulatory or
environmental inquiry or investigation;
o statements regarding anticipated legislative, governmental, regulatory,
administrative or other public body actions, requirements, permits or
decisions; and
o Any other statements that relate to nonhistorical or future information.
These forward-looking statements are often identified by the use of terms
and phrases such as "achieve," "anticipate," "believe," "estimate," "expect,"
"forecast," "plan," "project," "propose," "strategy" and similar terms and
phrases. Although the Company believes that the expectations reflected in these
forward-looking statements are reasonable, they do involve assumptions, risks
and uncertainties, and these expectations may prove to be incorrect. The reader
should not place undue reliance on these forward-looking statements, which speak
only as of the date of this report.
The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including those discussed in "Risk Factors" under Item 1A of Part II of
this report.
37
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to various market risks. The primary financial
risks include fluctuations in interest rates, certain commodity prices, and
changes in currency exchange rates. The Company manages these risks through
normal operating and financing activities and when appropriate through the use
of derivative instruments. It does not invest in derivative securities for
speculative purposes, but enters into hedging arrangements in order to reduce
its exposure to fluctuations in interest rates, the price of lead, as well as to
fluctuations in exchange rates.
The Company's 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 the Company's exposure to fluctuations in interest rates on its
underlying variable rate debt instruments.
The Company enters into forward contracts to hedge exposure to certain
foreign currencies. In the first quarter of this fiscal year the Company adopted
a lead hedging policy and entered into non-deliverable forward contracts to
manage the risk associated with changes in the price of lead.
Additional disclosure regarding various market risks were set forth in the
Company's fiscal year 2005 Annual Report on Form 10-K filed with the SEC.
38
Item 4. Controls and Procedures:
Management, with the participation of its Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Company's
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by it in the reports that it files or submit under the Exchange Act.
Internal Control over Financial Reporting:
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
its internal control over financial reporting.
39
PART II. OTHER INFORMATION
Item 1A. Risk Factors
Fluctuations in prices and availability of raw materials, particularly
lead, could increase the Company's costs or cause delays in shipments, which
would adversely impact its results of operations.
The Company's operating results could be adversely affected by increases
in the cost of raw materials, particularly lead, the primary component cost of
its battery products, or other product parts or components. Lead represented
approximately 20% of consolidated cost of sales during the nine months ended
October 31, 2005. Lead market prices averaged $0.217 per pound in fiscal year
2002, $0.203 per pound in fiscal year 2003, $0.246 per pound in fiscal year 2004
and $0.410 per pound in fiscal year 2005. Lead traded at $0.513 per pound on
December 6, 2005. The increase in the lead market price has negatively impacted
the Company's financial results in recent periods. The Company may not be able
to fully offset the effects of higher costs of raw materials through price
increases to customers or by way of productivity improvements. A significant
increase in the price of one or more raw materials, parts or components could
have a material adverse effect on the Company's results of operations.
Additionally, the Company has recently instituted a lead hedging policy to
mitigate its exposure to volatility in the price of lead. To the extent lead
market prices decline in the future, the Company may be obligated to purchase a
portion of its lead requirements at higher prices than are then available in the
market. The Company's ability to meet customer demand depends, in part, on its
ability to obtain timely and adequate supply and delivery of raw materials,
including lead, and other product parts or components from its suppliers or from
internal manufacturing capacity. Although it works closely with both its
internal and external suppliers (and, as to the continuing availability of lead,
its industry associations) to avoid encountering unavailability or shortages,
the Company may encounter them in the future. The cessation, reduction or
interruption of supply of raw materials, product parts or components could have
a material adverse effect on the Company's 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 its products, which could negatively
affect customer satisfaction, thereby reducing the Company's revenues, or
increasing its costs.
Lack of successful integration of acquired businesses or difficulties in
making acquisitions or forming strategic alliances could hinder the Company's
ability to implement its business strategies.
In addition to its recent acquisitions of Celab, Datel and CPS during
fiscal year 2005, the Company may continue to make acquisitions, and in the
future, may make divestitures and form strategic alliances, which may not be
completed or be beneficial to the Company. Acquisitions present significant
challenges and risks relating to the integration of the acquired business into
the Company, including substantial management time and financial and other
resources, and it may not manage acquisitions successfully. The Company's
success in realizing the expected benefits from recent and any future
acquisitions depends on a number of factors, including retaining or hiring local
management personnel, successful integration of the operations, information
technology (IT) systems, customers, vendors and partner relationships of the
acquired companies and its ability to devote capital and management attention to
the newly acquired companies in light of other operational needs. In addition,
the integration of the sales, accounting and research and development personnel
across several geographic areas is important to the success of the Company's
strategy. The Company's efforts to implement its strategy could be affected by a
number of factors beyond its control, such as increased competition and general
economic conditions in the countries where newly acquired companies operate. Any
failure to effectively implement its strategy could have a material adverse
effect on the Company's results of operations.
The Company may face additional impairment charges if economic
environments in which its businesses operate and key economic and business
assumptions substantially change.
Assessment of the potential impairment of property, plant and equipment,
goodwill and other identifiable intangible assets is an integral part of the
Company's normal ongoing review of operations. Testing for potential impairment
of long-lived assets is dependent on numerous assumptions and reflects the
Company's best estimates at a particular point in time, which may vary from
testing date to testing date. The economic environments in which its businesses
operate and key economic and business assumptions with respect to projected
product selling prices and materials costs, 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
40
economic environment and the economic outlook for the assets being evaluated
could also result in additional impairment charges. Any significant impairments
would adversely impact the Company's financial results.
Adverse economic or market changes in certain market sectors in which the
Company conducts business could impact its results of operations.
The Company's results of operations could be adversely affected by
conditions in the domestic and global economies or the markets in which it
conducts business, such as telecommunications, UPS, cable television, switchgear
and control, material handling and military. Its products are principally used
in connection with the telecommunications and IT industries. Weakness in these
markets, such as a decline in consumer and business expenditures for IT and
telecommunications may lead to a decrease in the demand for its equipment or the
prices that it can charge. Any such decrease could adversely affect its
operating results by decreasing revenues and gross profit margins. For example,
there were significant declines in corporate telecommunications and IT capital
expenditures in recent years, and this negatively affected the Company's results
of operations.
The Company is subject to pricing pressure from its larger customers.
The Company faces significant pricing pressures in all of its business
segments from its larger customers. Because of their purchasing size, the
Company's larger customers can influence market participants to compete on price
terms. Such customers also use their buying power to negotiate lower prices. If
the Company is not able to offset pricing reductions resulting from these
pressures by improved operating efficiencies and reduced expenditures, those
price reductions may have an adverse impact on its financial results.
The Company operates in extremely competitive industries and is subject to
continual pricing pressure.
The Company competes with a number of major domestic and international
manufacturers and distributors of electrical storage and power conversion
products, as well as a large number of smaller, regional competitors. Due to
excess capacity in some sectors of its industries, consolidation and the
financial difficulties being experienced by several of its competitors, the
Company has faced continual and significant pricing pressures. These pricing
pressures may prevent it from fully recovering increased costs it might incur.
The Company anticipates heightened competitive pricing pressure as Chinese and
other foreign producers, who are able to employ labor at significantly lower
costs than producers in the U.S. and Western Europe, expand their export
capacity and increase their marketing presence in the Company's major U.S. and
European markets. Several of the Company's competitors have stronger technical,
marketing, sales, manufacturing, distribution and other resources, as well as
more significant name recognition and established positions in the market and
longer-standing relationships with OEMs and other customers than it does. In
addition, certain of the Company's competitors own lead smelting facilities
which, during periods of lead cost increases or price volatility, may provide a
competitive pricing advantage and reduce their exposure to volatile raw material
costs. The Company's ability to maintain and improve its competitive position
has depended, and continues to depend, on its ability to control and reduce its
costs in the face of these pressures.
Difficulties or delays in product development would hinder the Company's
financial performance.
The Company's financial performance and its ability to compete are largely
dependent on the Company's ability to renew its pipeline of new products and to
bring these products to market, including introducing viable new products;
successfully completing research and development projects or integrating or
otherwise capitalizing upon purchased or licensed technology; obtaining adequate
intellectual property protection; maintaining or improving product quality or
reducing product costs through continued product engineering; and utilizing or
gaining market acceptance of new products. To the extent its research and
development initiatives are unsuccessful in one or more of these pursuits, the
market does not accept its new or improved products or its sales force is
unsuccessful in marketing such products, the Company's financial results will be
negatively impacted. In addition, industry standards, customer expectations, new
technologies or other products may emerge that could render one or more of its
products less desirable or obsolete. The Company's financial performance could
also be affected by competitive products and technologies.
The Company is subject to risks associated with its foreign operations.
The Company has operations in Canada, China, England, Germany, Japan and
Mexico, either directly or through joint ventures. For fiscal year 2005, sales
outside the U.S. accounted for approximately 26% of its revenue. In its
financial statements, the Company translates local currency financial results
into United States dollars based on average exchange rates prevailing during a
41
reporting period. Its most significant foreign currency exposures are to the
Canadian dollar and the Euro. During times of a strengthening United States
dollar, the Company's reported international revenue and earnings will be
reduced because the local currency will translate into fewer United States
dollars, in spite of its efforts to hedge against currency risk exposures. In
addition, the Company may face restrictions on its ability to repatriate funds
from its international operations.
Foreign operations are subject to risks that can materially increase the
cost of operating in foreign countries and thereby may reduce the Company's
overall profitability. These risks include, but are not limited to:
o currency exchange rate fluctuations;
o increases in foreign tax rates and foreign earnings potentially being
subject to withholding requirements or the imposition of tariffs, exchange
controls or other restrictions;
o general economic and political conditions in countries where the Company
operates and/or sell its products, including inflation;
o The difficulties associated with managing an organization spread
throughout various countries;
o Required compliance with a variety of foreign laws and regulations; and
o limited protection of intellectual property in certain foreign
jurisdictions.
The Company is subject to risks associated with its operations in China.
A substantial amount of the Company's materials sourcing originates in
China. Enforcement of existing laws or contracts based on existing Chinese law
may be uncertain and sporadic, and it may be difficult to obtain swift and
equitable enforcement or to obtain enforcement of a judgment by a court of
another jurisdiction in China. The relative inexperience of China's judiciary in
many cases creates additional uncertainty as to the outcome of any litigation.
In addition, interpretation of statutes and regulations may be subject to
government policies reflecting domestic political changes. Furthermore, many of
the Company's products are manufactured in China and must be shipped into the
U.S. and Europe. When they enter the U.S. or Europe, these products may be
subject to import quotas, import duties and other restrictions. Any inability to
import these products into the U.S. or Europe, and any tariffs it may be
required to pay with respect to these products may have a material adverse
impact on the Company's business and results of operations. Additionally, if the
Chinese government decides to significantly revalue the Yuan, such an action
could adversely impact the Company's business and financial results.
Delays in the relocation of the Company's Shanghai facility or the failure
to complete that relocation may adversely affect its business and results of
operations.
The Chinese government has notified the Company's joint venture that it is
required to relocate its Shanghai facility, for which the Chinese government has
paid the joint venture approximately $15.5 million to effect the relocation and
the construction of a new facility. The Company anticipates commencing
production in the new facility in the fourth quarter of fiscal year 2007. Delays
in or failure to complete the relocation and construction of the new facility
may inhibit the Company's ability to complete orders and deliver products to its
customers, and a failure to complete the relocation would require it to move
production of some products to other facilities, which would adversely impact
the Company's operations and hinder its growth. Also, this relocation will
require it to build up higher levels of inventory to enable it to continue to
satisfy customer demand during the transition period, which could require a
higher investment in working capital and affect the Company's financial
position.
The Company's worldwide operations could be adversely impacted by
political, economic and social changes, or acts of terrorism or war.
The Company operates worldwide and for fiscal year 2005 sales outside of
the United States accounted for approximately 26% of the Company's revenue.
Changes in the laws or policies of governmental and quasi-governmental agencies,
as well as social and economic conditions, in the countries in which it operates
(including the United States) could affect its business and its 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 it conducts business, could negatively affect
the Company's results of operations. Terrorist acts or acts of war, whether in
the United States or abroad, could cause damage or disruption to the Company's
operations, its 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 the Company's results of operations.
42
The Company is reliant on third parties whose operations are outside its
control.
The Company relies on arrangements with third-party shippers and carriers
such as independent shipping companies for timely delivery of its products to
its customers. As a result, it may be subject to carrier disruptions and
increased costs due to factors that are beyond its control, including labor
strikes, inclement weather, natural disasters and rapidly increasing fuel costs.
If the services of any of these third parties become unsatisfactory, the Company
may experience delays in meeting its customers' product demands and it may not
be able to find a suitable replacement on a timely basis or on commercially
reasonable terms. Any failure to deliver products to its customers in a timely
and accurate manner may damage its reputation and could cause it to lose
customers. The Company also utilizes third party distributors and manufacturers'
representatives to sell, install and service certain of its products. While it
is selective in whom the Company chooses to represent it, it is difficult for
the Company to ensure that its distributors and manufacturers' representatives
consistently act in accordance with the standards the Company sets for them. To
the extent any of its end-customers have negative experiences with any of the
Company's distributors or manufacturers' representatives, it could reflect
poorly on the Company and damage its reputation, thereby negatively impacting
its financial results. The Company also utilizes contract manufacturers to
manufacture certain of its Power Electronics products. In some instances the
Company is contractually obligated to use a contract manufacturer for production
of specific products for which it has supply agreements at contractual rates. To
the extent its manufacturing partners have issues with product quality or timely
delivery of products, it could impair the Company's relationships with its
customers. Additionally, certain of its manufacturing agreements may not provide
it with sufficient flexibility to negotiate pricing or to secure for itself some
of the inputs for the Company's products, which could result in higher
manufacturing costs. Any of these factors could impair the Company's financial
results by reducing future revenue or increasing costs.
Maintaining the Company's manufacturing operations requires significant
capital expenditures, and the inability or failure to maintain its operations
would have a material adverse impact on market share and the ability to generate
revenue.
The Company had capital expenditures of approximately $3.7 million and
$11.9 million in fiscal years 2004 and 2005, respectively. It expects to spend
approximately 1.4% to 2.5% of future revenues on capital expenditures in future
periods excluding construction of any new manufacturing facilities. It may incur
significant additional capital expenditures as a result of unanticipated
expenses, regulatory changes and other events that impact its business. If it is
unable or fails to adequately maintain its manufacturing capacity or quality
control processes, it could lose customers and there could be a material adverse
impact on the Company's market share and its ability to generate revenue.
The Company's productivity initiatives, including rationalizations,
relocations or consolidations may not be sufficiently effective to improve its
financial performance or generate desired cost savings.
The Company has undertaken and may continue to undertake productivity
initiatives, including, among others, reorganizations, including the shut down
or sale of portions of its business, and facility rationalizations to improve
performance or generate cost savings. In addition, it may from time to time
relocate or consolidate one or more of its operations. The Company may not
realize any planned performance improvements or cost savings from such
activities and delays or other interruptions in production or delivery of
products may 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,
these initiatives may not be completed or be beneficial to the Company.
The Company's new management team may not be able to successfully grow and
manage all businesses.
The Company believes that due to the challenges of growing the Company,
the quality of its executive officers and their ability to work effectively
together as a management team will be key to its success. The Company recently
hired its new Chief Executive Officer, Jeffrey Graves, its new Vice President
and General Counsel, James D. Dee, the new Vice President and General Manager of
its Power Electronics division, William Bachrach, and announced the resignation
of Stephen E. Markert, Jr. as its Vice President, Finance and Chief Financial
Officer. Mr. Markert's resignation will take effect following a transition
period. The Company is presently undertaking a search for Mr. Markert's
replacement. Also, Charles R. Giesige, Sr. was appointed Vice President and
General Manager of the Motive Power division in April 2005 in addition to his
position as Vice President and General Manager of the Standby Power division.
This new management team may not be effective in attaining the Company's
business goals and may not fulfill the Company's expectations regarding its
operations.
43
The Company's financial performance depends on certain restructuring and
rationalization programs currently being implemented by management. To the
extent these programs do not achieve their intended effect, financial results
could deteriorate.
Management is taking certain actions to improve profitability via several
initiatives. Firmwide, it is placing renewed emphasis on improving the quality
of the products it manufactures and on more timely delivery of its products. In
Motive Power in particular, the Company is working to improve its product
portfolio, its manufacturing processes and its sales channels including its
relationships with manufacturers' representatives and truck dealers. In Power
Electronics, it is working to improve its product fulfillment process and to
more tightly integrate its various operations to achieve desired revenue and
expense synergies. Additionally, it continues to work to optimize its
manufacturing portfolio by transitioning capacity to lower-cost regions and by
selectively using contract manufacturers for certain of its Power Electronics
products. To the extent management is unsuccessful at achieving the goals of any
or all of these initiatives, it will not be able to achieve its anticipated
operating results.
If the result of the Company's assessment of internal controls following
its recent acquisitions leaves it unable to conclude that its internal control
over financial reporting is effective or if its independent registered public
accounting firm disagrees with the Company's assessment of the effectiveness of
its internal control over financial reporting, the Company could lose investor
confidence in the reliability of its financial information.
Its assessment of internal control over financial reporting for the year
ending January 31, 2006 will, for the first time, include an assessment of the
internal controls relating to Datel and CPS. In conducting that assessment the
Company may find material weaknesses that would prevent it from concluding that
its internal control over financial reporting is effective as of January 31,
2006. Also, its independent registered public accounting firm may disagree with
the Company's assessment and/or may not be satisfied with the effectiveness of
the Company's internal control over financial reporting as of January 31, 2006.
In the event that it is unable to conclude that its internal control over
financial reporting at January 31, 2006 is effective, the Company may delay the
filing of its annual report and restate financial results, and its independent
registered public accounting firm will not be able to issue an unqualified audit
opinion with respect to the effectiveness of the Company's internal control over
financial reporting. Any of these consequences could cause investors to lose
confidence in the reliability of the Company's financial statements and other
reported financial information, which in turn, could harm the Company's business
and negatively impact the trading price of its common stock.
Costs of complying with environmental laws and regulations and liabilities
that the Company may incur from fines and penalties, in the United States and
internationally, could adversely impact its financial results and condition.
Its 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. The Company is also subject
to potentially significant fines and penalties for non-compliance with
applicable laws and regulations. Its 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 potentially responsible parties (PRPs) at multi-party sites,
the number and financial viability of other PRPs and risks associated with
litigation. These costs and liabilities could adversely impact the Company's
financial results and condition. In response to the European Union's
"Restriction on Use of Hazardous Substances in Electrical and Electronic
Equipment," the Company established a schedule for compliance. It will continue
to strive for elimination of, and seek to have its component part suppliers
eliminate, prohibited hazardous substances consistent with legislative
requirements. It will continue to actively monitor decisions around
environmental legislation and align its compliance with those decisions and the
needs of its customers. These efforts may not be successful or completed on a
timely basis, the failure of either of which could have an adverse effect on the
Company's results of operations.
The Company's results may be adversely impacted by customers that become
insolvent or bankrupt.
The Company is exposed to the credit risk of its customers, including risk
of insolvency and bankruptcy. Although it has programs in place to monitor and
mitigate the associated risk, such programs may not be effective in reducing the
Company's credit risks or risks associated with potential bankruptcy of its
customers. To the extent one or more of its customers becomes insolvent or seeks
protection from its creditors, the Company may not be able to collect money due
to it and it could incur write-downs to its accounts receivable balances.
Additionally, the loss of such customers could negatively impact the Company's
financial performance in future periods.
44
Pending or future litigation could impact the Company's financial results
and condition.
Its business, results of operations and financial condition could be
affected by significant pending and future litigation or claims adverse to the
Company. Types of potential litigation cases include: 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 the Company's
business (or that of a predecessor to the extent it is not indemnified for those
liabilities).
The Company's domestic business operations are dependent upon its ability
to engage in successful collective bargaining with its unionized workforce.
Approximately 30% of the Company's workforce is unionized, and it engages
in collective bargaining negotiations with the unions that represent them. If
the Company is unable to reach agreement with any of its unionized work groups
in future negotiations regarding the terms of their collective bargaining
agreements, or if additional segments of its workforce become unionized, the
Company may be subject to work interruptions or stoppages. Strikes or labor
disputes with its employees may adversely affect the Company's ability to
conduct its business.
A change in the Company's product mix may cause its results of operations
to differ substantially from the anticipated results in any particular period.
Its overall profitability may not meet expectations if its products,
customers or geographic mix are substantially different than anticipated. The
Company's profit margins vary among products, customers and geographic markets.
Consequently, if its mix of any of these is substantially different from what is
anticipated in any particular period, the Company's profitability could be lower
than anticipated.
Consolidation to a single enterprise resource planning system could
adversely affect the Company's operations.
The Company is consolidating its operations into a single enterprise
resource planning (ERP) system in certain locations over the next two years to
integrate the separate systems of businesses that it recently acquired. An ERP
system automates various business tasks including accounting, distribution and
sales. Successful implementation of this consolidation will be critical to the
Company's cost reduction initiatives and to its ability to comply with the
financial reporting and internal audit compliance obligations of a public
company. This process will significantly affect many aspects of the Company's
business, including its accounting, operations, purchasing, sales, marketing,
and administrative functions, and could disrupt its business, distract
management and increase its costs. This platform may require further
modifications and user training in order to properly handle all of the different
accounting requirements of the countries in which the Company operates. If it
were to experience difficulties or delays in the implementation of this
consolidation, the Company's ability to provide products to its customers on a
timely basis could be adversely affected, which would harm the Company's
operating results and relationships with its customers. Additionally, any
integration difficulties or delays could adversely affect the processing and
reporting of the Company's accounting and financial results. The Company may not
be able to correct any such difficulties or problems on a timely basis.
The achievement of the Company's business objectives is highly dependent
upon the proper functioning of its systems infrastructure.
In spite of having a disaster recovery plan in place, infrastructure
failures could have a material adverse effect on the Company's business. It is
highly dependent on its systems infrastructure in order to achieve the Company's
business objectives. If it experiences a problem that impairs its
infrastructure, such as a power outage, computer virus, intentional disruption
of IT systems by a third party, equipment failure or computer or telephone
system failure, the resulting disruptions could impede the Company's ability to
book or process orders, manufacture and ship products in a timely manner or
otherwise carry on its business in the ordinary course. Any such events could
cause the Company to lose significant customers or revenue and could require it
to incur significant expense to eliminate these problems and address related
security concerns.
45
If customers fail to renew supply agreements on terms as favorable to the
Company as existing agreements, its financial results could be adversely
impacted.
The Company supplies products to certain of its customers pursuant to
time-limited supply agreements. These contracts may not be renewed or, if
renewed, they may not be renewed on as favorable terms to the Company as
existing agreements, which could adversely impact the Company's financial
results.
The Company may not be able to adequately protect its proprietary
intellectual property and technology.
The Company relies on a combination of copyright, trademark, patent and
trade secret laws, non-disclosure agreements and other confidentiality
procedures and contractual provisions to establish, protect and maintain its
proprietary intellectual property and technology and other confidential
information. Despite the Company's efforts to protect its proprietary
intellectual property and technology and other confidential information,
unauthorized parties may attempt to copy or otherwise obtain and use its
intellectual property and proprietary technologies, which could adversely impact
the Company's competitive position and therefore its business operations and
financial results.
46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company entered into (i) the Purchase Agreement dated as of November
16, 2005 (the Purchase Agreement) between C&D Technologies, Inc. (the Company)
and Credit Suisse First Boston LLC and Wachovia Capital Markets, LLC (the
Initial Purchasers), (ii) the Indenture, dated as of November 21, 2005 (the
Indenture) between the Company, as issuer, and The Bank of New York, as trustee,
governing the terms of the Company's 5.25% Convertible Senior Notes Due 2025
(the Notes) and (iii) the Registration Rights Agreement dated as of November 21,
2005 (the Registration Rights Agreement) between the Company and the Initial
Purchasers.
Pursuant to the Purchase Agreement, the Company agreed to sell to the
Initial Purchasers $60 million aggregate principal amount of its Notes, which
are convertible into cash or a combination of cash and shares of common stock,
$.01 par value (the Common Stock), of the Company. In addition, the Company also
granted the Initial Purchasers a 30-day option to purchase up to $15 million
aggregate principal amount of additional Notes. The Initial Purchasers exercised
this option, thereby resulting in the sale of $75 million aggregate principal
amount of the Notes on November 21, 2005. The Purchase Agreement contains
customary representations and warranties of the parties and indemnification and
contribution provisions whereby the Company, on the one hand, and the Initial
Purchasers, on the other hand, have agreed to indemnify each other against
certain liabilities.
The closing of the sale of the Notes occurred on November 21, 2005. The
Notes were not registered under the Securities Act of 1933, as amended (the
Securities Act) and were sold to the Initial Purchasers on a private placement
basis in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act provided by Rule 144A. Pursuant to the Registration Rights
Agreement, the Company agreed, as promptly as practicable, but in no event more
than 90 days after the original issuance of the Notes, to file a shelf
registration statement with the SEC covering resales of the Notes and the Common
Stock issuable upon conversion of the Notes. In addition, the Company agreed to
use its commercially reasonable efforts to cause the shelf registration
statement to become effective no later than June 19, 2006.
Under the Indenture, the Company issued the Notes, which bear interest at
5.25% per annum on the principal amount from November 21, 2005, payable
semi-annually in arrears in cash on May 1 and November 1 each year, beginning
May 1, 2006. The Notes will mature on November 1, 2025. The Notes are
unsubordinated unsecured obligations and rank equally with the Company's
existing and future unsubordinated and unsecured obligations and are junior to
any of the Company's future secured obligations to the extent of the value of
the collateral securing such obligations. The Notes are not guaranteed by, and
are structurally subordinate in right of payment to, all obligations of the
Company's subsidiaries, except those subsidiaries that may in the future
guarantee certain of the Company's other obligations will also be required to
guarantee the Notes.
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
============================================================================================================================
August 1 - August 31, 2005 60 $10.52 -- 1,000,000
September 1 - September 30, 2005 124 $10.25 -- 1,000,000
October 1 - October 31, 2005 203 $ 9.35 -- 1,000,000
- --------------------------------------------------- -------------------
Total 387 --
=================================================== ===================
On September 30, 2004, the Board of Directors authorized a new stock
repurchase program. Under the program, the Company is permitted to repurchase up
to 1 million shares of C&D Technologies common stock having a total purchase
price of no greater than $25 million. This program entirely replaces and
supersedes all previously authorized stock repurchase programs. All of the
shares purchased during the third quarter of fiscal year 2006 were purchased
pursuant to deferred compensation plans.
47
Restrictions on Dividends:
The Company entered into two new credit facilities on December 7, 2005 (see
Note 16 - Subsequent Events of Notes to Condensed Consolidated Financial
Statements). There are certain restrictions in both agreements regarding the
payment of dividends. The Revolver requires minimum excess availability of $30
million at the time of declaration or payment of any dividend. The Term Note
contains a maximum leverage ratio. The Company may declare and pay a dividend
provided these conditions are met and there does not exist an event of default.
Item 4. Submission of Matters to a Vote of Security Holders
None
48
Item 6. Exhibits.
10.1 Fourth Amendment and Waiver dated as of November 8, 2005 to the
Credit Agreement by and among C&D Technologies, Inc., C&D
International Investment Holdings Inc., the Guarantors identified on
the signature pages thereto, the Lenders identified on the signature
pages thereto and Bank of America, N.A., as administrative agent
(incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K
filed with the Commission on November 15, 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).
49
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.
December 12, 2005 By: /s/ Jeffrey A. Graves
----------------------------------
Jeffrey A. Graves
President, Chief Executive
Officer and Director
(Principal Executive Officer)
December 12, 2005 By: /s/ Stephen E. Markert, Jr.
----------------------------------
Stephen E. Markert, Jr.
Vice President Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
50
EXHIBIT INDEX
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.
51