UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2006
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)
State or other jurisdiction of incorporation or organization: Delaware
I.R.S. Employer Identification Number: 13-3314599
Address of principal executive offices: 1400 Union Meeting Road
Blue Bell, Pennsylvania 19422
Registrant's telephone number, including area code: (215) 619-2700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Class on which registered
-------------- -------------------
Common Stock,
par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act Yes |_| No |X|
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act Yes |_| No |X|
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |_|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
One):
Large accelerated filer Accelerated filer |X| Non-accelerated filer
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act) Yes |_| No|X|
Aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the Registrant, based on the closing price on July 31, 2005:
$252,802,496
Number of shares outstanding of each of the Registrant's classes of common stock
as of March 31, 2006: 25,528,926 shares of Common Stock, par value $.01 per
share.
Documents incorporated by reference:
Part III - Portions of Registrant's Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of Registrant's fiscal year covered
by this Form 10-K.
(This page intentionally left blank)
C&D TECHNOLOGIES, INC.
FORM 10-K
For the Fiscal Year Ended January 31, 2006
INDEX
Part I
Item 1 Business 1
Item 1A Risk Factors 14
Item 1B Unresolved Staff Comments 21
Item 2 Properties 22
Item 3 Legal Proceedings 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities 24
Item 6 Selected Financial Data 26
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 27
Item 7A Quantitati and Qualitative Disclosure about Market Risk 40
Item 8 Financial Statements and Supplementary Data 41
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41
Item 9A Controls and Procedures 41
Item 9B Other Information 41
Part III
Item 10 Directors and Executive Officers of the Registrant 42
Item 11 Executive Compensation 42
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 42
Item 13 Certain Relationships and Related Transactions 42
Item 14 Principal Accountant Fees and Services 42
Part IV
Item 15 Exhibits and Financial Statement Schedules 43
Signatures 49
Index to Financial Statements and Financial Statement Schedule F-1
C&D TECHNOLOGIES, INC.
PART I
Item 1. Business
About Our Company
C&D Technologies, Inc. (together with its operating subsidiaries, "we,"
"the Company," "our" or "C&D") is a leading manufacturer and marketer of
electrical power storage systems for the standby power and motive power markets.
We are also a leading producer of electronic power supply and conversion
products for large original equipment manufacturers (OEMs) of
telecommunications, networking, office, industrial and military equipment.
We were organized in 1985 to acquire all the assets of C&D Power Systems
Division of Allied Corporation, which, along with its predecessors, had been
manufacturing batteries for more than 50 years. We have a global manufacturing
platform with plants located in the U.S., U.K., Mexico and China and sell our
products globally in more than 65 countries to over 5,000 customers. Through
organic development and strategic acquisitions, we believe we have become the
largest provider of lead acid batteries used in standby power systems and a
leading provider of motive power systems in North America. Moreover, we believe
our Power Electronics division is one of the largest global providers of DC to
DC converter products to the merchant market.
We currently conduct our business in three reportable segments: (1)
Standby Power, (2) Motive Power and (3) Power Electronics.
Standby Power
Our 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.
Our 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.
To meet the needs of our customers, we sell our batteries and other
standby power systems components in a wide variety of sizes, configurations and
electrical capacities. Specifically, we sell lead acid batteries in two broad
categories: flooded and VRLA. Flooded batteries, which require periodic watering
and maintenance, are typically used in UPS, telecommunications and utility
applications. VRLA, or sealed, batteries, which are often smaller and require
less maintenance, have shorter useful lives and are used in wireless cell sites,
cable television systems, corporate data centers and computer networks and other
applications. Power rectifiers convert or "rectify" external AC power into DC
power at the required level and quality of voltage necessary to constantly
charge the standby battery and operate the user's equipment. Our batteries and
standby power systems are marketed and sold under the DYNASTY(R), MAXRATE(R),
msENDUR(TM), LIBERTY(R) and SAGEON(R) brands.
Motive Power
Our 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 for these systems include lead
acid batteries, battery charging equipment and related specialty equipment and
parts, which we also sell individually. Our 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 our direct sales force and distributor network, we
sell to end users in industrial manufacturing, retail distribution and airline
ground support. Our batteries and motive power systems are marketed and sold
under the C-LINE(TM) CLASSIC, EM-LINE(TM) and V-LINE(R), FR(TM), IFR(TM),
VERSACHARGE(R) and VFR(TM) brands.
Power Electronics
Through our Power Electronics division, we manufacture and market custom,
standard and modified-standard power supply and conversion products. Power
supply and conversion products are utilized in almost all electronic products to
convert
1
available AC or DC voltage to the required level and quality of DC voltage to
power the associated equipment. Our 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. Our customers include OEMs of telecommunications
equipment, computer and networking equipment, office equipment, military
equipment, industrial automation systems and test instrumentation. Our power
electronics products are marketed and sold under the CELAB(TM), DATEL(R) and
C&D(R) product brand names.
In fiscal year 2005, we acquired Celab Limited (Celab), a provider of
power conversion products predominantly sold into military, cable television and
telecommunications applications in Europe; Datel Holding Corporation (Datel), a
manufacturer of primarily DC to DC converters, with additional product offerings
in data acquisition components and digital panel meters; and the Power Systems
division of Celestica, Inc. (CPS), a provider of DC to DC converters and AC to
DC power supplies. As a result of these acquisitions, we provide a full line of
power supply and conversion products to a significantly expanded Tier I customer
base.
Fiscal Year
Our fiscal year ends on the last day of January. Any references to a
fiscal year means the 12-month period ending January 31 of the year mentioned.
Forward-Looking Statements
Statements and information contained in this Annual Report on Form 10-K
that are not historical facts are "forward-looking" statements made pursuant to
the safe-harbor provisions of the Private Securities Litigation Act of 1995.
Forward-looking statements may be identified by their use of words like "plans,"
"expects," "will," "anticipates," "intends," "may," "projects," "estimates,"
"believes" or other words of similar meaning. All statements that address
expectations or projections about the future, including, but not limited to,
statements about our strategy for growth, goals, trends, product development,
market position, market conditions, expenditures, sales and financial results,
are forward-looking statements. Forward-looking statements are based on certain
assumptions and expectations of future events and involve a number of risks and
uncertainties. We cannot guarantee that these assumptions and expectations are
accurate or will occur. We caution readers not to place undue reliance on these
forward-looking statements. 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 we conduct business;
o changes in pricing environment and the ability to pass on pricing
increases to our customers and cover higher commodity costs;
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
resulting liabilities;
o statements regarding our business strategy, our business plans or
any other plans, forecasts or objectives, any or all of which are
subject to change;
o statements regarding any United States Securities and Exchange
Commission (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.
2
The factors that could cause actual results to differ materially from the
forward-looking statements made by a registrant include those factors discussed
herein, including those discussed in (a) Item 1A. Risk Factors, (b) Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, (c) Item 8. Financial Statements and Supplementary Data and (d)
other factors discussed in filings with the SEC by the Registrant. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
apply only as of the date of this Report. The Registrant undertakes no
obligation to publicly release any revision to its forward-looking statements to
reflect events or circumstances after the date of this Report.
Reportable Segments
Our operations are classified into the following reportable business
segments:
o Standby Power Division
o Power Electronics Division
o Motive Power Division
Segments are determined using the "management approach," which means the
way management organizes the segments within the enterprise for making operating
decisions and assessing performance. Effective February 1, 2004, we combined the
Dynasty and Powercom divisions into the newly created Standby Power Division.
Effective April 2005, the Motive Power Division reports to the general manager
of the Standby Power Division.
The financial information regarding our three business segments, which
includes net sales and operating income for each of the three years in the
period ended January 31, 2006, is provided in Note 16 to the Consolidated
Financial Statements. See Part II, Item 8.
The Market for Our Products
We manufacture and market products in the following general categories by
business segment:
o Standby Power Division - industrial batteries and fully integrated
reserve power systems and components for the standby power market,
which includes UPS applications for computer systems and corporate
data networks, telecommunications reserve power systems, CATV signal
powering, utilities and solar.
o Power Electronics Division - custom, standard and modified standard
DC to DC converters, embedded high frequency AC to DC and DC to DC
switching power supplies and magnetics (transformers and inductors);
digital meters and data acquisition components.
o Motive Power Division - motive power systems for the material
handling equipment market.
We market our products through independent manufacturer's representatives,
national and global distributors, specialty resellers and our own sales
personnel to end users and OEMs.
We sell some products to the U.S. Government. These sales accounted for
less than 5% of our total Company sales during each of our last three fiscal
years.
3
Products and Customers by Business Segment
Standby Power Division - Reserve Power Systems and Components
Through our Standby Power Division, we manufacture and market integrated
reserve power systems and components for the standby power market, which
includes telecommunications, UPS, cable and utilities. Integrated reserve power
systems monitor and regulate electric power flow and provide backup power in the
event of a primary power loss or interruption. The Standby Power Division also
produces the individual components of these systems, including reserve
batteries, power rectifiers, system monitors, power boards and chargers. Major
applications of these products include wireless and wireline telephone
infrastructure, CATV signal powering, corporate data center powering and
computer network backup for use during power outages. Our customers include
industry-leading OEMs, broadband and telecommunications providers, large
investor owned utilities as well as large end user customers.
We manufacture lead acid batteries for use in reserve power systems. We
sell these batteries in a wide range of sizes and configurations in two broad
categories:
o flooded batteries; and
o valve-regulated lead acid batteries (VRLA) (sealed type).
Flooded batteries require periodic watering and maintenance. VRLA
batteries require less maintenance and are often smaller.
To meet the needs of our customers, our reserve power systems include a
wide range of power electronics products, consisting principally of power
rectifiers and distribution and monitoring equipment. Our power rectifiers
convert or "rectify" external AC power into DC power at the required voltage to
constantly charge the reserve battery and operate the user's equipment. For
installations with end applications that require varied power levels, our power
control and distribution equipment distributes the rectified power for each of
the applications.
Uninterruptible Power Supplies. The Standby Power Division produces
batteries for UPS systems, which provide instant battery backup in the event of
primary power loss or interruption, thereby permitting an orderly shutdown of
equipment or continued operation for a limited period of time until a power
source comes back on-line. C&D offers distinct product families to meet the
needs and requirements of this growing industry. Our DYNASTY High Rate VRLA
Series batteries have been engineered specifically for UPS applications and
deliver extended life while complying with rigorous industry standards. In
addition, the Standby Power Division offers a line of premium replacement VRLA
batteries for UPS applications called the MAXRATE, which we believe provides a
longer life and improved runtime in the same space as that of original equipment
batteries currently supplied by UPS manufacturers. Our flooded XT & XTPlus
products are utilized for large system back up in major data centers and
critical 24/7 applications. As a critical component to overall power backup
solutions, our Standby Power Division continues to work closely with major
global UPS OEMs to design a cost-effective, reliable product to meet customer
expectations.
Telecommunications. As with UPS, the Standby Power Division produces
battery solutions to fill the many application needs of today's
telecommunications industry. Designed specifically for the telecommunications
need for long life and extended runtime, our flooded MCT(TM) and LCT(TM) family
of products have become the battery of choice for central office and critical
back up applications. With the addition of our facility in Reynosa, Mexico, in
fiscal year 2004, we have added the VRLA MSE(TM) and msENDUR family of products
designed for wireless applications, as well as other applications for
non-flooded requirements. In addition, our DYNASTY Tel Series VRLA Long Duration
batteries are designed to Telcordia standards to meet the demanding requirements
of telecommunications applications. These batteries operate in a wide variety of
environmental conditions, meet prolonged run time needs so as to maintain
operations during power loss and protect sophisticated electronics equipment.
Our customers use the majority of our standby power products in
telecommunications applications, such as central telephone exchanges, microwave
relay stations, private branch exchange (PBX) systems and wireless telephone
systems. Our major telecommunications customers include national long distance
companies, competitive local exchange carriers, wireline and wireless system
operators, paging systems and PBX telephone locations using fiber optic,
microwave transmission or traditional copper-wired systems.
4
CATV Signal Powering and Broadband. DYNASTY Broadband Series batteries are
designed for demanding standby float applications in abusive environments. These
batteries have been designed to offer the best combination of run time and
service life for CATV signal powering and broadband applications. Our gelled
electrolyte technology provides excellent heat transfer properties, which enable
these batteries to perform in high temperature environments. Unlike other
competitive gel technologies, the DYNASTY Broadband Series does not require
cycling subsequent to delivery to meet 100% of rated capacity. Our DYNASTY
Broadband Series of batteries is considered the market leader for CATV powering
in North America.
Modular Power Plants. We offer several modular power plants, which are a
type of integrated reserve power system. These products, which are referred to
as the LIBERTY AGM Series Power Plant and the LIBERTY ACM Series Power Plant,
integrate advanced rectifiers with virtually maintenance-free valve-regulated
batteries. Also, the Standby Power Division offers the SAGEON family of power
systems products, which are designed to fit virtually any application that
demands stable, reliable and easily expandable DC power.
Equipment for Electric Utilities and Industrial Control Applications. We
produce rectifiers and batteries used in reserve power systems for switchgear
and instrumentation control systems used in electric utilities and industrial
control applications. These power systems provide auxiliary power that enables
fossil fuel, hydro and nuclear power generating stations, switching substations
and industrial control facilities to be shut down in an orderly fashion during
emergencies or power failures until a power source comes back on-line.
Power Electronics Division - DC to DC Converters, AC to DC and DC to DC
Power Supplies and Magnetics
Through our Power Electronics Division, we manufacture and market custom,
standard and modified-standard electronic power supply systems, including DC to
DC converters, for large OEMs of telecommunications and networking equipment, as
well as office and industrial equipment. In addition, as a result of recent
acquisitions, the division also manufactures power conversion products sold into
military and CATV applications as well as digital panel meters and data
acquisition components.
We sell the majority of our power supply products to OEMs of electronic
products on either a custom, standard or modified-standard basis. Power supplies
are embedded in almost all electronic products and are used to convert available
AC or DC voltage to the required level and quality of DC voltage to power the
associated equipment.
Our power supplies incorporate advanced technology and are designed for
reliable operation of the host equipment. These products include DC to DC
converters, AC to DC and DC to DC power supplies and magnetics (transformers and
inductors) for use in a wide variety of applications, with outputs ranging from
sub one watt to several kilowatts. DC to DC products are circuit board mounted
devices used to convert available system power to required component voltages.
DC to DC converters are widely used in distributed power and intermediate bus
architecture where system voltages require conversion to a higher or lower
voltage to power components such as microprocessors and arrays. AC to DC power
supplies convert alternating current, the form in which virtually all power is
delivered by electric utilities to end users, into precisely controlled direct
current that is required by sensitive electronic application architecture.
In the telecommunications industry, our power supplies are broadly used in
central office and transmission equipment. We also produce power supplies for
networking equipment (switches, routers, hubs, etc.), office equipment (mass
storage, digital printing, etc.), and industrial equipment (computing,
automation and test instrumentation).
Motive Power Division - Motive Power Systems
The Motive Power Division manufactures complete systems and individual
components (including power electronics and batteries) to power, monitor, charge
and test the batteries used in electric industrial vehicles, including fork-lift
trucks, automated guided vehicles and airline ground support equipment. These
products are marketed to end users in a broad array of industries, dealers of
fork-lift trucks and other material handling vehicles, and, to a lesser extent,
OEMs.
We offer a broad line of motive power equipment including the C-LINE
battery, which we believe is the industry standard for long life and the V-LINE
battery for general material handling applications. We also offer a broad line
of battery charging and associated specialty equipment and parts.
5
Sales, Installation and Servicing
The sales, installation and servicing of certain Standby Power and Motive
Power products are performed through several networks of independent
manufacturer's representatives located throughout North America. Most of our
independent manufacturer's representatives (or contractors in the case of
installation or service) operate under contracts providing for compensation on a
commission basis or as a distributor with product purchased for resale. Certain
Standby Power and Power Electronics products are sold via a network of
independent manufacturer's representatives as well as independent distributors
located throughout the world.
In addition to these networks of independent manufacturers'
representatives and distributors, we employ internal sales management consisting
of regional sales managers, account specific sales persons and product/market
specialists. The regional sales managers are each responsible for managing a
number of independent manufacturers' representatives and for developing
long-term relationships with large end users, OEMs and national accounts. We
also employ a separate sales organization that works with the independent
manufacturers' representative network and directly with certain large customers.
We have internal product management and marketing personnel in each of our
divisions to manage the development of new products from the initial concept
definition and management approval stages through the engineering, production
and sales processes. They are also responsible for applications engineering,
technical training of sales representatives and the marketing communications
function.
We maintain branch sales and service facilities in North America, Europe
and Asia, with the support of our headquarters and service personnel, and have
business relationships with sales representatives and distributors throughout
the world.
No single customer of C&D accounted for 10% or more of our net sales for
the year ended January 31, 2006. We typically sell our products with terms
requiring payment in full within 30 days. We warrant our battery products for
various periods of time depending on the type of product and its application.
The longest warranties, for periods up to twenty years, generally are applicable
to flooded standby power batteries sold by our Standby Power Division. Power
supply products from our Power Electronics Division are generally sold with a
one year warranty.
Backlog
The level of unfilled orders at any given date during the year may be
materially affected by the timing and product mix of orders, customer
requirements and, taking into account considerations of manufacturing capacity
and flexibility, the speed with which we fill those orders. Period-to-period
comparisons may not be meaningful. Occasionally orders may be canceled by the
customer prior to shipment.
Our order backlog at March 31, 2006 and 2005 was $109,481,000 and
$90,838,000, respectively. With the exception of our Celab subsidiary, we expect
to fill virtually all of the March 31, 2006, backlog during fiscal year 2007.
Approximately $18,900,000 of backlog related to Celab is expected to be shipped
in fiscal year 2008.
Manufacturing and Raw Materials
We manufacture our products at seven domestic plants, two plants in China,
two plants in Mexico and two plants in the United Kingdom. Additionally, the
Company maintains four design centers in the U.S., Canada and China. We
manufacture most key product lines at a single focused plant in order to
optimize manufacturing efficiency, asset management and quality control. A
significant portion of our Power Electronics products are manufactured by third
party manufacturers.
Consolidation. No manufacturing facilities were closed during fiscal year
2006.
Raw Materials. The principal raw materials used in the manufacture of our
products include lead, steel, copper, plastics, printed circuit boards and
electronic components, all of which are generally available from multiple
suppliers. We use a number of suppliers to satisfy our raw materials needs.
6
ISO 9001 Recognition. ISO certification assures customers that our
internal processes and systems meet internationally recognized standards. We are
ISO 9001:2000 standard certified at the following locations:
Domestic
o Conyers, Georgia;
o Dunlap, Tennessee;
o Mansfield, Massachusetts;
o Milwaukee, Wisconsin;
o Milwaukie, Oregon; and
o Tucson, Arizona.
International
o Bordon, United Kingdom;
o Guangzhou, China;
o Milton Keynes, United Kingdom;
o Nogales, Mexico;
o Romsey, United Kingdom;
o Shanghai, China, Standby Division joint venture; and
o Toronto, Canada.
We are working towards certification at our battery plants in Attica,
Indiana, and Reynosa, Mexico, and our Power Electronics Research and Development
facility in Shanghai, China.
Competition
Our products compete on the basis of:
o product quality and reliability;
o technology;
o reputation;
o delivery capability; and
o customer service.
We offer competitive pricing and highly value our relationships with our
customers. In addition, we believe that we have certain competitive advantages
in specific product lines.
We believe that we are one of the four largest producers of both reserve
and motive power systems in North America. We believe that the ability to
provide a single source for design, engineering, manufacturing and service is an
important element in our competitive position.
When lead prices rise, certain of our battery competitors that own
smelting operations may have lower lead costs than we have. However, when lead
prices decline, the high fixed costs associated with these operations may
provide C&D with a cost advantage.
7
Having completed the acquisitions of Celab, Datel and CPS (formerly the
Celestica Power Systems division of Celestica, Inc.), we believe we have the
building blocks to firmly establish our Power Electronics Division as a
significant power platform in the industry. We believe our Power Electronics
Division is a leading supplier of board mounted DC to DC technologies worldwide.
In addition we have leading technology in the area of AC to DC and DC to DC
power supplies, data acquisition, digital panel meters and magnetics. Our
channels-to-market and preferred supplier position at major global OEMs set us
apart in the power electronics field. We have several major technology licenses
(with other power companies) and development alliances with industry-leading
silicon vendors that give us a competitive portfolio in the power electronics
space. Our Power Electronics Division's value proposition is rooted in
technology, quality and reliability coupled with strategically located
manufacturing facilities worldwide to meet the cost and logistic needs of our
customers.
Research and Development
Research and development expenses for the fiscal years ended January 31,
2006, 2005 and 2004, were $25,128,000, $18,641,000 and $9,542,000, respectively.
We maintain extensive technology departments concentrating on
electrochemical and electronics technologies. We focus on:
o design and development of new products;
o development and improvement of existing products;
o sustaining engineering;
o production engineering (including quality testing and managing the
changes in production capacity); and
o evaluation of competitive products.
We have research and development facilities in North America, China and
Europe which utilize computer-aided design tools and testing equipment. Notable
new product achievements in fiscal year 2006 include:
o Standby Power and Motive Divisions. New products have become a
significant contributor to revenue. Products launched within the
last five years now account for greater than 25% of revenue. The
division has a very active new product development program for
products to be launched in the next three years. New product
launches in fiscal year 2006 include:
o a new motive power product line - the EM-LINE which greatly
extends the watering interval and saves maintenance costs for
our customers;
o a new, longer-running gel product for CATV applications that
was launched under the DYNASTY brand; the existing product was
also upgraded to improve power density;
o a new UPS line, the XDJ line, based on a modification of our
new and successful DJ switchgear products.
Additionally, the divisions strive to partner with companies and
organizations that can potentially provide breakthrough technologies for our
existing and new markets. We established a number of such arrangements during
the year.
8
o Power Electronics Division. Development effectiveness improved
dramatically during the year, and a greater emphasis was placed on
designs at the leading edge of function, density and efficiency.
This is illustrated by a significant increase in the introduction of
industry-leading products during fiscal year 2006, including:
o High reliability AC to DC Power Supplies:
low profile front-end power supplies that are
designed to deliver reliable bulk power to servers,
workstations, storage systems or any 12V distributed
power architecture systems requiring high power
density.
o CompactPCI(R) Power Supplies:
new models allowing system designers to achieve new
levels of space efficiency with the ability to
operate at significantly lower airflows.
o High-efficiency DC to DC converters:
new Voltage Regulator Modules (VRMs) to satisfy the
latest 64-bit AMD Opteron(TM) and Athlon(TM)
processor families; new converters designed for use
in Power-Over_Ethernet (PoE) applications; new high
current density half-brick models that deliver full
power at high temperatures and comply with tough
standards for surge, shock and vibration resistance.
o Cost-effective Data Acquisition components:
low-cost, dual sampling ADC devices that deliver
low-noise, high-performance operation and are
available in commercial and military temperature
range options.
In addition, the Power Electronics Division continued to develop high
performance custom AC to DC and DC to DC solutions for use in communications and
high-end computing applications such as in blade servers, fiber-to-the-home and
central office applications.
International Operations
Along with our domestic manufacturing facilities, we have international
manufacturing facilities in China, Mexico, and the United Kingdom. Our 67% joint
venture facility in Shanghai, China, manufactures industrial batteries that are
sold primarily in China and Europe. Our Power Electronics Division facilities in
China and the United Kingdom manufacture electronics that are sold primarily in
Europe, North America, and the Far East. International sales accounted for
33.4%, 26.3% and 17.4% of net sales for the years ended January 31, 2006, 2005
and 2004, respectively.
Patents and Trademarks
Our practice is to apply for patents on new inventions, designs and
processes that have strategic value or are associated with existing or
prospective product lines, service offerings or operations. We believe that the
growth of our business will depend primarily upon the quality and reliability of
our products and our relationships with our customers, rather than the extent of
our patent protection. While we believe that patents are important to our
business operations, the loss of any single or several patents would not have a
material adverse effect on our company. We regard all of our trademarks as being
of substantial value in the marketing of our products, some of which are:
C&D(R), C&D TECHNOLOGIES(R), C&D TECHNOLOGIES POWER SOLUTIONS(R), DATEL(R),
DYNASTY(R), LIBERTY(R), LIBERTY SERIES(R), C-LINE(TM), COMPUCHARGE(R),
EM-LINE(TM), FERRO FIVE(R), FERRO 1500(TM), HYPERON(R), MAXRATE(R), msENDUR(TM),
POSITION PERFECT(TM), RANGER(R), REVOLUTION(R), SAGEON(R), SCOUT(R),
SMARTBATTERY(R), and V-LINE(R).
Employees
On January 31, 2006, we employed 3,065 people. Of these employees, 2,038
were employed in manufacturing and 1,027 were employed in field sales,
technology, manufacturing support, sales support, marketing and administrative
activities. Our management considers our employee relations to be satisfactory.
Employees at five North American plants are represented by five different unions
under collective bargaining agreements.
9
Environmental Regulations
Our operations are 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, the following:
o requirements relating to the handling, storage, use and disposal of
lead and other hazardous materials used in manufacturing processes
and contained in solid wastes;
o record keeping and periodic reporting to governmental entities
regarding the use and disposal of hazardous materials;
o monitoring and permitting of air emissions and water discharge; and
o monitoring worker exposure to hazardous substances in the workplace
and protecting workers from impermissible exposure to hazardous
substances, including lead, used in our manufacturing process.
We operate under a comprehensive environmental, health and safety
compliance program, which is headed by an environmental director and staffed
with trained environmental professionals. As part of our program, we:
o prepare environmental and health and safety practice manuals and
policies;
o conduct employee training;
o develop and implement waste minimization initiatives;
o undertake periodic internal and oversee external audits of our
operations and environmental and health and safety programs;
o practice and engage in routine sampling and monitoring of employee
chemical and physical exposure levels;
o engage in sampling and monitoring of potential points of
environmental emissions; and
o prepare and/or review internal reports to regulatory bodies and
interface with them regarding environmental, safety and other
issues.
In addition, we also have installed certain pollution abatement equipment
to reduce emissions and discharges of regulated pollutants into the environment.
Our program monitors and seeks to resolve potential environmental liabilities
that result from, or may arise from, current and historic hazardous materials
handling and waste disposal practices. We have in place a spent product
recapture and recycling program for our facilities and our customers.
While we believe that we are in material compliance with the applicable
environmental requirements, we have received, and in the future may receive,
citations and notices from governmental regulatory authorities that certain of
our operations are not in compliance with our permits or applicable
environmental requirements. Occasionally we are required to pay a penalty or
fine, to install control technology or to make equipment or process changes (or
a combination thereof) as a result of the non-compliance or changing regulatory
requirements. When we become aware of any non-compliance or change in regulatory
requirements, we take immediate steps to correct and resolve the issues. The
associated costs have not had a material adverse effect on our business,
financial condition or results of operations.
10
Notwithstanding the Company's efforts to maintain compliance with
applicable environmental requirements, if injury or damage to persons or the
environment arises from hazardous substances used, generated or disposed of in
the conduct of the Company's business (or that of a predecessor to the extent
the Company is not indemnified therefor), the Company may be held liable for
certain damages, the costs of investigation and remediation, and fines and
penalties, which could have a material adverse effect on the Company's business,
financial condition, or results of operations. However, under the terms of the
purchase agreement with Allied Corporation (Allied) for the acquisition (the
Acquisition) of the Company (the Acquisition Agreement), Allied was obligated to
indemnify the Company for any liabilities of this type resulting from conditions
existing at January 28, 1986, that were not disclosed by Allied to the Company
in the schedules to the Acquisition Agreement. These obligations have since been
assumed by Allied's successor in interest, Honeywell (Honeywell).
C&D is participating in the investigation of contamination at several lead
smelting facilities (Third Party Facilities) to which C&D allegedly made scrap
lead shipments for reclamation prior to the date of the acquisition.
Pursuant to a 1996 Site Participation Agreement, as later amended in 2000,
C&D and several other potentially responsible parties (PRPs) agreed upon a cost
sharing allocation for performance of remedial activities required by the United
States Environmental Protection Agency (EPA) Administrative Order Consent Decree
entered for the design and remediation phases at the former NL Industries site
in Pedricktown, New Jersey, Third Party Facility. In April 2002, one of the
original PRPs, Exide Technologies (Exide), filed for relief under Chapter 11 of
Title 11 of the United States Code. In August 2002, Exide notified the PRPs that
it would no longer be taking an active role in any further action at the site
and discontinued its financial participation, resulting in a pro rata increase
in the cost participation of the other PRPs, including C&D, for which C&D's
allocated share rose from 5.25% to 7.79%.
In August 2002, we were notified of our involvement as a PRP at the NL
Atlanta, Northside Drive Superfund site. NL Industries, Inc. (NL) and Norfolk
Southern Railway Company have been conducting a removal action on the site,
preliminary to remediation. We, along with other PRPs, continue to negotiate
with NL at this site regarding our share of the allocated liability, which we
expect will not have a material adverse effect on our business, financial
condition or results of our operations.
The Company is also aware of the existence of contamination at its
Huguenot, New York, facility, which is expected to require expenditures for
further investigation and remediation. The site is listed by the New York State
Department of Environmental Conservation (NYSDEC) on its registry of inactive
hazardous waste disposal sites due to the presence of fluoride and other
contaminants in and underlying a lagoon used by the former owner of this site,
Avnet, Inc., for disposal of wastewater. Contamination is present at
concentrations that exceed state groundwater standards. In 2002, the NYSDEC
issued a Record of Decision (ROD) for the soil remediation portion of the site.
A ROD for the ground water portion has not yet been issued by the NYSDEC. In
2005, the NYSDEC also requested that the parties engage in a Feasibility Study,
which the parties are conducting in accordance with a NYSDEC approved workplan.
In February 2000, the Company filed suit against Avnet, Inc., which has agreed
in principle to bear a substantial share of the costs associated with
investigation and remediation of the lagoon-related contamination. Should the
parties fail to reach a final settlement agreement, the Company will
aggressively pursue available legal remedies. Additionally, should the parties
fail to reach a final settlement agreement, NYSDEC may conduct the remediation
and seek recovery from the parties.
C&D, together with Johnson Controls, Inc. (JCI), is conducting an
assessment and remediation of contamination at and near its facility in
Milwaukee, Wisconsin. The majority of the on-site soil remediation portion of
this project was completed as of October 2001. Under the purchase agreement with
JCI, C&D is responsible for (i) one-half of the cost of the on-site assessment
and remediation, with a maximum liability of $1,750,000 (ii) any environmental
liabilities at the facility that are not remediated as part of the ongoing
cleanup project and (iii) environmental liabilities for any new claims made
after the fifth anniversary of the closing, i.e. March 2004, that arise from
migration from a pre-closing condition at the Milwaukee facility to locations
other than the Milwaukee facility, but specifically excluding liabilities
relating to pre-closing offsite disposal. JCI retained the environmental
liability for the off-site assessment and remediation of lead. In March 2004, we
entered into an agreement with JCI to continue to share responsibility as set
forth in the original purchase agreement. We continue to negotiate with JCI
regarding the allocation of costs for assessment and remediation of certain
off-site chlorinated volatile organic compounds (CVOCs) in groundwater.
11
In January 1999, we received notification from the EPA of alleged
violations of permit effluent and pretreatment discharge limits at our plant in
Attica, Indiana. We submitted a compliance plan to the EPA in April 2002. We
engaged in negotiations with both the EPA and U.S. Department of Justice (DOJ)
through March 2003 regarding a potential resolution of this matter. The
government filed suit against C&D in March 2003 in the United States District
Court for the Southern District of Indiana for alleged violations of the Clean
Water Act. The parties have reached a tentative settlement, subject to execution
of a Consent Decree, with an agreed civil penalty of $1,600,000. Terms of the
Consent Decree have been negotiated and agreed to by the parties. The Company
has executed the Consent Decree and it has been submitted to the EPA and DOJ for
signature. The executed Consent Decree will then be lodged with the Court. In
addition to the civil penalty, the Consent Decree, if finalized in the form
submitted to the EPA and DOJ, will require the Company to submit to the EPA a
Compliance Work Plan for completing implementation of certain compliance
measures set forth in the Consent Decree. These compliance measures will be
required to be implemented by the Company in accordance with a schedule approved
by the EPA. Once approved, the Compliance Work Plan and schedule will become
fully enforceable parts of the Consent Decree. The Consent Decree will also
require certain pretreatment compliance measures, including the continued
operation of a wastewater pretreatment system, which was previously installed at
the Attica facility. The Consent Decree will further require certain National
Pollution Discharge Elimination System (NPDES) compliance measures, including
testing, sampling and reporting requirements relating to a NPDES storm water
monitoring system at the facility. Additionally, the Consent Decree will provide
for stipulated penalties for noncompliance with the requirements of the Consent
Decree occurring after the lodging of the Consent Decree with the Court. We do
not expect that the Consent Decree will have a material adverse effect on our
business, financial condition or results of our operations.
In February 2005, we received a request from EPA to conduct exploratory
testing to determine if the historical municipal landfill located on the C&D
Attica, Indiana, property is the source of elevated levels of trichloroethylene
detected in two city wells downgradient of the C&D property. EPA advised that it
believes the former landfill is subject to remediation under the RCRA corrective
action program. We have submitted an investigation work plan to EPA, and testing
in accordance with the plan is being conducted. EPA has recently advised that
the agency also wants C&D to embark upon a more comprehensive investigation
under an agreed consent order to determine whether there have been any releases
of other hazardous waste constituents from the C&D Attica facility and, if so,
to determine what corrective measure may be appropriate. The scope of any
potential exposure is not defined at this time. However, we do not currently
believe that this matter will have a material adverse effect on our business,
financial condition or results of operations.
In March 2005, the Financial Accounting Standards Board (FASB) released
Interpretation (FIN) No. 47 "Accounting for Conditional Asset Retirement
Obligations--an Interpretation of FASB Statement No. 143." FIN 47 requires
companies to record a conditional asset retirement obligation (CARO) for any
legal obligations to perform asset retirement activities. The Company evaluated
the impact of FIN 47 and determined that it has numerous battery facilities that
are classified as subject to prescribed post-closure cleanup actions, which
include requirements for the disposal of all hazardous wastes within 90 days of
facility closure. The hazardous wastes are contained within wastewater holding
tanks. The Company has no plans or legal requirements to remove or replace the
tanks. The Company's tank cleanup and removal is conditional on closure or sale
of the plants. There is an indeterminate settlement date for the retirement
obligation to which the holding tanks give rise, because the range of time over
which the Company may settle the obligation is unknown and cannot be estimated.
The Company will continue to monitor the measurement of this liability if plans
for these manufacturing sites should change.
We accrue reserves for liabilities in our consolidated financial
statements and periodically reevaluate the reserved amounts for these
liabilities in view of the most current information available in accordance with
Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for
Contingencies." As of January 31, 2006, accrued environmental reserves totaled
$3,775,000 consisting of $2,534,000 in other current liabilities and $1,241,000
in other liabilities. During fiscal year 2006, the Company reversed $3,504,000
of environmental reserves as a result of revised estimates associated with two
of its facilities. Based on currently available information, we believe that
appropriate reserves have been established with respect to the foregoing
contingent liabilities and that they are not expected to have a material adverse
effect on our business, financial condition or results of operations.
Certifications
C&D has included as Exhibits 31.1 and 31.2 to its Annual Report on 10-K
for fiscal year ended January 31, 2006, filed with the SEC, certifications of
the Chief Executive Officer and Chief Financial Officer of C&D regarding the
quality of C&D's public disclosure. In June 2005, C&D submitted to the New York
Stock Exchange the certification of the Chief Executive Officer required by the
rules of the New York Stock Exchange certifying that he was not aware of any
violation by C&D of the New York Stock Exchange corporate governance listing
standards.
12
Available Information
C&D maintains an Internet web site (www.cdtechno.com) and makes available
free of charge on or through the web site its Annual Report on Form 10-K, its
Quarterly Reports on Form 10-Q and its Current Reports on Form 8-K as soon as
reasonably practicable after it electronically files such material with, or
furnishes it to, the SEC. C&D also makes available on its web site and in
printed form upon request, C&D's Code of Business Conduct, which includes C&D's
Corporate Compliance Program and a Code of Ethics for C&D's Chief Executive
Officer, Chief Financial Officer and all C&D personnel serving in a finance,
accounting, tax or investor relations role.
13
Item 1A. Risk Factors
Fluctuations in prices and availability of raw materials, particularly
lead, could increase our costs or cause delays in shipments, which would
adversely impact our results of operations.
Our operating results could be adversely affected by increases in the cost
of raw materials, particularly lead, the primary component cost of our battery
products, or other product parts or components. Lead represented approximately
20% of our consolidated cost of sales for the fiscal year 2006. Lead market
prices averaged $0.22 per pound in fiscal year 2002, $0.20 per pound in fiscal
year 2003, $0.25 per pound in fiscal year 2004, $0.41 per pound in fiscal year
2005 and $0.45 per pound in fiscal year 2006. Lead traded as high as $0.657 per
pound on February 2, 2006. The increase in lead market price has negatively
impacted our financial results in recent periods. We historically have not been
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 our results of operations. Additionally, we
have recently instituted a lead hedging policy to mitigate our exposure to
volatility in the price of lead. To the extent lead market prices decline in the
future, we may be obligated to purchase a portion of our lead requirements at
higher prices than are then available in the market.
Our ability to meet customer demand depends, in part, on our ability to
obtain timely and adequate supply and delivery of raw materials, including lead,
and other product parts or components from our suppliers or from internal
manufacturing capacity. Although we work closely with both our internal and
external suppliers (and, as to the continuing availability of lead, our industry
associations) to avoid encountering unavailability or shortages, we 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 our operations. The loss of a key supplier or the inability to obtain
certain key products or components could cause delays or reductions in shipments
of our products, which could negatively affect customer satisfaction, thereby
reducing our revenues, or could increase our costs.
Lack of successful integration of acquired businesses or difficulties in
making acquisitions or forming strategic alliances could hinder our ability to
implement our business strategies.
In addition to our recent acquisitions of Celab, Datel and CPS during
fiscal year 2005, we 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 us. Acquisitions present significant challenges and risks relating
to the integration of the acquired business into our company, including
substantial management time and financial and other resources, and we may not
manage acquisitions successfully. Our 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 our 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 our strategy. Our efforts to implement our strategy
could be affected by a number of factors beyond our control, such as increased
competition and general economic conditions in the countries where newly
acquired companies operate. Any failure to effectively implement our strategy
could have a material adverse effect on our results of operations.
14
Restrictive loan covenants may impact our ability to operate our business
and to pursue our business strategies, and our failure to comply with these
covenants could result in an acceleration of our indebtedness.
Our $75,000 principal amount Line of Credit Facility (Credit Facility) and
$50,000 Term Loan facility (Term Loan), as well as the indenture governing our
5.25% Convertible Senior Notes Due 2025 (Notes) contain certain covenants that
restrict our ability to finance future operations or capital needs, to respond
to changing business and economic conditions or to engage in other transactions
or business activities that may be important to our growth strategy or otherwise
important to us. The Credit Facility, Term Loan and the indenture governing our
Notes restrict, among other things, our ability and the ability of our
subsidiaries to:
o incur additional indebtedness or enter into sale and leaseback
transactions;
o pay dividends or make distributions on our capital stock or
certain other restricted payments or investments;
o purchase or redeem stock;
o issue stock of our subsidiaries;
o make investments and extend credit;
o engage in transactions with affiliates;
o transfer and sell assets;
o effect a consolidation or merger or sell, transfer, lease or
otherwise dispose of all or substantially all of our assets;
and
o create liens on our assets to secure debt.
Our liquidity derived from the Credit Facility is based on availability
determined by a borrowing base. The availability is calculated monthly and is
dependent upon our eligible receivables, inventory and certain equipment. There
can be no assurance that we will maintain adequate levels of eligible assets to
support our required liquidity.
In addition, our Credit Facility and Term Loan require us to meet certain
financial ratios. Our ability to comply with these provisions may be affected by
events beyond our control, and we may not be able to meet the financial ratios.
Rising prices of lead and other commodities and other circumstances have
resulted in us recently obtaining an amendment to our financial covenants.
Any breach of the covenants in our Credit Facility, Term Loan or the
indenture governing our Notes could cause a default under our Credit Facility
and other debt (including the Term Loan and the Notes), which would restrict our
ability to borrow under our Credit Facility, thereby significantly impacting our
liquidity. If there were an event of default under any of our debt instruments
that was not cured or waived, the holders of the defaulted debt could cause all
amounts outstanding with respect to the debt instrument to be due and payable
immediately. Our assets and cash flow may not be sufficient to fully repay
borrowings under our outstanding debt instruments if accelerated upon an event
of default. If, as or when required, we are unable to repay, refinance or
restructure our indebtedness under, or amend the covenants contained in, our
Credit Facility or Term Loan, the lenders under our Credit Facility or Term Loan
could institute foreclosure proceedings against the assets securing borrowings
under those facilities.
We may face additional impairment charges if economic environments in
which our 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 our
normal ongoing review of operations. Testing for potential impairment of
long-lived assets is dependent on numerous assumptions and reflects our best
estimates at a particular point in time, which may vary from testing date to
testing date. The economic environments in which our 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 economic environment and the
economic outlook for the assets being evaluated could also result in additional
impairment charges. Any significant impairments would adversely impact our
financial results.
15
Adverse economic or market changes in certain market sectors in which we
conduct business could impact our results of operations.
Our results of operations could be adversely affected by conditions in the
domestic and global economies or the markets in which we conduct business, such
as telecommunications, UPS, cable television, switchgear and control, material
handling and military. Our 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 our equipment or the prices that we can
charge. Any such decrease could adversely affect our 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 our results of operations.
We are subject to pricing pressure from our larger customers.
We face significant pricing pressures in all of our business segments from
our larger customers. Because of their purchasing size, our larger customers can
influence market participants to compete on price terms. Such customers also use
their buying power to negotiate lower prices. If we are 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 our financial results.
We operate in extremely competitive industries and are subject to
continual pricing pressure.
We compete 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 our industries, consolidation and the financial difficulties being
experienced by several of our competitors, we have faced continual and
significant pricing pressures. These pricing pressures may prevent us from fully
recovering increased costs we might incur. We anticipate 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
our major U.S. and European markets. Several of our 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 we
do. In addition, certain of our 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. Our ability to maintain and improve our competitive position has
depended, and continues to depend, on our ability to control and reduce our
costs in the face of these pressures.
Difficulties or delays in product development would hinder our financial
performance.
Our financial performance and our ability to compete are largely dependent
on our ability to renew our 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 our research and development
initiatives are unsuccessful in one or more of these pursuits, the market does
not accept our new or improved products or our sales force is unsuccessful in
marketing such products, our 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 our products less desirable
or obsolete. Our financial performance could also be affected by competitive
products and technologies.
16
We are subject to risks associated with our foreign operations.
We have operations in Canada, China, England, Germany, Japan and Mexico,
either directly or through joint ventures. For fiscal year 2006, sales outside
of the U.S. accounted for approximately 33% of our net sales. In our financial
statements, we translate local currency financial results into United States
dollars based on average exchange rates prevailing during a reporting period.
Our most significant foreign currency exposures are to the Canadian dollar, the
British pound and the euro. During times of a strengthening United States
dollar, our reported international revenue and earnings will be reduced because
the local currency will translate into fewer United States dollars, in spite of
our efforts to hedge against currency risk exposures. In addition, we may face
restrictions on our ability to repatriate funds from our international
operations.
Foreign operations are subject to risks that can materially increase the
cost of operating in foreign countries and thereby may reduce our 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 we
operate and/or sell our 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.
We are subject to risks associated with our operations in China.
A substantial amount of our 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 our 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
we may be required to pay with respect to these products may have a material
adverse impact on our business and results of operations. Additionally, if the
Chinese government decides to significantly revalue the Yuan, such an action
could adversely impact our business and financial results.
Delays in the relocation of our Shanghai facility or the failure to
complete that relocation may adversely affect our business and results of
operations.
The Chinese government has notified our joint venture that it is required
to relocate our 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 with an additional $1.7 million payable by the
Chinese government upon the transfer of the Shanghai facility to the Chinese
government on or about January 2007. We anticipate 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 our
ability to complete orders and deliver products to our customers, and a failure
to complete the relocation would require us to move production of some products
to other facilities, which would adversely impact our operations and hinder our
growth. Also, this relocation will require us to build up higher levels of
inventory to enable us to continue to satisfy customer demand during the
transition period, which will require a higher investment in working capital and
affect our financial position.
17
Our worldwide operations could be adversely impacted by political,
economic and social changes, or acts of terrorism or war.
We operate worldwide and for fiscal year 2006 sales outside of the U.S.
accounted for approximately 33% of our net sales. Changes in the laws or
policies of governmental and quasi-governmental agencies, as well as social and
economic conditions, in the countries in which we operate (including the United
States) could affect our business and our results of operations. In addition,
economic factors (including inflation and fluctuations in interest rates and
foreign currency exchange rates) and competitive factors (such as price
competition and business combinations or reorganizations of competitors) or a
decline in industry sales or cancelled or delayed orders due to economic
weakness or changes in economic conditions, either in the United States or other
countries in which we conduct business, could negatively affect our results of
operations.
Terrorist acts or acts of war, whether in the United States or abroad,
could cause damage or disruption to our operations, our suppliers, channels to
market or customers, or could cause costs to increase, or create political or
economic instability, any of which could have a material adverse effect on our
results of operations.
We are reliant on third parties whose operations are outside our control.
We rely on arrangements with third-party shippers and carriers such as
independent shipping companies for timely delivery of our products to our
customers. As a result, we may be subject to carrier disruptions and increased
costs due to factors that are beyond our control, including labor strikes,
inclement weather, natural disasters and rapidly increasing fuel costs. If the
services of any of these third parties become unsatisfactory, we may experience
delays in meeting our customers' product demands and we may not be able to find
a suitable replacement on a timely basis or on commercially reasonable terms.
Any failure to deliver products to our customers in a timely and accurate manner
may damage our reputation and could cause us to lose customers.
We also utilize third party distributors and manufacturers'
representatives to sell, install and service certain of our products. While we
are selective in whom we choose to represent us, it is difficult for us to
ensure that our distributors and manufacturers' representatives consistently act
in accordance with the standards we set for them. To the extent any of our
end-customers have negative experiences with any of our distributors or
manufacturers' representatives, it could reflect poorly on us and damage our
reputation, thereby negatively impacting our financial results.
We also utilize contract manufacturers to manufacture certain of our Power
Electronics products. In some instances we are contractually obligated to use a
contract manufacturer for production of specific products for which we have
supply agreements at contractual rates. To the extent our manufacturing partners
have issues with product quality or timely delivery of products, it could impair
our relationships with our customers. Additionally, certain of our manufacturing
agreements may not provide us with sufficient flexibility to negotiate pricing
or to secure for ourselves some of the inputs for our products, which could
result in higher manufacturing costs. Any of these factors could impair our
financial results by reducing future revenue or increasing costs.
Maintaining our manufacturing operations requires significant capital
expenditures, and our inability or failure to maintain our operations would have
a material adverse impact on our market share and ability to generate revenue.
We had capital expenditures of approximately $8.8 million and $11.9
million in fiscal years 2006 and 2005, respectively. We expect to spend
approximately 2% to 3% of future revenues on capital expenditures in future
periods excluding construction of any new manufacturing facilities. We may incur
significant additional capital expenditures as a result of unanticipated
expenses, regulatory changes and other events that impact our business. If we
are unable or fail to adequately maintain our manufacturing capacity or quality
control processes, we could lose customers and there could be a material adverse
impact on our market share and our ability to generate revenue.
18
Our productivity initiatives, including rationalizations, relocations or
consolidations may not be sufficiently effective to improve our financial
performance or generate desired cost savings.
We have undertaken and may continue to undertake productivity initiatives,
including, among others, reorganizations, including the shut down or sale of
portions of our business, and facility rationalizations to improve performance
or generate cost savings. In addition, we may from time to time relocate or
consolidate one or more of our operations. We 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 us.
Firmwide, we are placing renewed emphasis on improving the quality of the
products we manufacture and on more timely delivery of our products. In Motive
Power in particular, we are working to improve our product portfolio, our
manufacturing processes and our sales channels including our relationships with
manufacturers' representatives and truck dealers. In Power Electronics, we are
working to improve our product fulfillment process and to more tightly integrate
our various operations to achieve desired revenue and expense synergies.
Additionally, we continue to work to optimize our manufacturing portfolio by
transitioning capacity to lower-cost regions and by selectively using contract
manufacturers for certain of our Power Electronics products. To the extent
management is unsuccessful at achieving the goals of any or all of these
initiatives, we will not be able to achieve our anticipated operating results.
Our new management team may not be able to successfully grow and manage
all businesses.
We believe that due to the challenges of growing our company, the quality
of our executive officers and their ability to work effectively together as a
management team will be key to our success. We recently hired a new President
and Chief Executive Officer, Jeffrey A. Graves, a new Vice President, General
Counsel and Corporate Secretary, James D. Dee, a new Vice President and General
Manager of our Power Electronics division, William E. Bachrach, a new Vice
President and Chief Financial Officer, Ian J. Harvie, and a new Vice President
of Human Resources, Debora M. Castle. The Company is currently undertaking a
search for a new Vice President and General Manager of the Motive Power and
Standby Power divisions. This new management team may not be effective in
attaining our business goals and may not fulfill our expectations regarding our
operations.
Costs of complying with environmental laws and regulations and liabilities
that we may incur from fines and penalties, in the United States and
internationally, could adversely impact our financial results and condition.
Our facilities are subject to a broad array of environmental laws and
regulations. The costs of complying with complex environmental laws and
regulations, as well as participation in voluntary programs, are significant and
will continue to be so for the foreseeable future. We are also subject to
potentially significant fines and penalties for non-compliance with applicable
laws and regulations. Our accruals for such costs and liabilities may not be
adequate since the estimates on which the accruals are based depend on a number
of factors including, but not limited to, the nature of the problem, the
complexity of the issues, the nature of the remedy, the outcome of discussions
with regulatory agencies and/or the government or third parties and, as
applicable, other PRPs at multiparty sites, the number and financial viability
of other PRPs and risks associated with litigation. These costs and liabilities
could adversely impact our financial results and condition.
In response to the European Union's "Restriction on Use of Hazardous
Substances in Electrical and Electronic Equipment," we established a schedule
for compliance for our Power Electronics division . We will continue to strive
for elimination of, and seek to have our component part suppliers eliminate,
prohibited hazardous substances consistent with legislative requirements. We
will continue to actively monitor decisions around environmental legislation and
align our compliance with those decisions and the needs of our customers. These
efforts may not be successful or completed on a timely basis, the failure of
either of which could have an adverse effect on our results of operations.
19
Our results may be adversely impacted by customers that become insolvent
or bankrupt.
We are exposed to the credit risk of our customers, including risk of
insolvency and bankruptcy. Although we have programs in place to monitor and
mitigate the associated risk, such programs may not be effective in reducing our
credit risks or risks associated with potential bankruptcy of our customers. To
the extent one or more of our customers becomes insolvent or seeks protection
from its creditors, we may not be able to collect money due to us and we could
incur write-downs to our accounts receivable balances. Additionally, the loss of
such customers could negatively impact our financial performance in future
periods.
Pending or future litigation could impact our financial results and
condition.
Our business, results of operations and financial condition could be
affected by significant pending and future litigation or claims adverse to us.
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 our business (or that of a
predecessor to the extent we are not indemnified for those liabilities).
Our domestic business operations are dependent upon our ability to engage
in successful collective bargaining with our unionized workforce.
Currently, approximately 30% of our workforce is unionized, and we engage
in collective bargaining negotiations with the unions that represent them. If we
are unable to reach agreement with any of our unionized work groups in future
negotiations regarding the terms of their collective bargaining agreements, or
if additional segments of our workforce become unionized, we may be subject to
work interruptions or stoppages. Strikes or labor disputes with our employees
may adversely affect our ability to conduct our business.
A change in our product mix may cause our results of operations to differ
substantially from the anticipated results in any particular period.
Our overall profitability may not meet expectations if our products,
customers or geographic mix are substantially different than anticipated. Our
profit margins vary among products, customers and geographic markets.
Consequently, if our mix of any of these is substantially different from what is
anticipated in any particular period, our profitability could be lower than
anticipated.
Consolidation of existing enterprise resource planning systems could
adversely affect our operations.
We are evaluating consolidating our operations into fewer enterprise
resource planning (ERP) systems in certain locations to integrate the separate
systems of businesses that we recently acquired. An ERP system automates various
business tasks including accounting, distribution and sales. Successful
implementation of any consolidation will be critical to our cost reduction
initiatives and to our ability to comply with the financial reporting and
compliance obligations of a public company. Such processes will significantly
affect many aspects of our business, including our accounting, operations,
purchasing, sales, marketing, and administrative functions, and could disrupt
our business, distract management and increase our costs. Our plans may require
further modification and user training in order to properly handle all of the
different accounting requirements of the countries in which we operate. If we
were to experience difficulties or delays in any implementation efforts from
this consolidation, our ability to provide products to our customers on a timely
basis could be adversely affected, which would harm our operating results and
relationships with our customers. Additionally, any integration difficulties or
delays could adversely affect the processing and reporting of our accounting and
financial results. We may not be able to correct any such difficulties or
problems on a timely basis.
20
If customers fail to renew supply agreements on terms as favorable to us
as existing agreements, our financial results could be adversely impacted.
We supply products to certain of our 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 us as existing agreements, which could
adversely impact our financial results.
We may not be able to adequately protect our proprietary intellectual
property and technology.
We rely 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 our proprietary
intellectual property and technology and other confidential information. Despite
our efforts to protect our proprietary intellectual property and technology and
other confidential information, unauthorized parties may attempt to copy or
otherwise obtain and use our intellectual property and proprietary technologies,
which could adversely impact our competitive position and therefore our business
operations and financial results.
Item 1B. Unresolved Staff Comments
None.
21
Item 2. Properties
Set forth below is certain information, as of January 31, 2006, with
respect to our principal properties.
Square
Location Footage Products Manufactured at or Use of Facility
- --------------------------------------------------------------------------------------------------------------------
United States Properties:
Milwaukee, Wisconsin (1) 370,000 Small standby power batteries
Attica, Indiana (1) 295,000 Large standby power batteries
Leola, Pennsylvania (1) (4) 240,000 Round Cell and battery R&D laboratory
Mansfield, Massachusetts (1) 180,000 Power supplies, data acquisition and digital meters,
headquarters of Power Electronics Division
Conyers, Georgia (1) 161,000 Small standby power batteries
Huguenot, New York (1) 148,000 Motive power batteries
Dunlap, Tennessee (2) 72,000 Standby power and motive power electronics products
Blue Bell, Pennsylvania (2) 63,000 Corporate headquarters, Standby Power and Motive Power
divisional headquarters
Tucson, Arizona (2) 57,000 DC to DC converters, power supplies, electronics R&D laboratory
Milwaukie, Oregon (2) 50,000 Design, development and manufacture of power supplies
Santa Fe Springs, California (2) 23,000 Sales, service and distribution of industrial batteries
International Properties:
Shanghai, China (3) 315,000 Small standby power batteries
Reynosa, Mexico (1) 240,000 Large standby power batteries and motive power batteries
Nogales, Mexico (2) 81,000 DC to DC converters and AC to DC power supplies
Guangzhou, China (2) 46,000 DC to DC converters and wound magnetics
Hampshire, United Kingdom (2) 42,000 Low voltage switchmode power supply units
Milton Keynes, United Kingdom (2) 33,000 DC to DC converters, wound magnetics and electronics R&D
laboratory
Romsey, United Kingdom (2) 21,000 Distribution center
Mississauga, Canada (2) 20,000 Sales office and distribution center
Markham, Ontario, Canada (2) 17,000 Design and development of power supplies
(1) Property is owned by C&D.
(2) Property is leased by C&D.
(3) Building is owned by a joint venture, of which the Company owns 67%;
however, the land is leased under a 50-year agreement, of which 39 years
remain. The Chinese government previously notified our joint venture that
it will be required to relocate the Shanghai facility and has paid our
joint venture approximately $15,547,000 as a partial payment, which the
Company is applying towards construction of a new facility in the Pudong
Development Zone. Our joint venture began preliminary construction in the
fourth quarter of fiscal year 2006 and anticipates production will begin
in the fourth quarter of fiscal year 2007. Upon return of the existing
property to the Chinese government, it will pay the joint venture an
additional $1,727,000.
(4) One of the buildings in the Leola, Pennsylvania, location is held for
sale.
22
Item 3. Legal Proceedings
We are involved in ordinary, routine litigation incidental to the conduct
of our business. None of this litigation, individually or in the aggregate, is
material or is expected to be material to our business, financial condition or
results of operations in any year. See Business - Environmental Regulations for
a description of certain legal proceedings in which we are involved.
In January 1999, we received notification from the EPA of alleged
violations of permit effluent and pretreatment discharge limits at our plant in
Attica, Indiana. We submitted a compliance plan to the EPA in April 2002. We
engaged in negotiations with both the EPA and DOJ through March 2003 regarding a
potential resolution of this matter. On March 24, 2003, the government filed
suit against C&D 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. The parties
have reached a tentative settlement, subject to execution of a Consent Decree,
with an agreed civil penalty of $1,600,000. Terms of the Consent Decree have
been negotiated and agreed to by the parties. The Company has executed the
Consent Decree and it has been submitted to the EPA and DOJ for signature. The
executed Consent Decree will then be lodged with the Court. In addition to the
civil penalty, the Consent Decree, if finalized in the form submitted to the EPA
and DOJ, will require the Company to submit to the EPA a Compliance Work Plan
for completing implementation of certain compliance measures set forth in the
Consent Decree. These compliance measures will be required to be implemented by
the Company in accordance with a schedule approved by the EPA. Once approved,
the Compliance Work Plan and schedule will become fully enforceable parts of the
Consent Decree. The Consent Decree will also require certain pretreatment
compliance measures, including the continued operation of a wastewater
pretreatment system, which was previously installed at the Attica facility. The
Consent Decree will further require certain NPDES compliance measures, including
testing, sampling and reporting requirements relating to a NPDES storm water
monitoring system at the facility. Additionally, the Consent Decree will provide
for stipulated penalties for noncompliance with the requirements of the Consent
Decree occurring after the lodging of the Consent Decree with the Court. We do
not expect that the Consent Decree will have a material adverse effect on our
business, financial condition or results of our operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
23
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities
Our Common Stock is traded on The New York Stock Exchange under the symbol
CHP. There were 61 registered record holders of our Common Stock on March 31,
2006.
The following table sets forth, for the periods indicated, the high and
low sales prices for our Common Stock as reported by the New York Stock
Exchange. These prices represent actual transactions, but do not reflect
adjustment for retail markups, markdowns or commissions.
Years Ended January 31,
2006 2005
----------------------- ----------------------
Fiscal Quarter High Low High Low
==================================================================================================================
First Quarter $15.23 $ 6.79 $20.86 $14.59
Second Quarter 10.70 6.16 18.20 13.55
Third Quarter 11.75 8.50 20.26 13.64
Fourth Quarter 10.42 6.80 19.55 14.36
Dividends. We began paying cash dividends on our Common Stock in April
1987. For the years ended January 31, 2006 and 2005, we declared dividends per
share as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
===================================================================================================================
2006 $ 0.01375 $ 0.01375 $ 0.01375 $ 0.01375
2005 $ 0.01375 $ 0.02750 $ -- $ 0.01375
Our loan agreements permit dividends to be paid on our Common Stock, up to
$1,750,000 in any one calendar year, subject to certain restrictions, including
having excess availability of at least $30,000,000 for each of the thirty
consecutive days immediately prior to the date of the dividend. Subject to those
restrictions and the provisions of Delaware law, future dividends will depend on
our earnings, financial condition and other factors. (See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.)
On February 22, 2000, the Board of Directors of C&D declared a dividend of
one common stock purchase right (Right) for each share of Common Stock
outstanding on March 3, 2000 to the stockholders of record on that date. The
description and terms of the Rights are set forth in a Rights Agreement between
C&D and Mellon Investor Services, LLC (formerly ChaseMellon Shareholder
Services, L.L.C.), as rights agent. On November 15, 2004, an amendment was
signed among C&D, Mellon Investor Services LLC and the Bank of New York whereby
Mellon Investor Services LLC resigned as rights agent effective as of 12:00
A.M., New York time, November 30, 2004. We appointed the Bank of New York as
successor rights agent effective as of 12:01 A.M., New York time, December 1,
2004. Upon the occurrence of certain events, each Right will entitle the
registered holder to purchase from C&D one one-hundredth of a share of Common
Stock at a purchase price of $150 per one one-hundredth of a share, subject to
adjustment, as stated in the Rights Agreement. Upon the occurrence of certain
events involving a hostile takeover of C&D, unless our Board of Directors acts
otherwise, each holder of a Right, other than Rights beneficially owned by the
acquiring company, will thereafter have the right to receive upon exercise: (i)
that number of shares of our common stock having a market value equal to two
times the purchase price of the Right or (ii) that number of shares of common
stock of the acquiring company that at the time of the transaction has a market
value of two times the exercise price of the Right.
24
The following table provides information regarding repurchases by C&D of
our common stock during the fourth quarter of fiscal year 2006.
Total Number Maximum Number
of Shares (or Approximate
Publicly Dollar Value) of
Total Number Announced Shares that May Yet
of Shares Average Price Plans Be Purchased Under
Period Purchased Paid per Share or Programs the Plans or Programs
=====================================================================================================================
November 1 - November 30, 2005 84 $ 7.52 -- 1,000,000
December 1 - December 31, 2005 163 $ 7.46 -- 1,000,000
January 1 - January 31, 2006 166 $ 7.79 -- 1,000,000
- ----------------------------------------------------- ---------------
Total 413 --
===================================================== ===============
On September 30, 2004, our Board of Directors authorized a new stock
repurchase program. Under the program, the Company is permitted to repurchase up
to 1,000,000 shares of C&D Technologies common stock having a total purchase
price of no greater than $25,000,000. This program entirely replaces and
supersedes all previously authorized stock repurchase programs. None of the
shares purchased during the fourth quarter of fiscal year 2006 were purchased
pursuant to the September 30, 2004, repurchase program; 413 shares were
purchased through deferred compensation plans.
25
Item 6. Selected Financial Data
The following selected historical financial data for the periods indicated
have been derived from C&D's audited consolidated financial statements.
STATEMENT OF OPERATIONS DATA
(In thousands, except share and per share data)
STATEMENT OF OPERATIONS DATA
(In thousands, except share and per share data)
Fiscal 2006 (1) 2005 (2) (3)* 2004 (4) 2003 2002
===========================================================================================================================
NET SALES $ 497,407 $ 414,738 $324,824 $335,745 $471,641
- ---------------------------------------------------------------------------------------------------------------------------
COST OF SALES 414,499 348,080 248,145 257,046 343,370
- ---------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 82,908 66,658 76,679 78,699 128,271
OPERATING EXPENSES:
Selling, general and administrative expenses 61,812 47,480 40,459 34,647 50,406
Research and development expenses 25,128 18,641 9,542 9,509 10,291
Identifiable intangible assets impairment 20,045 464 -- -- --
Goodwill impairment 13,674 74,233 -- 489 --
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (37,751) (74,160) 26,678 34,054 67,574
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense, net 10,487 5,015 1,268 3,800 6,700
Other (income) expense, net (21) 1,612 1,641 1,457 1,239
- ---------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST (48,217) (80,787) 23,769 28,797 59,635
Provision (benefit) for income taxes 12,362 (21,289) 8,795 9,414 22,244
- ---------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE MINORITY INTEREST (60,579) (59,498) 14,974 19,383 37,391
Minority interest 83 (5) 83 91 1,317
- ---------------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (60,662) $ (59,493) $ 14,891 $ 19,292 $ 36,074
===========================================================================================================================
Net (loss) income per common share - basic (5) $ (2.39) $ (2.35) $ 0.58 $ 0.75 $ 1.38
===========================================================================================================================
Net (loss) income per common share - diluted (6) $ (2.39) $ (2.35) $ 0.58 $ 0.74 $ 1.35
===========================================================================================================================
Dividends per common share $ 0.055 $ 0.055 $ 0.055 $ 0.055 $ 0.055
===========================================================================================================================
BALANCE SHEET DATA
Working capital $ 96,750 $ 115,897 $ 64,005 $ 53,776 $ 55,014
Total assets 418,419 480,923 385,950 382,156 395,558
Short-term debt 1,038 1,389 -- 14,062 27,255
Long-term debt 133,067 135,004 19,620 25,857 46,892
Stockholders' equity 130,817 209,328 269,533 258,274 241,858
* Reclassified for comparative purposes.
(1) The following charges are included in the Statement of Operations for
the fiscal year ended January 31, 2006: Cost of Sales includes non-cash fixed
asset impairment charges at our Tucson, Arizona facilities totaling $2,161 and
non-cash fixed asset impairment charges at our Huguenot, New York, facilities
totaling $2,641. Cost of Sales also includes the reversal of $3,504 of
environmental reserves as a result of revised estimates associated with two of
our facilities. Operating expenses include non-cash goodwill and intangible
asset impairment charges of $13,674 and $20,045, respectively, relating to the
Power Electronics Division.
(2) The following charges are included in the Statement of Operations for
the fiscal year ended January 31, 2005: Cost of sales includes non-cash fixed
asset impairment charges at our Leola, Pennsylvania, and Huguenot, New York,
facilities totaling $9,602; environmental clean-up charges at these two
facilities in the amount of $3,881; and rigging, transportation and severance
costs related to the transfer of production to our Reynosa, Mexico, facility of
$1,426. Operating expenses include non-cash goodwill and intangible asset
impairment charges of $74,233 and $464, respectively, relating to the Power
Electronics Division.
26
(3) On May 27, 2004, we acquired Celab Limited, based in Hampshire, United
Kingdom, a provider of power conversion products, predominately sold into
military, CATV and telecommunications applications in Europe. On June 30, 2004,
we acquired Datel Holding Corporation and its subsidiaries, a Mansfield,
Massachusetts-based manufacturer of primarily DC to DC converters, with
additional product offerings in data acquisition components and digital panel
meters. On September 30, 2004, we acquired the Power Systems division of
Celestica, Inc., which we now operate as CPS, a Toronto, Ontario-based company.
CPS develops DC to DC converters and AC to DC power supplies which are sold on a
direct basis to large computing and communications OEMs. For reporting purposes,
these three acquisitions are included in the Power Electronics Division.
(4) On September 25, 2003, we and our wholly owned Mexican subsidiary, C&D
Technologies Reynosa, S. de R.L. de C.V., acquired from Matsushita Battery
Industrial Corporation of America, and its Mexican subsidiary, Matsushita
Battery Industrial de Mexico, S.A. de C.V., a 240,000 square foot facility in
Reynosa, Mexico, and the equipment in that facility historically used for the
manufacture of large, valve regulated lead acid batteries ("VRLA batteries") for
standby power applications. In addition, we entered into a worldwide technology
license agreement with Matsushita Battery Industrial Co. Ltd. of Japan for
selected patents and know-how relating to the manufacturing technology for the
aforementioned products. For reporting purposes, the acquisition of the Reynosa
facility and associated operating results are included in both the Motive Power
and Standby Power divisions. We continue to use the assets acquired for the
manufacture of large, VRLA batteries for standby power applications.
(5) Based on 25,379,717, 25,349,488, 25,536,628, 25,818,024, and
26,153,715 weighted average shares outstanding - basic.
(6) Based on 25,379,717, 25,349,488, 25,731,961, 26,025,179, and
26,688,011 weighted average shares outstanding - diluted.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All dollar amounts in this Item 7 are in thousands, except per share
amounts and per pound lead amounts.
Overview
During fiscal year 2006, major items that impacted our financial results
include: (i) non-cash pre-tax intangible assets, goodwill and fixed asset
impairment charges totaling $35,880 related to our Power Electronics Division
and non-cash fixed asset impairment charges of $2,641 related to our Motive
Power Division; (ii) the increased cost of lead, which had a significant
negative impact on the results of our Standby Power and Motive Power divisions;
and (iii) the acquisitions and associated financial results of Celab, Datel and
CPS, which are included in the results of operations of the Power Electronics
division for the entire year.
Impact of Economy and Shift in Customer Demand
During fiscal year 2006, our Standby Power Division experienced higher
demand for products sold to the telecommunication markets, while demand for our
Standby Power products sold into the UPS markets softened. Demand for our Motive
Power products declined slightly while demand increased in the Power Electronics
Division, after adjusting for prior year acquisitions.
Raw Material Pricing and Productivity
Lead, steel, copper, plastics and electronic components are the major raw
materials used in the manufacture of our industrial batteries and electronics
products and, accordingly, represent a significant portion of our materials
costs. During fiscal years 2006, 2005 and 2004, the average London Metals
Exchange (LME) price per pound of lead was as follows:
Fiscal 2006 2005 2004
=========================================================================================
Average annual LME price per pound of lead $ 0.45 $ 0.41 $0.25
Lowest average monthly LME price per pound of lead $ 0.39 $ 0.34 $0.20
Highest average monthly LME price per pound of lead $ 0.57 $ 0.44 $0.34
27
Lead represented approximately 20% of our consolidated cost of sales for
the fiscal year 2006. Lead traded as high as $0.657 per pound on February 2,
2006. The increase in lead market price has negatively impacted our financial
results in recent periods. We historically have not been able to fully offset
the effects of higher costs of raw materials through price increases to
customers or by way of productivity improvements. We estimate that a variation
of $0.01 per pound of lead changes materials costs by approximately $1,500 for
our Standby Power and Motive Power divisions.
Inflation
The cost to C&D of manufacturing materials and labor and most other
operating costs are affected by inflationary pressures. All of our raw materials
prices, including lead, steel, copper and resins, as well as fuel costs,
continued to rise in fiscal year 2006, and we generally have not been able to
fully offset these higher prices through selective price increases. We believe
that, over recent years, we have been able to offset inflationary cost increases
on most items other than lead by:
o effective raw materials purchasing programs;
o increases in labor productivity;
o improvements in overall manufacturing efficiencies; and
o selective price increases of our products.
Results of Operations
The following table sets forth selected items in C&D's consolidated
statements of operations as a percentage of sales for the periods indicated.
Fiscal 2006 2005 * 2004
=========================================================================================================
NET SALES 100.0% 100.0% 100.0%
- ---------------------------------------------------------------------------------------------------------
COST OF SALES 83.3 83.9 76.4
- ---------------------------------------------------------------------------------------------------------
GROSS PROFIT 16.7 16.1 23.6
OPERATING EXPENSES:
Selling, general and administrative expenses 12.4 11.5 12.5
Research and development expenses 5.1 4.5 2.9
Identifiable intangible asset impairment 4.0 0.1 --
Goodwill impairment 2.8 17.9 --
- ---------------------------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (7.6) (17.9) 8.2
- ---------------------------------------------------------------------------------------------------------
Interest expense, net 2.1 1.2 0.4
Other expense, net 0.0 0.4 0.5
- ---------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST (9.7) (19.5) 7.3
Provision (benefit) for income taxes 2.5 (5.2) 2.7
- ---------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME BEFORE MINORITY INTEREST (12.2) (14.3) 4.6
Minority interest 0.0 0.0 0.0
- ---------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME (12.2)% (14.3)% 4.6%
=========================================================================================================
* Reclassified for comparative purposes.
28
Critical Accounting Policies
We have identified the critical accounting policies that are most
important to the portrayal of our financial condition and results of operations.
The policies set forth below require management's most subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Revenue Recognition
C&D recognizes revenue when the earnings process is complete. This occurs
when products are shipped to the customer in accordance with terms of the
agreement, title and risk of loss have been transferred, collectibility is
reasonably assured and pricing is fixed or determinable. Accruals are made for
sales returns and other allowances based on our experience. While returns have
historically been minimal and within the provisions established, we cannot
guarantee that we will continue to experience the same return rates that we have
in the past.
Allowance for Doubtful Accounts
C&D maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances might be
required.
Inventory Reserves
C&D adjusts the value of its obsolete and unmarketable inventory to the
estimated market value based upon assumptions of future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Valuation of Long-lived Assets
We assess the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets or the asset
grouping may not be recoverable. Factors we consider in deciding when to perform
an impairment review include significant under-performance of a business or
product line in relation to expectations, significant negative industry or
economic trends, and significant changes or planned changes in our use of the
assets. Recoverability of assets that will continue to be used in our operations
is measured by comparing the carrying amount of the asset grouping to the
related total future net cash flows. If an asset grouping's carrying value is
not recoverable through those cash flows, the asset grouping is considered to be
impaired. The impairment is measured by the difference between the assets'
carrying amount and their fair value, based on the best information available,
including market prices or discounted cash flow analyses.
Impairment of Goodwill
Goodwill represents the excess of the cost over the fair value of net
assets acquired in business combinations. Goodwill and other "indefinite-lived"
assets are not amortized and are subject to the impairment rules of SFAS No.
142, "Goodwill and Other Intangible Assets." Goodwill is tested for impairment
on an annual basis or upon the occurrence of certain circumstances or events.
C&D determines the fair value of its reporting units using a combination of
financial projections and discounted cash flow techniques adjusted for risk
characteristics, also giving consideration to C&D's overall market
capitalization. The fair market value of the reporting units is compared to the
carrying value of the reporting units to determine if an impairment loss should
be calculated. If the book value of a reporting unit exceeds the fair value of
the reporting unit, an impairment loss is indicated. The loss is calculated by
comparing the fair value of the goodwill to the book value of the goodwill. If
the book value of the goodwill exceeds the fair value of the goodwill, an
impairment loss is recorded. Fair value of goodwill is determined by subtracting
the fair value of the identifiable assets of a reporting unit from the fair
value of the reporting unit.
29
Deferred Tax Valuation Allowance
C&D records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event C&D was to
determine that it would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made. Likewise,
should we determine that C&D would not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made.
Warranty Reserves
C&D provides for the estimated cost of product warranties at the time
revenue is recognized. While we engage in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of our
suppliers' products and processes, C&D's warranty obligation is affected by
product failure rates, warranty replacement costs and service delivery costs
incurred in correcting a product failure. Should actual product failure rates,
warranty replacement costs or service delivery costs differ from our estimates,
revisions to the estimated warranty liability would be made.
Pension and Other Employee Benefits
Certain assumptions are used in the calculation of the actuarial valuation
of our defined benefit pension plans and postretirement benefits. These
assumptions include the weighted average discount rate, rates of increase in
compensation levels, expected long-term rates of return on assets and increases
or trends in health care costs. If actual results are less favorable than those
projected by management, additional expense may be required.
Litigation and Environmental Reserves
C&D is involved in litigation in the ordinary course of business,
including personal injury, property damage and environmental litigation. We also
expend funds for environmental remediation of both company-owned and third-party
locations. In accordance with SFAS No. 5, "Accounting for Contingencies" and
Statement of Position 96-1, "Environmental Remediation Liabilities," we record a
loss and establish a reserve for litigation or remediation when it is probable
that an asset has been impaired or a liability exists and the amount of the
liability can be reasonably estimated. Reasonable estimates involve judgments
made by management after considering a broad range of information including:
notifications, demands or settlements that have been received from a regulatory
authority or private party, estimates performed by independent engineering
companies and outside counsel, available facts, existing and proposed
technology, the identification of other PRPs, their ability to contribute and
prior experience. These judgments are reviewed quarterly as more information is
received and the amounts reserved are updated as necessary. However, the
reserves may materially differ from ultimate actual liabilities if the loss
contingency is difficult to estimate or if management's judgments turn out to be
inaccurate. If management believes no best estimate exists, the minimum loss is
accrued.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect internal costs related to
specific projects. The cost of materials (whether from our normal inventory or
acquired specially for research and development activities) and equipment or
facilities that are acquired or constructed for research and development
activities and that have alternative future uses (in research and development
projects or otherwise) are capitalized as tangible assets when acquired or
constructed. The cost of such materials consumed in research and development
activities and the depreciation of such equipment or facilities used in those
activities are recorded as research and development costs.
30
Fiscal 2006 Compared to Fiscal 2005
All comparisons are with the corresponding periods in the previous year,
unless otherwise stated.
Net sales for fiscal year 2006 increased $82,669 or 20% to $497,407 from
$414,738 in fiscal year 2005. This increase resulted primarily from the
acquisitions of Celab, Datel and CPS, for which a full year of sales was
recorded in fiscal year 2006. Sales of the Power Electronics Division increased
$74,759 or 67%, primarily due to the acquisitions. In the prior fiscal year, C&D
owned Celab for eight months, Datel for seven months and CPS for four months.
Sales by the Standby Power Division increased $10,478 or 4%, primarily due to
increased sales in the telecom market, partially offset by lower sales to the
UPS market. Motive Power divisional sales decreased $2,568 or 4%, primarily due
to lower sales of both batteries and chargers.
Gross profit for fiscal year 2006 increased $16,250 or 24% to $82,908 from
$66,658. Margins increased to 16.7% from 16.1% in the prior year. Gross profit
in the Power Electronics Division increased $7,921, 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 and Motive Power
divisions increased $5,774 and $2,555, respectively. These variances are due
primarily to the fixed asset impairments and environmental clean-up charges
incurred in the prior year, coupled with the re-evaluation of those
environmental clean-up charges in the current year. The benefit of these prior
year charges was partially offset by an increase in the cost of lead of
approximately $9,697 and fixed asset impairments in the Motive Power Division.
Selling, general and administrative expenses for fiscal year 2006
increased $14,332 or 30%. This increase was primarily due to increased selling
and general and administrative expenses of $6,770 due to the acquisitions,
increased severance and related costs of $3,380, higher Sarbanes-Oxley
compliance costs of $918, principally attributable to the Company's fiscal 2005
acquisitions, and higher warranty expenses of $2,253 in the Standby and Motive
Power divisions.
Research and development expenses for fiscal year 2006 increased $6,487 or
35%. As a percentage of sales, research and development expenses increased from
4.5% during fiscal year 2005 to 5.1% during fiscal year 2006. The increase was
primarily due to the full year impact of the Celab, Datel and CPS acquisitions.
During the third quarter of the year, 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. 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. The prior impairment test was the result of our annual assessment
conducted in the fourth quarter of fiscal year 2005, and resulted in a goodwill
impairment charge of $74,233 and an intangible asset impairment charge of $464.
Operating loss for fiscal year 2006 decreased $36,409 or 49% to an
operating loss of $37,751 from an operating loss of $74,160 in fiscal year 2005.
Below is a summary of key items affecting operating (loss) income for fiscal
year 2006:
31
Analysis of Change in Operating (Loss) Income
Standby Power Motive
Power Electronics Power
Fiscal Year 2006 vs. 2005 Division Division Division Consolidated
=================================================================================================================
Operating income (loss) - fiscal 2005 $ 9,211 $(71,703) $(11,668) $(74,160)
Lead - increased costs (7,764) -- (1,933) (9,697)
Fiscal 2006 fixed asset impairment -- (2,161) (2,641) (4,802)
Fiscal 2005 fixed asset impairment 6,407 -- 3,195 9,602
Fiscal 2006 intangible asset impairment -- (20,045) -- (20,045)
Fiscal 2005 intangible asset impairment -- 464 -- 464
Fiscal 2006 goodwill impairment -- (13,674) -- (13,674)
Fiscal 2005 goodwill impairment -- 74,233 -- 74,233
Fiscal 2006 environmental liability estimate change 2,481 -- 1,023 3,504
Fiscal 2005 environmental accrual 2,481 -- 1,400 3,881
Fiscal 2006 management changes -
severance/executive search fees (1,528) (1,353) (499) (3,380)
Sarbanes-Oxley costs - (decrease) increase (56) 997 (23) 918
Increase in Standby and Motive warranty expense (1,201) -- (1,052) (2,253)
Fiscal 2006 - RoHS compliance -- (2,684) -- (2,684)
Fiscal 2006 - PED assimilation charges -- (770) -- (770)
Fiscal 2005 Reynosa transition costs 599 -- 827 1,426
Pricing, volume, mix and other 2,010 (3,825) 1,501 (314)
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) fiscal 2006 $ 12,640 $(40,521) $ (9,870) $(37,751)
=================================================================================================================
Interest expense, net, increased $5,472 in fiscal year 2006, primarily due
to higher debt levels resulting from fiscal year 2005 acquisitions and
refinancing activities that occurred during the year, resulting in higher
interest rates compared to the prior fiscal year.
Income tax expense of $12,362 was recorded in fiscal year 2006, compared
to an income tax benefit of $21,289 in fiscal year 2005. The increase income tax
expense in fiscal year 2006 is primarily due to the following items:
o The valuation allowance related to domestic, state and foreign
deferred tax assets increased by an additional $13,411 in fiscal
year 2006 compared to fiscal year 2005;
o The $8,614 write-off of deferred tax assets related to C&D's
investment in several foreign subsidiaries;
o The reduction of $2,154 in the tax benefit related to foreign tax
credits taken in prior years due to the current year domestic net
operating loss;
o An increase in tax expense of $2,212 due to a combination of
domestic losses for which no tax benefit is recorded and tax expense
in certain profitable foreign jurisdictions, along with the lack of
foreign tax credits related to current year repatriated earnings due
to the domestic net operating loss; and
o An increase of $11,882 in tax expense due to the lower pre-tax book
loss in fiscal year 2006.
These items are partially offset by a $2,731 decrease in the tax effect of
the impairments of goodwill and intangible assets in certain jurisdictions.
Minority interest reflects the 33% ownership interest in the joint venture
battery business located in Shanghai, China, that is not owned by C&D. In the
current year, the joint venture had minority interest of $83 at the Shanghai
facility compared to a minority interest of $(5) in fiscal year 2005.
As a result of all of the above, a net loss was recorded of $60,662
compared to a net loss of $59,493 in the prior year. On a per share basis, net
loss was $2.39 compared to a net loss of $2.35 - basic and fully diluted for
fiscal years 2006 and 2005, respectively.
32
Other Comprehensive Loss
Other comprehensive loss increased from $57,477 in fiscal year 2005 to
$77,813 in fiscal year 2006, primarily due to the recording of a minimum pension
liability adjustment of $24,661, partially offset by an unrealized gain on
derivative instruments of $7,813 related to lead hedges.
Fiscal 2005 Compared to Fiscal 2004
All comparisons are with the corresponding periods in the previous year,
unless otherwise stated.
Three acquisitions occurred during fiscal year 2005. On May 27, 2004, we
acquired Celab, based in Hampshire, United Kingdom, a provider of power
conversion products, predominately sold into military, CATV and
telecommunications applications in Europe. On June 30, 2004, we acquired Datel,
a Mansfield, Massachusetts-based manufacturer of DC to DC converters, data
acquisition components and digital meters. On September 30, 2004, we acquired
the Power Systems division of Celestica, Inc., which we now operate as "CPS," a
Toronto, Ontario-based company. CPS develops DC to DC converters and AC to DC
power supplies which are sold on a direct basis to large computing and
communications OEMs. For reporting purposes, these three acquisitions are part
of the Power Electronics Division.
Net sales for fiscal year 2005 increased $89,914 or 28% to $414,738 from
$324,824 in fiscal year 2004. This increase resulted primarily from the
aforementioned acquisitions coupled with improved customer demand for products
of all three divisions. Sales of the Power Electronics Division increased
$72,466, primarily due to net sales of $66,806 recorded by the entities acquired
during the year, coupled with higher sales by the legacy portion of the Power
Electronics Division, which increased by $5,660 or 14%, primarily due to higher
DC to DC converter sales. Sales by the Standby Power Division increased $13,107
or 6%, primarily due to increased sales to the UPS market, partially offset by
continued weakness in the telecommunications market. Motive Power divisional
sales increased $4,341 or 8%, primarily due to higher battery and charger sales.
Gross profit for fiscal year 2005 declined $10,021 or 13% to $66,658 from
$76,679 with margins decreasing from 23.6% to 16.1%. Gross profit in the Standby
Power and Motive Power divisions declined primarily as a result of non-cash
impairment charges at our Leola, Pennsylvania, and Huguenot, New York,
facilities totaling $9,602, and associated environmental clean-up charges at
these two facilities in the amount of $3,881, coupled with an increase in the
cost of lead of approximately $25,309. Additionally, there were rigging,
transportation and severance costs related to the transfer of production to our
Reynosa, Mexico, facility of approximately $1,426. Gross profit in the Power
Electronics Division increased primarily due to the results of the acquisitions
coupled with the favorable impact of increased sales by the legacy portion of
the Power Electronics Division.
Selling, general and administrative expenses for fiscal year 2005
increased $7,021 or 17%. This increase was primarily due to selling, general and
administrative expenses of $9,253 incurred by the current year acquisitions.
Excluding the acquired companies, selling, general and administrative expenses
decreased $2,232 primarily as a result of lower warranty costs of $3,738 and
lower commissions of $988, partially offset by Sarbanes-Oxley compliance costs
of $2,664.
Research and development expenses for fiscal year 2005 increased $9,099.
As a percentage of sales, research and development expenses increased from 2.9%
during fiscal year 2004 to 4.5% during fiscal year 2005. The increase was
primarily the result of $8,473 of research and development expenses incurred by
our recent acquisitions, including acquired in-process research and development
expenses of $780 related to the acquired companies.
Goodwill impairment charges of $74,233 were recorded in the Power
Electronics Division for the fiscal year ended January 31, 2005. No goodwill
impairment charges were recorded in the Standby Power Division. All of the
goodwill of the Motive Power Division was written off in fiscal year 2003. C&D
determined the fair value of its reporting units, using a combination of
financial projections and discounted cash flow techniques adjusted for risk
characteristics, also giving consideration to C&D's overall market
capitalization.
Operating (loss) income for fiscal year 2005 decreased $100,838 to an
operating loss of $74,160 from operating income of $26,678 in fiscal year 2004.
This decrease was primarily the result of goodwill and intangible impairment
charges in the Power Electronics Division, lower operating income in the Standby
Power Division, coupled with a higher operating loss in the Motive Power
Division.
33
Below is a summary of key items affecting operating (loss) income for
fiscal year 2005:
Analysis of Change in Operating (Loss) Income
Standby Power Motive
Power Electronics Power
Fiscal Year 2005 vs. 2004 Division Division Division Consolidated
===========================================================================================================
Operating income (loss) - fiscal 2004 $ 30,280 $ 1,109 $ (4,711) $ 26,678
Lead - increased costs (20,740) -- (4,569) (25,309)
Operations 9,158 1,063 3,034 13,255
Operations - Acquired companies -- 822 -- 822
Reynosa rigging, transportation, severance (599) -- (827) (1,426)
Impairments and environmental cleanup (8,888) -- (4,595) (13,483)
Goodwill and intangible asset impairments -- (74,697) -- (74,697)
- -----------------------------------------------------------------------------------------------------------
Operating income (loss) - fiscal 2005 $ 9,211 $(71,703) $(11,668) $(74,160)
===========================================================================================================
Interest expense, net, increased $3,747 in fiscal year 2005, primarily due
to higher average debt balances outstanding during the period due to funds
borrowed to finance the Celab, Datel and CPS acquisitions.
There was an income tax benefit of $21,289 recorded in fiscal year 2005 as
a result of a net loss before income taxes, compared to income tax expense of
$8,795 in fiscal year 2004. The effective tax rate consists of statutory rates
adjusted for the tax impacts of foreign operations and other permanent items.
The effective tax rate for fiscal year 2005 reflects a benefit of 26.4% compared
to a provision of 37% in the prior year. The benefit recorded in fiscal year
2005 was adjusted from the statutory rate to reflect the tax effect of the
goodwill impairment, an increase to the valuation allowance relating to foreign
tax credits for the unremitted earnings of a controlled foreign subsidiary, and
the impact of non-deductible acquired in-process research and development assets
related to the Datel acquisition.
Minority interest reflects the 33% ownership interest in the joint venture
battery business located in Shanghai, China, that is not owned by C&D. The joint
venture incurred a net loss in fiscal year 2005 compared to net income in the
prior year.
As a result of all of the above, a net loss was recorded of $59,493
compared to net income of $14,891 in the prior year. On a per share basis, net
loss was $2.35 compared to net income of $0.58 - basic and fully diluted for
fiscal years 2005 and 2004, respectively.
34
Future Outlook
The Company considers the following, among other matters, to be key
elements of focus for its underlying business plans and strategies for fiscal
year 2007. Any failures in effectively implementing these strategies and actions
would impact our performance and results of operations.
Lead and Commodity Costs and Pricing
In response to continually increasing raw materials prices, particularly
lead, the Company announced a general price increase for its Standby and Motive
Power products effective March 1, 2006. We expect higher raw materials costs,
particularly lead, to continue to put pressure on our results of operations in
the near term. Higher lead prices negatively affected operating results in
fiscal year 2006 by approximately $9,697 compared to the prior year.
Manufacturing Moves
Construction of a new manufacturing facility has commenced with our joint
venture in China, due to the required relocation of our Shanghai facility. We
expect production will begin in the fourth quarter of fiscal year 2007. The
joint venture received $15,547 from the Chinese government as a partial payment
for the Shanghai facility. Upon return of the existing property to the Chinese
government by January 2007, the Chinese government will pay the joint venture an
additional $1,727.
On April 3, 2006 we announced changes to our contract manufacturing
arrangements for our Power Electronics business involving the termination of
existing manufacturing agreements with Celestica. Wind down of these operations
and transfer to other manufacturers is scheduled to be completed by September
2006. These changes are expected to drive our ability to meet customer needs and
improve our cost structure.
On April 6, 2006 we announced further actions associated with the
revitalization of our Motive Power Products business. These actions include
launching new products to open access to several unaddressed markets, the
planned closure of our Huguenot, New York facility and relocation of production
to Reynosa, Mexico and the establishment of new distribution centers to service
our customer base.
These manufacturing moves all require significant inventory builds during
transition/relocation to other operations which is expected to adversely impact
our working capital requirements, principally during the second and third
quarters of fiscal year 2007. We expect these inventory builds to be temporary
in nature with a return to historical working capital levels by the end of
fiscal year 2007.
Cost Management, Quality and Six Sigma
The Company is expanding its efforts to reduce costs and improve customer
service and satisfaction through enhanced quality and delivery focus and goals.
These strategies are being supported by Lean supply chain initiatives and Six
Sigma methodologies and tools. The completion of the integration of the fiscal
year 2005 Power Electronics acquisitions also continues, with an emphasis in
fiscal year 2007 on supply chain management and product development activities.
RoHS Conversion and Compliance
A key operational initiative facing the Company's Power Electronics
business in fiscal year 2006 and early in fiscal year 2007 relates to conversion
of products to satisfy regulatory changes and customer demands driven by the
European Union's "Restriction on Use of Hazardous Substances in Electrical and
Electronic Equipment" (RoHS). The Company's execution of these requirements,
which involves product design changes among other matters, if not successful,
would impact our ability to service customer order demands and risks of
inventory obsolescence.
35
Liquidity and Capital Resources
Net cash provided by operating activities decreased $9,373 or 31% to
$20,818 for the fiscal year ended January 31, 2006, compared to $30,191 in the
prior fiscal year. The decrease in net cash provided by operating activity was
primarily due to: (i) a higher net loss of $46,947 after adjusting for non-cash
impairment charges in both fiscal years; (ii) a decrease of $2,721 in other
liabilities in fiscal year 2006 as compared to an increase of $6,450 in fiscal
year 2005; (iii) an increase of $5,092 in accounts receivable in fiscal year
2006 as compared to a decrease of $3,994 in fiscal year 2005; and (iv) a $6,765
increase in inventories in fiscal year 2006 as compared to a $1,288 increase in
fiscal year 2005 . These changes were partially offset by (i) an increase of
$15,467 in accounts payable in fiscal year 2006 as compared to an increase of
$2,797 in fiscal year 2005; (ii) an increase of $4,848 in other current
liabilities in fiscal year 2006 as compared to a decrease of $4,475 in fiscal
year 2005; and (iii) a decrease in current taxes payable of $958 in fiscal year
2006 as compared to a decrease of $5,449 in fiscal year 2005. The fiscal year
2006 receivable increases reflect the increased pace of the business in the
fourth quarter of fiscal year 2006 as compared to fiscal year 2005, particularly
in the Power Electronics Division. The increases in inventory that occurred in
fiscal year 2006 reflect the Company's decision to stock additional lead to
protect against shortages of this important raw material. Additionally, the
Company has been increasing its inventory of Motive Power finished goods in
order to more quickly meet the needs of our customers.
Net cash used by investing activities decreased $115,909 or 93% to $8,700
in the fiscal year 2006 as compared to $124,609 in the prior fiscal year,
primarily due to the acquisitions of Celab, Datel and CPS and the receipt of
approximately $15,547 from the Chinese government as partial payment for the
Shanghai joint venture's existing battery facility, both of which occurred in
the prior fiscal year. These funds will be applied to the construction of a new
battery manufacturing facility in Shanghai, China, which began at the end of the
fiscal year ended January 31, 2006.
We had net cash used in financing activities of $13,648 in fiscal year
2006 as compared to net cash provided by financing activities of $108,889 in the
prior fiscal year. Current year financing activities included $133,142 from new
borrowings, primarily used to repay prior debt agreements. Other activities
included a decrease in book overdrafts and the payment of financing costs
related to the new debt agreements.
On November 21, 2005, the Company completed the private placement of
$75,000 aggregate principal amount of Notes. The Company used substantially all
of the net proceeds to reduce the balance of its existing revolving credit
agreement.
On December 7, 2005, the Company completed the refinancing of its debt
with the closing of $125,000 principal amount of new credit facilities,
consisting of (i) a $75,000 principal amount Credit Facility and (ii) a $50,000
Term Loan.
The Credit Facility consists of a five-year senior revolving line of
credit. The maximum availability under the Credit Facility is $75,000, although
at any time the Company is limited by the amount available as determined by a
borrowing base. As of January 31, 2006, the maximum availability calculated
under the borrowing base was $53,798, of which $8,143 was funded, and $3,212 was
utilized for letters of credit. The Credit Facility is secured by a first lien
on certain assets and initially bears interest at LIBOR plus 1.75% or Prime plus
..25%. As provided under the Credit Facility, excess borrowing capacity will be
available for future working capital needs and general corporate purposes.
The Term Loan is a five and one half year term facility with payment due
in 2011. The facility is secured by a second lien on certain assets and bears
interest at LIBOR plus 6.75% or Prime plus 4.50%.
In anticipation of a possible future violation of the leverage ratio
covenant under the Term Loan, and to provide greater flexibility with respect to
this covenant, on March 30, 2006 the Company executed a first amendment to both
of these credit facilities. These amendments modified the definition of EBITDA
of both credit facilities, changed the leverage ratio commencing February 28,
2006 through December 31, 2006 under the Term Loan facility and modified certain
other definitions. In consideration of these changes the Company paid a fee of
$500 to the Term Loan lenders and $38 to the Credit Facility lenders. The
Company agreed to grant a security interest in its Leola, Pennsylvania battery
plant and its Mansfield, Massachusetts electronics plant. The Company also
agreed to an increase in the interest rate for the benefit of the Term Loan
lenders of .25% until such time as the leverage ratio falls below 3.0 as defined
in the amended Term Loan agreement.
36
The availability under the Credit Facility is expected to be sufficient to
meet our ongoing cash needs for working capital requirements, debt service and
capital expenditures. Capital expenditures during fiscal year 2006 were incurred
to fund cost reduction programs, normal maintenance and regulatory compliance.
Fiscal year 2007 capital expenditures are expected to be approximately $35,000
primarily for the construction of our new Shanghai joint-venture facility (of
which approximately $15,547 has already been received from the Chinese
government to fund construction).
The Credit Facility and Term Loan include a minimum fixed charge coverage
ratio that is measured only when the excess availability as defined in the
agreements is less than $15,000. Both agreements limit restricted payments
including dividends and Treasury Stock purchases to no more than $250 for
Treasury Stock in any one calendar year and $1,750 for dividends for any one
calendar year subject to adjustments of up to $400 per year in the case of the
conversion of debt to stock per the terms of the 5.25% convertible offering.
These restricted payments can only occur with prior notice to the lenders and
provided that there is a minimum of $30,000 in excess availability for a period
of thirty days prior to the dividend. The Term Loan also includes a maximum
leverage ratio.
On December 7, 2005 the entire proceeds of the Term Loan and approximately
$15,869 of the initial proceeds of the Credit Facility were used to pay in full
and terminate the existing $200,000 amended and restated revolving credit
agreement which was entered into on June 30, 2004 (Former Credit Agreement), and
which had a maturity date of June 30, 2009.
The total aggregate amount of loans outstanding under the Term Loan, the
Notes and the Credit Facility, and the Former Credit Agreement, at any point
during the year ended January 31, 2006 was $145,673, and the outstanding loans
under these credit agreements, computed on a monthly basis, averaged $134,902 at
a weighted-average interest rate of 6.03%.
The Credit Facility includes a swingline sub-loan facility not to exceed
$7,000. The Former Credit Agreement included a swingline sub-loan facility of
$10,000.
As of January 31, 2006, the Company had $2,658 of letters of credit with
other financial institutions that do not reduce the Company's availability under
its Credit Facility.
Contractual Obligations and Commercial Commitments
The following tables summarize our contractual obligations and commercial
commitments as of January 31, 2006:
Payments Due by Period
-----------------------------------------------------------------
Less
than 1 1 - 3 4 - 5 After
Contractual Obligations Total year years years 5 years
=============================================================================================================================
Operating leases $ 20,233 $ 4,292 $ 7,024 $ 5,886 $ 3,031
Inventory 1,944 1,944 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total contractual cash obligations $ 22,177 $ 6,236 $ 7,024 $ 5,886 $ 3,031
=============================================================================================================================
Amount of Commitment Expiration Per Period
-----------------------------------------------------------------
Total
Amounts Less than 1 - 3 4 - 5 After
Other Commercial Commitments Committed 1 year years years 5 years
=============================================================================================================================
Mortgage $ 5,230 $ 279 $ 4,951 $ -- $ --
Capital lease 1,024 759 265 -- --
Notes 75,000 -- -- -- 75,000
Term Loan 50,000 -- -- -- 50,000
Credit Facility 8,143 -- -- 8,143 --
Standby letters of credit 5,870 1,670 4,200 -- --
Lead commitments 6,216 6,216 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total commercial commitments $151,483 $ 8,924 $ 9,416 $ 8,143 $125,000
=============================================================================================================================
37
Off-Balance Sheet Arrangements
Other than certain elements of our Notes arrangements, we have no
off-balance sheet arrangements at January 31, 2006.
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 151, "Inventory Costs, an amendment of Accounting Research Bulletin
(ARB) No. 43, Chapter 4" (SFAS No. 151), which is the result of its efforts to
converge U.S. accounting standards for inventories with International Accounting
Standards. SFAS No. 151 requires abnormal amounts of idle facility expense,
freight, handling costs and wasted material or spoilage to be recognized as
current-period charges. It also requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 will be effective for inventory costs
incurred beginning February 1, 2006. Adoption of this standard is not expected
to have a material impact on C&D's consolidated operations, financial position
or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. That
cost will be measured based on the fair value of the equity or liability
instruments issued. The Company will no longer be permitted to follow the
intrinsic value accounting method of APB No. 25, and the pro forma disclosures
previously permitted under SFAS No. 123 will no longer be an alternative to
financial statement recognition. Under SFAS No. 123R, the Company must determine
the appropriate fair value model to be used for valuing share-based payments,
the amortization method for compensation cost and the transition method to be
used at date of adoption. SFAS No. 123R is effective for the Company on February
1, 2006, and will apply to all prospective awards using the modified prospective
transition method without restatement of prior periods.
Adoption of SFAS No. 123R in the first quarter of fiscal 2007 will result
in a reduction of reported future earnings. However, the accelerated vesting of
stock options on March 1, 2005 will reduce the amount of stock-based
compensation expense to be incurred in future periods. The Company also
accelerated grants of stock options in January 2006. The Company's future
stock-based compensation strategy, stock price volatility, estimated forfeitures
and employee stock option exercise behavior, will affect the amount of future
stock-based compensation expense that will be recognized in future periods.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47,
"Accounting for Conditional Asset Retirement Obligations--an Interpretation of
FASB Statement No. 143" (FIN 47). 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. FIN 47 requires an entity 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. FIN 47 was
effective for the Company in the fourth quarter of fiscal year 2006, and
adoption of this Interpretation did not have a material impact on the Company's
financial position and results of operations. See Note 9 of Notes to
Consolidated Financial Statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS
No. 154). Previously, APB No. 20, "Accounting Changes" and SFAS No. 3 "Reporting
Accounting Changes in Interim Financial Statements" required the inclusion of
the cumulative effect of changes in accounting principle in net income of the
period of the change. SFAS No. 154 requires companies to recognize a change in
accounting principle, including a change required by a new accounting
pronouncement when the pronouncement does not include specific transition
provisions, retrospectively to prior periods' financial statements. The Company
will assess the impact of a retrospective application of a change in accounting
principle in accordance with SFAS No. 154 when such a change arises after the
effective date of February 1, 2006.
38
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Instruments" (SFAS No. 155). This standard allows financial instruments
that have embedded derivatives to be accounted for as a whole (eliminating the
need to bifurcate the derivative from its host) if the holder elects to account
for the whole instrument on a fair value basis. This standard is effective for
all financial instruments acquired or issued by the Company in fiscal year 2008,
and may be applied to hybrid financial instruments previously entered into that
meet certain criteria. The Company will assess the impact of adoption of this
standard on our consolidated operations, financial position or cash flows as new
financing arrangements arise.
39
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
All dollar amounts in this Item 7A are in thousands.
Market Risk Factors
We are exposed to various market risks. The primary financial risks
include fluctuations in the price of raw materials, interest rates and changes
in currency exchange rates.
To assist in management of these risks, on occasion we use derivative
instruments. We do not invest in derivative securities for speculative purposes,
but do enter into hedging arrangements in order to reduce our exposure to
fluctuations in interest rates as well as to fluctuations in exchange rates.
Our financial instruments that are subject to interest rate risk include
our mortgage, capital leases, term and revolving credit facilities and our
convertible notes. The net market value of our debt instruments (excluding
capital lease obligations) was $145,456 and $134,237 at January 31, 2006 and
2005, respectively. According to our established policies, we maintain certain
ratios of fixed versus variable rate debt in order to mitigate our risk to
changes in interest rates. We utilize interest rate swaps when necessary to
further manage this risk.
A 1% increase in interest rates from their year end levels would result in
an increase of $581 in interest expense on an annualized basis, with all other
variables held constant. A 1% decrease in interest rates from their year end
levels would result in a decrease of $581 in interest expense on an annualized
basis, with all other variables held constant.
We use currency forwards and swaps to hedge anticipated cash flows in
foreign currencies. The exposures currently hedged are the British Pound, Euro,
Japanese Yen, Canadian Dollar and Mexican Peso. These financial instruments
represent a net market value of $(38) and $78 at January 31, 2006 and 2005,
respectively.
To monitor our currency exchange rate risk, we use sensitivity analysis to
measure the impact on earnings in the case of a 10% change in exchange rates.
The sensitivity analysis assumes an instantaneous 10% change in foreign currency
exchange rates from year-end levels, with all other variables being held
constant. At January 31, 2006 and 2005, a 10% strengthening of the US Dollar
versus these currencies would result in an increase of the net market value of
the forwards of $2,772 and $171, respectively. At January 31, 2006 and 2005, a
10% weakening of the US Dollar versus these currencies would result in a
decrease in the net market value of the forwards of $2,903 and $207,
respectively.
The market value of the instruments was determined by taking into
consideration the contracted interest rates and foreign exchange rates versus
those available for similar maturities in the market at January 31, 2006 and
2005, respectively.
Foreign exchange forwards are used to hedge our firm and anticipated
foreign currency cash flows. There is either a balance sheet or cash flow
exposure related to all of the financial instruments in the above sensitivity
analysis for which the impact of a movement in exchange rates would be in the
opposite direction and substantially equal to the impact on the instruments in
the analysis.
Effective for fiscal year 2006, we adopted a lead hedging policy. We have
entered into non-deliverable forward contracts with certain financial
counterparties to hedge our exposure to the fluctuations in the price of lead,
the primary raw material component used in our Power Systems division. We employ
hedge accounting in the treatment of these contracts. Changes in the value of
the contracts are marked to market each month and the gains and losses are
recorded in Other Comprehensive Income (Loss) until they are released to the
income statement through cost of goods sold in the same period as is the hedged
item (lead).
As of January 31, 2006 we had hedged approximately 51.1 million pounds of
lead at an average price of $0.454 per pound. Effective February 23, 2006, one
of the Company's financial counterparties exercised its right to terminate 25.6
million pounds of lead forward contracts, representing approximately $10,375 in
lead. This settlement resulted in cash proceeds of $3,099. The settlement does
not change the hedge accounting for these forward contracts, with the gain in
comprehensive (loss) income continuing to be released to earnings during fiscal
2007 in the month in which the hedged item is recognized in cost of sales.
40
The net market value of our lead contracts was $6,507 at January 31, 2006.
At January 31, 2006, a 10% increase in the price of lead would result in a
$1,770 increase in the market value, and a 10% decrease in the price of lead
would result in a $1,770 decrease in the market value. At January 31, 2005, we
did not utilize any lead forward contracts.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data listed in Item 15(a)(1)
hereof are incorporated herein by reference and are filed as part of this report
immediately following the signature page of this Form 10-K.
Item 9. Changes in and Disagreements with Auditors on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Controls and Procedures:
The Chief Executive Officer and the Chief Financial Officer of C&D have
concluded, based on their evaluation as of January 31, 2006, that C&D's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) are effective to ensure
that information required to be disclosed by C&D in the reports filed or
submitted by it under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and include controls and procedures designed to
ensure that information required to be disclosed by C&D in such reports is
accumulated and communicated to the Company's management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control:
There were no changes in C&D's internal control over financial reporting
that occurred during the fourth quarter of fiscal year 2006 that have materially
affected, or are reasonably likely to materially affect, C&D's internal control
over financial reporting.
Management's Report on Internal Control over Financial Reporting:
Management's report on internal control over financial reporting and the
attestation report of C&D's independent registered public accounting firm are
included in C&D's Financial Statements under the captions entitled "Management's
Report on Internal Control over Financial Reporting" and "Report of Independent
Registered Public Accounting Firm" located in Item 15.
Item 9B. Other Information
In anticipation of a possible future violation of the leverage ratio
covenant under the Term Loan, and to provide greater flexibility with respect to
this covenant, on March 30, 2006 the Company executed a first amendment to its
Term Loan and Credit Facility. These amendments modified the definition of
EBITDA of both credit facilities, changed the leverage ratio commencing February
28, 2006 through December 31, 2006 under the Term Loan facility and modified
certain other definitions. In consideration of these changes the Company paid a
fee of $500 to the Term Loan lenders and $38 to the Line of Credit facility
lenders. The Company agreed to grant a security interest in its Leola,
Pennsylvania battery plant and its Mansfield, Massachusetts electronics plant.
The Company also agreed to an increase in the interest rate for the benefit of
the Term Loan lenders of .25% until such time as the leverage ratio falls below
3.0 as defined in the amended Term Loan agreement.
41
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is incorporated by reference to
the information under the captions "Election of Directors," "Current Executive
Officers" and "Compliance with Section 16(a)" of the Securities Exchange Act of
1934" included in C&D's Proxy Statement for our 2006 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to
the information under the caption "Executive Compensation" included in C&D's
Proxy Statement for our 2006 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item 12 is incorporated by reference to
the information under the captions "Principal Stockholders," "Beneficial
Ownership of Management" and "Equity Compensation Plan Information" included in
C&D's Proxy Statement for our 2006 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 is incorporated by reference to
the information under the caption "Fees of Independent Registered Public
Accounting Firm" included in C&D's Proxy Statement for our 2006 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission.
42
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
(1) The following financial statements are included in this report on
Form 10-K:
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 31, 2006 and 2005
Consolidated Statements of Operations for the years ended January
31, 2006, 2005 and 2004
Consolidated Statements of Stockholders' Equity for the years ended
January 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended January
31, 2006, 2005 and 2004
Consolidated Statements of Comprehensive (Loss) Income for the years
ended January 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
(2) The following financial statement schedule is included in this
report on Form 10-K:
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES for the years ended January
31, 2006, 2005 and 2004
II. Valuation and Qualifying Accounts
(3) Exhibits:
3.1 Restated Certificate of Incorporation of C&D, as amended
(incorporated by reference to Exhibits 3.1 and 3.2 to C&D's
Current Report on Form 8-K dated une 30, 1998).
3.2 Amended and Restated By-laws of C&D (incorporated by reference
to Exhibit 3.1 to C&D's Quarterly Report on Form 10-Q for the
fiscal quarter ended October 31, 2002).
4.1 Rights Agreement dated as of February 22, 2000, between C&D
and Mellon Investor Services, LLC (formerly ChaseMellon
Shareholder Services, L.L.C.), as rights agent, which includes
as Exhibit B thereto the form of rights certificate
(incorporated by reference to Exhibit 1 to C&D's Form 8-A
Registration Statement filed on February 28, 2000); Amendment
to Rights Agreement (incorporated by reference to Exhibit 10.3
to C&D's Quarterly Report on Form 10-Q for the period ended
October 31, 2004).
4.2 Purchase Agreement dated November 16, 2005, among C&D, Credit
Suisse First Boston LLC and Wachovia Capital Markets, LLC
(filed herewith).
4.3 Registration Rights Agreement dated November 21, 2005, among
C&D, Credit Suisse First Boston LLC and Wachovia Capital
Markets, LLC (filed herewith).
4.4 Indenture, dated as of November 21, 2005, between C&D and Bank
of New York, as trustee (filed herewith).
4.5 Form of C&D Technologies, Inc. 5.25% Convertible Senior Notes
due 2025 (filed herewith).
43
10.1 Purchase Agreement dated November 27, 1985, between Allied,
Allied Canada Inc. and C&D; Amendments thereto dated January
28 and October 8, 1986 (incorporated by reference to Exhibit
10.1 to C&D's Registration Statement on Form S-1, No.
33-10889).
10.2 Agreement dated December 15, 1986, between C&D and Allied
(incorporated by reference to Exhibit 10.2 to C&D's
Registration Statement on Form S-1, No. 33-10889).
10.3 Lease Agreement dated February 15, 1994, by and between
Sequatchie Associates, Incorporated and C&D Charter Power
Systems, Inc. (which has since been merged into C&D)
(incorporated by reference to Exhibit 10.1 to C&D's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1999);
Extension and Modification Agreement effective December 19,
2003 (incorporated by reference to Exhibit 10.3 to C&D's
Annual Report on Form 10-K for the fiscal year ended January
31, 2004).
10.4 Purchase and Sale Agreement, dated as of November 23, 1998,
among Johnson Controls, Inc. and its subsidiaries as Seller
and C&D and C&D Acquisition Corp. as Purchaser (incorporated
by reference to Exhibit 2.1 to C&D's Current Report on Form
8-K dated March 1, 1999).
10.5 Amended and Restated Credit Agreement dated as of June 30,
2004, among C&D Technologies, Inc. and Certain of its
Subsidiaries as the Borrowers, the Subsidiaries identified
herein as the Guarantors, Citizens Bank as Syndication Agent,
LaSalle National Bank National Association as Co-Agent, Bank
of America, N.A., as Administrative Agent, Swing Line Lender
and L/C Issuer and the Other Lenders Party Hereto Arranged By
Banc of America Securities LLC as Sole Lead Arranger and Sole
Book Manager (incorporated by reference to Exhibit 10.1 to
C&D's Quarterly Report on Form 10-Q for the period ended July
31, 2004), First Amendment thereto dated as of December 9,
2004 (incorporated by reference to Exhibit 10.5 to C&D's
Annual Report on Form 10-K for the fiscal year ended January
31, 2005), Second Amendment thereto dated as of April 21, 2005
(incorporated by reference to Exhibit 10.5 to C&D's Annual
Report on Form 10-K for the fiscal year ended January 31,
2005), Third Amendment thereto dated as of April 29, 2005
(incorporated by reference to Exhibit 10.5 to C&D's Annual
Report on Form 10-K for the fiscal year ended January 31,
2005), Fourth Amendment and Waiver thereto dated as of
November 8, 2005 (incorporated by reference to Exhibit 10.1 to
C&D's Current Report on Form 8-K dated November 15, 2005).
10.6 Security Agreement dated April 21, 2005, among C&D
Technologies, Inc., C&D International Investment Holdings
Inc., C&D Charter Holdings, Inc., C&D Technologies (Datel),
Inc., Datel Systems, Inc., C&D Dynamo Corp., Dynamo
Acquisition Corp., C&D Technologies (CPS) LLC and Datel
Holding Corporation as Grantors, and the Bank of America,
N.A., in its capacity as administrative agent for the holders
of the Secured Obligations (incorporated by reference to
Exhibit 10.6 to C&D's Annual Report on Form 10-K for the
fiscal year ended January 31, 2005).
10.7 Uncommitted loan facility dated June 5, 2001, between C&D
Holdings Limited and ABN Amro Bank N.V. (incorporated by
reference to Exhibit 10.2 to C&D's Quarterly Report on Form
10-Q for the period ended April 30, 2001).
10.8 Asset Purchase Agreement among Matsushita Battery Industrial
Corporation of America, Matsushita Battery Industrial de
Mexico, S.A. de C.V., C&D Technologies, Inc. and C&D
Technologies Reynosa, S. de R.L. de C.V., dated as of August
27, 2003 (incorporated by reference to C&D's Current Report on
Form 8-K dated September 25, 2003).
10.9 Agreement for Manufacture between Dynamo Power System (USA)
LLC and Celestica Hong Kong Limited and C&D Technologies,
Inc., dated September 30, 2004. Portions of this exhibit have
been deleted pursuant to the Company's Application Requesting
Grant of Confidential Treatment under the Exchange Act and
pursuant to the Rule 12b-24 promulgated thereunder
(incorporated by reference to Exhibit 10.2 to C&D's Quarterly
Report on Form 10-Q for the period ended October 31, 2004).
10.10 Assignment and Assumption dated as of August 3, 2004, by and
between Bank of America, N.A. and Sovereign Bank (incorporated
by reference to Exhibit 10.2 to C&D's Quarterly Report on Form
10-Q for the period ended July 31, 2004).
44
10.11 Lender Joinder Agreement dated as of August 3, 2004, among C&D
Technologies, Inc. and Certain of its subsidiaries as the
Borrowers and Calyon New York Branch as the New Lender and
Bank of America, N.A., as Administrative Agent (incorporated
by reference to Exhibit 10.3 to C&D's Quarterly Report on Form
10-Q for the period ended July 31, 2004).
10.12 Lender Joinder Agreement dated as of August 3, 2004, among C&D
Technologies, Inc. and Certain of its subsidiaries as the
Borrowers and Sovereign Bank as the New Lender and Bank of
America, N.A., as Administrative Agent (incorporated by
reference to Exhibit 10.4 to C&D's Quarterly Report on Form
10-Q for the period ended July 31, 2004).
10.13 LLC Interest Purchase Agreement between Celestica Corporation,
Celestica Inc. and C&D Technologies, Inc., dated September 23,
2004 (incorporated by reference to Exhibit 2.1 to C&D's
Current Report on Form 8-K dated September 30, 2004).
10.14 Share Purchase Agreement between Celestica International Inc.,
Celestica Inc., C&D Power Systems (Canada) ULC and C&D
Technologies, Inc., dated September 23, 2004 (incorporated by
reference to Exhibit 2.2 to C&D's Current Report on Form 8-K
dated September 30, 2004).
10.15 Asset Purchase Agreement between Celestica International Inc.,
Celestica Corporation, Celestica (Thailand) Limited, Dynamo
Acquisition Corp., Celestica Inc. and C&D Technologies, Inc.,
dated September 23, 2004 (incorporated by reference to Exhibit
2.3 to C&D's Current Report on Form 8-K dated September 30,
2004).
10.16 Asset Purchase Agreement between Celestica Electronics
(Shanghai) Co. Ltd., Datel Electronic Technology (Shanghai)
Co., Ltd., Celestica Inc. and C&D Technologies, Inc., dated
September 23, 2004 (incorporated by reference to Exhibit 2.4
to C&D's Current Report on Form 8-K dated September 30, 2004).
10.17 Inventory Purchase Agreement between Celestica Suzhou
Technology Ltd., Dynamo Acquisition Corp., Celestica Inc. and
C&D Technologies, Inc., dated September 23, 2004 (incorporated
by reference to Exhibit 2.5 to C&D's Current Report on Form
8-K dated September 30, 2004).
10.18 Purchase Price Adjustment Agreement between Celestica
International Inc., Celestica Corporation, Celestica
(Thailand) Limited, Celestica Electronics (Shanghai) Co. Ltd.,
Celestica Suzhou Technology Ltd., Celestica Inc., C&D Power
Systems (Canada) ULC, C&D Technologies, Inc., Dynamo
Acquisition Corp., and Datel Electronic Technology (Shanghai)
Co., Ltd., dated September 23, 2004 (incorporated by reference
to Exhibit 2.6 to C&D's Current Report on Form 8-K dated
September 30, 2004).
10.19 Merger Agreement dated as of June 10, 2004, among C&D
Technologies, Inc., CLETADD Acquisition Corporation and Datel
Holding Company (incorporated by reference to Exhibit 10.1 to
C&D's Current Report on Form 8-K dated June 30, 2004).
10.20 Loan and Security Agreement dated December 7,2005 by and among
C&D Technologies, Inc., C&D Technologies (Datel), Inc., C&D
Technologies (CPS) LLC, as Borrowers and C&D Charter Holdings,
Inc., C&D Dynamo Corp., Dynamo Acquisition Corp., C&D
International Investment Holdings Inc. and Datel Holding
Corporation, as Guarantors, and Ableco Finance LLC, as Agent
(filed herewith); Amendment No. 1 thereto dated March 30, 2006
(incorporated by reference to C&D's Current Report on Form 8-K
dated April 5, 2006).
10.21 Loan and Security Agreement dated December 7,2005 by and among
C&D Technologies, Inc., C&D Technologies (Datel), Inc., C&D
Technologies (CPS) LLC, as Borrowers and C&D Charter Holdings,
Inc., C&D Dynamo Corp., Dynamo Acquisition Corp., C&D
International Investment Holdings Inc. and Datel Holding
Corporation, as Guarantors, and Wachovia Bank National
Association, as Administrative Agent and Wachovia Capital
Markets, LLC as Sole Lead Arranger, Manager and Bookrunner
(filed herewith); Amendment No. 1 thereto dated March 30, 2006
(incorporated by reference to C&D's Current Report on Form 8-K
dated April 5, 2006).
45
Management Contracts or Plans
10.22 Charter Power Systems, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.1 to C&D's Quarterly
Report on Form 10-Q for the quarter ended July 31, 1996),
First Amendment to C&D Technologies, Inc. 1996 Stock Option
Plan (formerly known as the Charter Power Systems, Inc. 1996
Stock Option Plan) dated April 27, 1999 (incorporated by
reference to Exhibit 10.3 to C&D's Quarterly Report on Form
10-Q for the quarter ended July 31, 1999).
10.23 C&D Technologies, Inc. Amended and Restated 1998 Stock Option
Plan (incorporated by reference to Exhibit 10.7 to C&D's
Annual Report on Form 10-K for fiscal year ended January 31,
2001).
10.24 C&D Technologies, Inc. Savings Plan as restated and amended
(incorporated by reference to Exhibit 10.9 to C&D's Annual
Report on Form 10-K for fiscal year ended January 31, 2002),
First Amendment thereto dated June 12, 2002 (incorporated by
reference to Exhibit 10.10 to C&D's Quarterly Report on Form
10-Q for the quarter ended October 31, 2002), Second Amendment
thereto dated November 20, 2002 (incorporated by reference to
Exhibit 10.11 to C&D's Quarterly Report on Form 10-Q for the
quarter ended October 31, 2002); Third Amendment thereto dated
June 18, 2003 (incorporated by reference to Exhibit 10.1 to
C&D's Quarterly Report on Form 10-Q for the quarter ended July
31, 2003).
10.25 C&D Technologies, Inc. Pension Plan for Salaried Employees as
amended and restated (incorporated by reference to Exhibit
10.10 to C&D's Annual Report on Form 10-K for fiscal year
ended January 31, 2002); First Amendment thereto dated June
12, 2002 (incorporated by reference to Exhibit 10.3 to C&D's
Quarterly Report on Form 10-Q for the quarter ended April 30,
2003); Second Amendment thereto dated September 25, 2002
(incorporated by reference to Exhibit 10.4 to C&D's Quarterly
Report on Form 10-Q for the quarter ended April 30, 2003);
Third Amendment thereto dated March 19, 2004 (incorporated by
reference to Exhibit 10.11 to C&D's Annual Report on Form 10-K
for the fiscal year ended January 31, 2004).
10.26 Supplemental Executive Retirement Plan compiled as of February
27, 2004, to reflect all amendments (incorporated by reference
to Exhibit 10.12 to C&D's Annual Report on Form 10-K for the
fiscal year ended January 31, 2004); Amendment thereto dated
May 6, 2005, (incorporated by reference to Exhibit 10.1 to
C&D's Quarterly Report on Form 10-Q for the period ended April
30, 2005).
10.27 C&D Technologies, Inc. Management Incentive Bonus Plan Policy
(incorporated by reference to Exhibit 10.1 to C&D's Current
Report on Form 8-K dated March 2, 2005).
10.28 Employment Agreement dated November 28, 2000, between Wade H.
Roberts, Jr. and C&D (incorporated by reference to Exhibit
10.1 to C&D's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2000).
10.29 Release Agreement dated March 24, 2005, between C&D
Technologies, Inc. and Wade H. Roberts, Jr. (incorporated by
reference to Exhibit 10.27 to C&D's Annual Report on Form 10-K
for the fiscal year ended January 31, 2005).
10.30 Employment Agreement dated March 31, 2000, between Stephen E.
Markert, Jr. and C&D (incorporated by reference to Exhibit
10.14 to C&D's Annual Report on Form 10-K for the fiscal year
ended January 31, 2000).
10.31 Release Agreement dated December 14, 2005, between C&D
Technologies, Inc. and Stephen E. Markert, Jr. (filed
herewith)
10.32 Employment Agreement dated March 31, 2000, between Linda R.
Hansen and C&D (incorporated by reference to Exhibit 10.15 to
C&D's Annual Report on Form 10-K for the fiscal year ended
January 31, 2000); Letter Agreement dated May 6, 2005, between
Linda R. Hansen and C&D (incorporated by reference to Exhibit
10.1 to C&D's Quarterly Report on Form 10-Q for the quarter
ended April 30, 2005).
46
10.33 Employment Agreement dated March 31, 2000, between Charles R.
Giesige, Sr. and C&D (incorporated by reference to Exhibit
10.18 to C&D's Annual Report on Form 10-K for the fiscal year
ended January 31, 2000); letter dated January 27, 2004 to
Charles R. Giesige, Sr. amending Employment Agreement dated
March 31, 2000 (incorporated by reference to Exhibit 10.17 to
C&D's Annual Report on Form 10-K for the fiscal year ended
January 31, 2004).
10.34 Employment Agreement dated February 1, 2006, between Charles
R. Giesige and C&D (filed herewith).
10.35 Release Agreement dated March 2, 2006, between C&D
Technologies, Inc. and Charles R. Giesige (filed herewith).
10.36 Employment Agreement dated February 1, 2006, between James D.
Dee and C&D (filed herewith).
10.37 Employment Agreement dated February 1, 2006, between Ian J.
Harvie and C&D (filed herewith).
10.38 Employment Agreement dated February 1, 2006, between William
E. Bachrach and C&D (filed herewith).
10.39 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and William Harral, III
(incorporated by reference to Exhibit 10.2 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.40 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and Kevin P. Dowd
(incorporated by reference to Exhibit 10.5 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.41 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and Robert I. Harries
(incorporated by reference to Exhibit 10.6 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.42 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and Pamela S. Lewis
(incorporated by reference to Exhibit 10.7 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.43 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and George MacKenzie
(incorporated by reference to Exhibit 10.8 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.44 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and John A. H. Shober
(incorporated by reference to Exhibit 10.9 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.45 Indemnification Agreement dated as of February 24, 2003, by
and between C&D Technologies, Inc. and Stanley W. Silverman
(incorporated by reference to Exhibit 10.33 to C&D's Annual
Report on Form 10-K for the fiscal year ended January 31,
2003).
10.46 C&D Technologies, Inc. Nonqualified Deferred Compensation Plan
(incorporated by reference to Exhibit 4 to C&D's Registration
Statement on Form S-8, No. 333-42054).
10.47 C&D Technologies, Inc. Approved Share Option Plan
(incorporated by reference to Exhibit 4 to C&D's Registration
Statement on Form S-8, No. 333-69266).
10.48 C&D Technologies, Inc. Management Compensation Plan Policy for
Fiscal Year 2006 (incorporated by reference to Exhibit 10.1 to
C&D's Form 8-K dated March 1, 2005).
10.49 C&D Technologies, Inc. Board of Directors Nominating/Corporate
Governance Committee Charter As Amended Effective as of March
1, 2005 (incorporated by reference to Exhibit 10.2 to C&D's
Form 8-K dated March 1, 2005).
47
10.50 Employment Agreement dated June 21, 2005, between C&D
Technologies, Inc. and Dr. Jeffrey A. Graves (incorporated by
reference to Exhibit 10.1 to C&D's Quarterly Report on Form
10-Q for quarter ended July 31, 2005).
10.51 Amendment dated February 1, 2006, to the Employment Agreement
between C&D Technologies and Dr. Jeffrey A. Graves (filed
herewith).
14 Code of Ethics (incorporated by reference to Exhibit 14 to
C&D's Annual Report on Form 10-K for the fiscal year ended
January 31, 2004).
21 Subsidiaries of C&D (filed herewith).
23 Consent of Independent Registered Public Accounting Firm
(filed herewith).
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).
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
April 10, 2006 By: /s/ Jeffrey A. Graves
----------------------------------
Jeffrey A. Graves
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jeffrey A. Graves President, Chief Executive April 10, 2006
- ------------------------------ Officer and Director
Jeffrey A. Graves (Principal Executive Officer)
/s/ Ian J. Harvie Vice President and April 10, 2006
- ------------------------------ Chief Financial Officer
Ian J. Harvie (Principal Financial and Accounting
Officer)
/s/ William Harral, III Director, Chairman April 10, 2006
- ------------------------------
William Harral, III
/s/ Kevin P. Dowd Director April 10, 2006
- ------------------------------
Kevin P. Dowd
/s/ Robert I. Harries Director April 10, 2006
- ------------------------------
Robert I. Harries
/s/ Pamela S. Lewis Davies Director April 10, 2006
- ------------------------------
Pamela S. Lewis Davies
/s/ George MacKenzie Director April 10, 2006
- ------------------------------
George MacKenzie
/s/ John A. H. Shober Director April 10, 2006
- ------------------------------
John A. H. Shober
/s/ Stanley W. Silverman Director April 10, 2006
- ------------------------------
Stanley W. Silverman
/s/ Ellen C. Wolf Director April 10, 2006
- ------------------------------
Ellen C. Wolf
49
(This page intentionally left blank)
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Report on Internal Control over Financial Reporting F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheets as of January 31, 2006 and 2005 F-5
Consolidated Statements of Operations for the years ended January 31, 2006, 2005 and 2004 F-6
Consolidated Statements of Stockholders' Equity for the years ended January 31, 2006, 2005 and 2004 F-7
Consolidated Statements of Cash Flows for the years ended January 31, 2006, 2005 and 2004 F-8
Consolidated Statements of Comprehensive (Loss) Income for the years ended January 31, 2006,
2005 and 2004 F-10
Notes to Consolidated Financial Statements F-11
FINANCIAL STATEMENT SCHEDULE
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
For the years ended January 31, 2006, 2005 and 2004
Schedule II. Valuation and Qualifying Accounts S-1
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with Generally Accepted Accounting
Principles (GAAP). It includes policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the assets of C&D Technologies, Inc. (C&D);
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of management and
directors; and
o Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management evaluated the effectiveness of our internal control over
financial reporting as of January 31, 2006, based on the criteria established in
a report entitled Internal Control - Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on such evaluation and the criteria in the COSO framework, we have concluded
that our internal control over financial reporting was effective as of January
31, 2006.
Our management's assessment of the effectiveness of C&D's internal control
over financial reporting as of January 31, 2006, has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears on the following page.
/s/ Jeffrey A. Graves /s/ Ian Harvie
- -------------------------------- ----------------------------------
Jeffrey A. Graves Ian Harvie
President, Chief Executive Vice President and
Officer and Director Chief Financial Officer
April 10, 2006
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of C&D Technologies, Inc.:
We have completed integrated audits of C&D Technologies, Inc. and its
subsidiaries' 2006 and 2005 consolidated financial statements and of its
internal control over financial reporting as of January 31, 2006, and an audit
of its 2004 consolidated financial statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of C&D Technologies, Inc. and its subsidiaries (the
"Company") as of January 31, 2006 and 2005, and the results of their operations
and their cash flows for each of the three years in the period ended January 31,
2006 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing herein that the Company
maintained effective internal control over financial reporting as of January 31,
2006 based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of January 31, 2006,
based on criteria established in Internal Control - Integrated Framework issued
by the COSO. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management's assessment and on the effectiveness of
the Company's internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and
F-3
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 10, 2006
F-4
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31,
(Dollars in thousands, except par value)
2006 2005*
====================================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 25,693 $ 26,855
Accounts receivable, less allowance for doubtful accounts
of $2,889 in 2006 and $2,018 in 2005 78,420 73,136
Inventories 83,803 77,272
Deferred income taxes 3,430 14,481
Prepaid taxes 6,838 1,644
Other current assets 8,892 2,008
- --------------------------------------------------------------------------------------------------------------------
Total current assets 207,076 195,396
Property, plant and equipment, net 91,041 104,130
Deferred income taxes 401 287
Intangible and other assets, net 38,450 83,863
Goodwill 81,451 97,247
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 418,419 $ 480,923
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,038 $ 1,389
Accounts payable 50,199 34,808
Book overdrafts 71 8,674
Accrued liabilities 23,440 24,254
Other current liabilities 35,578 10,374
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 110,326 79,499
Deferred income taxes 11,660 12,216
Long-term debt 133,067 135,004
Other liabilities 24,051 36,705
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 279,104 263,424
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (see Note 9)
Minority interest 8,498 8,171
Stockholders' equity:
Common stock, $.01 par value, 75,000,000
shares authorized; 28,828,428 and 28,714,973
shares issued in 2006 and 2005, respectively 288 287
Additional paid-in capital 72,599 71,956
Treasury stock, at cost, 3,380,102 and (47,094) (47,151)
3,368,676 shares in 2006 and 2005, respectively
Accumulated other comprehensive (loss) income (11,876) 5,275
Retained earnings 116,900 178,961
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 130,817 209,328
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 418,419 $ 480,923
====================================================================================================================
* Reclassified for comparative purposes.
See notes to consolidated financial statements.
F-5
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended JANUARY 31,
(Dollars in thousands, except per share data)
2006 2005* 2004
========================================================================================================================
NET SALES $ 497,407 $ 414,738 $ 324,824
- ------------------------------------------------------------------------------------------------------------------------
COST OF SALES 414,499 348,080 248,145
- ------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 82,908 66,658 76,679
OPERATING EXPENSES:
Selling, general and administrative expenses 61,812 47,480 40,459
Research and development expenses 25,128 18,641 9,542
Identifiable intangible asset impairment 20,045 464 --
Goodwill impairment 13,674 74,233 --
- ------------------------------------------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (37,751) (74,160) 26,678
- ------------------------------------------------------------------------------------------------------------------------
Interest expense, net 10,487 5,015 1,268
Other (income) expense, net (21) 1,612 1,641
- ------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST (48,217) (80,787) 23,769
- ------------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes 12,362 (21,289) 8,795
- ------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE MINORITY INTEREST (60,579) (59,498) 14,974
- ------------------------------------------------------------------------------------------------------------------------
Minority interest 83 (5) 83
- ------------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (60,662) $ (59,493) $ 14,891
========================================================================================================================
Net (loss) income per common share - basic $ (2.39) $ (2.35) $ 0.58
========================================================================================================================
Net (loss) income per common share - diluted $ (2.39) $ (2.35) $ 0.58
========================================================================================================================
* Reclassified for comparative purposes.
See notes to consolidated financial statements.
F-6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended JANUARY 31, 2006, 2005 and 2004
(Dollars in thousands, except per share data)
Accumulated
Additional Other Total
Common Stock Paid-In Treasury Stock Retained Retained Stockholders'
Shares Amount Capital Shares Amount Earnings Earnings Equity
====================================================================================================================================
BALANCE AT
JANUARY 31, 2003 28,509,803 $ 285 $69,152 (2,810,280) $ (38,409) $ 881 $226,365 $258,274
Net income 14,891 14,891
Dividends to stockholders,
$.055 per share (1,406) (1,406)
Tax effect relating to
stock options exercised 162 162
Foreign currency
translation adjustment 2,132 2,132
Unrealized gain on
derivative instruments 246 246
Purchase of common stock (374,000) (5,887) (5,887)
Deferred compensation plan (1) (12,228) (185) (186)
Issuance of common stock 12,842 183 183
Stock options exercised 83,102 1 1,123 1,124
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2004 28,605,747 286 70,619 (3,196,508) (44,481) 3,259 239,850 269,533
Net loss (59,493) (59,493)
Dividends to stockholders,
$.055 per share (1,396) (1,396)
Tax effect relating to
stock options exercised 264 264
Foreign currency
translation adjustment 1,511 1,511
Unrealized gain on
derivative instruments 505 505
Purchase of common stock (163,700) (2,543) (2,543)
Deferred compensation plan (14) (8,468) (127) (141)
Issuance of common stock 9,627 156 156
Stock options exercised 99,599 1 931 932
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2005 28,714,973 287 71,956 (3,368,676) (47,151) 5,275 178,961 209,328
Net loss (60,662) (60,662)
Dividends to stockholders,
$.055 per share (1,399) (1,399)
Foreign currency
translation adjustment (303) (303)
Unrealized gain on
derivative instruments 7,813 7,813
Deferred compensation plan (138) (11,426) 57 (81)
Issuance of common stock 28,155 198 198
Stock options exercised 85,300 1 583 584
Minimum pension liability
adjustment (24,661) (24,661)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2006 28,828,428 $ 288 $72,599 (3,380,102) $ (47,094) $ (11,876) $116,900 $130,817
====================================================================================================================================
See notes to consolidated financial statements.
F-7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended JANUARY 31,
(Dollars in thousands)
2006 2005* 2004
==============================================================================================================================
Cash flows from operating activities:
Net (loss) income $ (60,662) $ (59,493) $ 14,891
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Minority interest 83 (5) 83
Depreciation and amortization 23,622 24,875 22,534
Impairment of fixed assets 4,802 9,602 --
Impairment of goodwill 13,674 74,233 --
Impairment of identifiable intangible assets 20,045 464 --
Purchased in-process research and development -- 780 --
Deferred income taxes 10,649 (19,416) 4,668
Loss on disposal of assets 234 215 208
Annual retainer to Board of Directors paid by the issuance of common stock 198 156 183
Changes in assets and liabilities, net of effects from businesses acquired:
Accounts receivable (5,092) 3,994 (1,096)
Inventories (6,765) (1,288) 1,249
Other current assets 290 (2) (251)
Accounts payable 15,467 2,797 (95)
Accrued liabilities (39) (623) (2,504)
Income taxes payable (958) (5,449) 5,237
Other current liabilities 4,848 (4,475) 3,750
Other liabilities (2,721) 6,450 (2,302)
Other long-term assets 1,624 (2,667) (1,128)
Other, net 1,519 43 (4,469)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,818 30,191 40,958
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired -- (128,429) (12,116)
Acquisition of property, plant and equipment (8,773) (11,865) (3,697)
Proceeds from disposal of property, plant and equipment 73 15,685 165
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,700) (124,609) (15,648)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of debt (131,079) (775) (20,000)
Proceeds from new borrowings 133,142 110,176 --
(Decrease) increase in book overdrafts (8,603) 3,753 420
Financing cost of long term debt (6,130) (768) (407)
Proceeds from issuance of common stock, net 584 932 1,123
Purchase of treasury stock (163) (3,023) (5,770)
Common stock dividends paid (1,399) (1,396) (1,406)
Payment of minority interest dividends -- (10) (207)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (13,648) 108,889 (26,247)
- ------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 368 78 277
- ------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (1,162) 14,549 (660)
Cash and cash equivalents, beginning of fiscal year 26,855 12,306 12,966
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of fiscal year $ 25,693 $ 26,855 $ 12,306
==============================================================================================================================
* Reclassified for comparative purposes.
See notes to consolidated financial statements.
F-8
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
for the years ended JANUARY 31,
(Dollars in thousands)
2006 2005 2004
====================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
Interest paid, net $ 9,316 $ 4,362 $ 1,405
Income taxes paid, net $ 2,271 $ 4,417 $ 623
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquired business:
Estimated fair value of assets acquired $ -- $ 75,697 $ 10,980
Goodwill -- 48,885 --
Identifiable intangible assets -- 44,989 3,936
Purchased in-process research and development -- 780 --
Cash paid, net of cash acquired -- (128,429) (12,116)
- --------------------------------------------------------------------------------------------------------------------
Liabilities $ -- $ 41,922 $ 2,800
====================================================================================================================
(Decrease) increase in property, plant and equipment acquisitions in
accounts payable $ (12) $ 408 $ (368)
Tax effect of stock options exercised $ -- $ 264 $ 162
See notes to consolidated financial statements.
F-9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
for the years ended JANUARY 31,
(Dollars in thousands)
2006 2005 2004
===========================================================================================================================
NET (LOSS) INCOME $(60,662) $(59,493) $ 14,891
Other comprehensive (loss) income, net of tax:
Net unrealized gain on derivative instruments, less tax expense of $258,
$337 and $165 for 2006, 2005 and 2004, respectively 7,813 505 246
Foreign currency translation adjustments, less tax expense of $0, $316
and $1,440 for 2006, 2005 and 2004, respectively (303) 1,511 2,132
Minimum pension liability adjustment (24,661) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive (loss) income $(77,813) $(57,477) $ 17,269
===========================================================================================================================
See notes to consolidated financial statements.
F-10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of C&D
Technologies, Inc., its wholly owned subsidiaries and a 67% owned joint venture
(collectively the Company). All intercompany accounts and transactions have been
eliminated.
The Company produces and markets systems for the conversion and storage of
electrical power, including industrial batteries and electronics. The Company's
reportable business segments consist of the Standby Power Division, the Power
Electronics Division and the Motive Power Division.
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. In
addition, financial projections and estimates are required in the Company's
annual impairment assessment of goodwill. Actual results could differ from those
estimates.
Foreign Currency Translation:
Assets and liabilities in foreign currencies are translated into U.S.
dollars at the rate of exchange prevailing at the balance sheet date. Revenue
and expenses are translated at the average rate of exchange for the period.
Gains and losses on foreign currency transactions are included in other
expenses, net. Gains and losses on foreign currency translation are included in
Other Comprehensive (Loss) Income.
Derivative Financial Instruments:
The Company follows Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments. Specifically, SFAS No. 133 requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and to measure those instruments at fair value. Additionally, the fair
value adjustments will affect either stockholders' equity as accumulated other
comprehensive (loss) income or net (loss) income depending on whether the
derivative instrument qualifies as a hedge for accounting purposes and, if so,
the nature of the hedging activity.
In the normal course of business, the Company uses a variety of derivative
financial instruments primarily to manage currency exchange rate and interest
rate risk. All derivatives are recognized on the balance sheet at fair value and
are reported in either other current assets or accrued liabilities. To qualify
for hedge accounting, the instruments must be effective in reducing the risk
exposure that they are designed to hedge. For instruments that are associated
with the hedge of an anticipated transaction, hedge effectiveness criteria also
require that it be probable that the underlying transaction will occur.
Instruments that meet established accounting criteria are formally designated as
hedges at the inception of the contract. These criteria demonstrate that the
derivative is expected to be highly effective at offsetting changes in fair
value of the underlying exposure both at inception of the hedging relationship
and on an ongoing basis. The assessment for effectiveness is formally documented
at hedge inception and reviewed at least quarterly throughout the designated
hedge period.
Until the fourth quarter of fiscal year 2006, the Company used interest
rate swap agreements to reduce the impact of interest rate changes on its debt.
The interest rate swap agreements involve the exchange of variable for fixed
rate interest payments without the exchange of the underlying notional amount.
The Company has entered into lead hedge contracts to manage risk of the
cost of lead. The agreements are with major financial institutions. The Company
uses forward contracts to fix the price of a portion of its purchases according
to its policies.
F-11
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents:
The Company considers all highly liquid instruments purchased with an
initial maturity of three months or less to be cash equivalents. The Company's
cash management program utilizes zero balance accounts.
Revenue Recognition:
The Company recognizes revenue when the earnings process is complete. This
occurs when products are shipped to the customer in accordance with terms of the
agreement, title and risk of loss have been transferred, collectibility is
reasonably assured and pricing is fixed or determinable. Accruals are made for
sales returns and other allowances based on the Company's experience. Amounts
charged to customers for shipping and handling are classified as revenue. The
Company accounts for sales rebates as a reduction in revenue at the time revenue
is recorded.
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 January 31, 2006 and 2005.
Years Ended January 31, 2006 2005*
================================================================================
Trade receivables $ 75,018 $ 72,680
Notes receivables 216 500
Other 6,075 1,974
Allowance for doubtful accounts (2,889) (2,018)
- --------------------------------------------------------------------------------
Total receivables $ 78,420 $ 73,136
================================================================================
* Reclassified for comparative purposes.
Following are the changes in the allowance for doubtful accounts during
the periods ended:
Years Ended January 31, 2006 2005
================================================================================
Balance at beginning of period $ 2,018 $ 1,476
Additions 1,027 56
Translation adjustment 6 --
Write-offs net of recoveries (162) (241)
Opening balance sheet of acquired companies -- 727
- --------------------------------------------------------------------------------
Balance at end of period $ 2,889 $ 2,018
================================================================================
F-12
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories:
Inventories are stated at the lower of cost or net realizable value. Cost
is determined by the last-in, first-out (LIFO) method for financial statement
and federal income tax purposes. The Company adjusts its inventory reserves
based upon assumptions of future demand and market conditions.
Property, Plant and Equipment:
Property, plant and equipment acquired as part of a business combination
are recorded at the then fair market value. Property, plant and equipment
purchased are recorded at cost. Property, plant and equipment, including capital
leases, are depreciated on the straight-line method for financial reporting
purposes over estimated useful lives or lease terms, whichever is shorter, which
range from 3 to 10 years for machinery and equipment, and 10 to 40 years for
buildings and improvements. The Company capitalizes interest on borrowings
during the active construction period of major capital projects. Capitalized
interest is added to the cost of the underlying assets and is depreciated over
the useful lives of the assets.
The cost of maintenance and repairs is charged to expense as incurred.
Renewals and betterments are capitalized. Upon retirement or other disposition
of property, plant and equipment, the cost and related accumulated depreciation
are removed from the accounts and any gain or loss is included in operations.
The Company capitalizes purchased software, including certain costs
associated with its installation. The cost of software capitalized is amortized
over its estimated useful life, ranging from 3 to 5 years, using the
straight-line method.
Identifiable Intangible Assets, Net:
Acquisition-related intangible assets are amortized on a straight-line
basis over their estimated useful lives, which range from 5 to 25 years.
Intellectual property assets are amortized over the periods of benefit, ranging
from 2 to 11 years, on a straight-line basis. All identifiable intangible assets
are classified within intangible and other assets, net on the balance sheet.
Long-Lived Assets:
The Company performs periodic evaluations of the recoverability of the
carrying amount of long-lived assets (including property, plant and equipment,
and intangible assets with determinable lives) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. Events or changes in circumstances are evaluated based on a number
of factors including operating results, business plans and forecasts, general
and industry trends and, economic projections and anticipated cash flows. An
impairment is assessed when the undiscounted expected future cash flows derived
from an asset are less than its carrying amount. Impairment losses are measured
as the amount by which the carrying value of an asset exceeds its fair value and
are recognized in earnings. The Company also continually evaluates the estimated
useful lives of all long-lived assets and periodically revises such estimates
based on current events (see Note 5, Property, Plant and Equipment).
F-13
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill:
Goodwill represents the excess of the cost over the fair value of net
assets acquired in business combinations. Goodwill is not amortized and is
subject to impairment tests. Goodwill is tested for impairment on an annual
basis or upon the occurrence of certain circumstances or events. The Company
determines the fair value of its reporting units using a combination of
financial projections and discounted cash flow techniques adjusted for risk
characteristics, also giving consideration to the Company's overall market
capitalization. The fair value of the reporting units is compared to the
carrying value of the reporting units to determine if an impairment loss should
be calculated. If the book value of a reporting unit exceeds the fair value of
the reporting unit, an impairment loss is indicated. The loss is calculated by
comparing the implied fair value of the goodwill to the book value of the
goodwill. If the book value of the goodwill exceeds the fair value of the
goodwill, an impairment loss is recorded. The implied fair value of goodwill is
determined by subtracting the fair value of the identifiable assets of a
reporting unit from the fair value of the reporting unit.
Other Current Liabilities:
The Company's joint venture received $15,547 from the Chinese government
as partial payment for the Company's existing battery facility located in
Shanghai. The Company expects to use these funds for the construction of a new
battery manufacturing facility in Shanghai. This payment will be recognized as
income when the construction of the new facility is complete and the existing
facility is transferred to the Chinese government.
Deferred revenue of $6,511 and $2,165 is included in other current
liabilities as of January 31, 2006 and 2005, respectively.
Environmental Matters:
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and that do not contribute to current or future
revenue generation, are also expensed. The Company records liabilities on an
undiscounted basis for environmental costs when environmental assessments and/or
remedial efforts are probable and the costs can be reasonably estimated. The
liability for future environmental remediation costs is evaluated on a quarterly
basis by management.
Research and Development:
Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect internal costs related to
specific projects. The cost of materials (whether from our normal inventory or
acquired specially for research and development activities) and equipment or
facilities that are acquired or constructed for research and development
activities and that have alternative future uses (in research and development
projects or otherwise) are capitalized as tangible assets when acquired or
constructed. The cost of such materials consumed in research and development
activities and the depreciation of such equipment or facilities used in those
activities are recorded as research and development expenses.
F-14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes:
The Company is routinely audited by federal, state and local taxing
authorities. The outcome of these audits may result in our being assessed taxes
in addition to amounts previously paid. Accordingly, we maintain tax contingency
reserves for such potential assessments. The reserves are determined based upon
our best estimate of possible assessments by the Internal Revenue Service (IRS)
or other taxing authorities and are adjusted, from time to time, based upon
changing facts and circumstances.
The Company recognized deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns using tax rates in effect for the year in
which the differences are expected to reverse.
Net (Loss) Income per Share:
Net (loss) income per common share is based on the weighted-average number
of shares of Common Stock outstanding. Net (loss) income per common share -
diluted reflects the potential dilution that could occur if stock options were
exercised. Weighted-average common shares and common shares - diluted were as
follows:
Years Ended January 31, 2006 2005 2004
============================================================================================================================
Weighted-average shares of common stock 25,379,717 25,349,488 25,536,628
Assumed conversion of stock options, net of shares assumed reacquired -- -- 195,333
- ----------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares - diluted 25,379,717 25,349,488 25,731,961
============================================================================================================================
Due to a net loss in fiscal year 2006, 8,854,785 of dilutive securities
issuable in connection with convertible bonds have been excluded from the
diluted loss per share calculation for these years because their effect would
reduce the loss per share. Additionally, due to net losses in fiscal years 2006
and 2005, 100,242 and 134,295 of dilutive securities issuable in connection with
stock plans have been excluded from the diluted loss per share calculation for
these years because their effect would reduce the loss per share. During the
year ended January 31, 2004, the Company had 1,001,762 outstanding stock options
that were excluded from the calculation of diluted earnings per share because
their inclusion would have been anti-dilutive. These stock options could be
dilutive in the future.
F-15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based Compensation Plans:
Under Accounting Principles Board (APB) No. 25, "Accounting for Stock
Issued to Employees," 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) income. The following table illustrates the effect on net (loss) income
and net (loss) income per share if the Company had applied the fair value
recognition provisions of 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, generally three years.
Because the estimated value is determined as of the date of grant, the actual
value ultimately realized by the employee may be significantly different.
Years Ended January 31, 2006 2005 2004
====================================================================================================================
Net (loss) income - as reported $(60,662) $(59,493) $14,891
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effect 9,297 3,790 3,382
- --------------------------------------------------------------------------------------------------------------------
Net (loss) income - pro forma $(69,959) $(63,283) $11,509
====================================================================================================================
Net (loss) income per common share - basic - as reported $ (2.39) $ (2.35) $ 0.58
Net (loss) income per common share - basic - pro forma $ (2.76) $ (2.50) $ 0.45
Net (loss) income per common share - diluted - as reported $ (2.39) $ (2.35) $ 0.58
Net (loss) income per common share - diluted - pro forma $ (2.76) $ (2.50) $ 0.45
Weighted-average fair value of options granted during the year $ 3.66 $ 9.05 $ 7.79
The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions for 2006, 2005 and 2004:
Years Ended January 31, 2006 2005 2004
====================================================================================================================
Risk-free interest rate 4.20% 3.07% 2.80%
Expected dividend yield 0.72% 0.30% 0.34%
Expected volatility factor 0.525 0.547 0.537
Weighted-average expected life 5.00 years 5.00 years 5.00 years
SFAS No. 123 requires the use of option pricing models that were not
developed for use in valuing employee stock options. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including the option's expected life and the
price volatility of the underlying stock. Because changes in the subjective
input assumptions can materially affect the fair value estimate, the existing
models may not provide a reliable single measure of the fair value of employee
stock options.
On March 1, 2005, the Company's Compensation Committee authorized the
vesting of all outstanding non-vested options then held by employees of the
Company and any of its subsidiaries, which were granted by the Corporation under
the 1996 and 1998 Stock Option Plans. In accordance with SFAS No. 123R, "Share
Based Payment," which is effective for the first annual period after December
15, 2005, the Company will be required to apply the expense recognition
provisions under SFAS No. 123R beginning February 1, 2006. The reason that the
Company accelerated the vesting of the identified stock options was to reduce
the Company's compensation charge in periods subsequent to adoption of SFAS No.
123R.
F-16
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
New Accounting Pronouncements:
In November 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 151, "Inventory Costs, an amendment of Accounting Research Bulletin
(ARB) No. 43, Chapter 4," which is the result of its efforts to converge U.S.
accounting standards for inventories with International Accounting Standards.
SFAS No. 151 requires abnormal amounts of idle facility expense, freight,
handling costs and wasted material or spoilage to be recognized as
current-period charges. It also requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 will be effective for inventory costs
incurred beginning February 1, 2006. Adoption of this standard is not expected
to have a material impact on C&D's consolidated operations, financial position
or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. That
cost will be measured based on the fair value of the equity or liability
instruments issued. The Company will no longer be permitted to follow the
intrinsic value accounting method of APB No. 25, and the pro forma disclosures
previously permitted under SFAS No. 123 will no longer be an alternative to
financial statement recognition. Under SFAS No. 123R, the Company must determine
the appropriate fair value model to be used for valuing share-based payments,
the amortization method for compensation cost and the transition method to be
used at date of adoption. SFAS No. 123R is effective for the Company on February
1, 2006, and will apply to all prospective awards using the modified prospective
transition method without restatement of prior periods.
Adoption of SFAS No. 123R in the first quarter of fiscal 2007 will result
in a reduction of reported future earnings. However, the acceleration of vesting
of stock options on March 1, 2005 will reduce the amount of stock-based
compensation expense to be incurred in future periods. The Company also
accelerated grants of stock options in January 2006. The Company's future
stock-based compensation strategy, stock price volatility, estimated forfeitures
and employee stock option exercise behavior, will affect the amount of future
stock-based compensation expense that will be recognized in future periods.
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. FIN 47 requires an entity 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. FIN 47 was effective for the Company
in the fourth quarter of fiscal year 2006, and adoption of this Interpretation
did not have a material impact on the Company's financial position and results
of operations. See Note 9 of Notes to Consolidated Financial Statements.
F-17
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS
No. 154). Previously, APB No. 20, "Accounting Changes" and SFAS No. 3 "Reporting
Accounting Changes in Interim Financial Statements" required the inclusion of
the cumulative effect of changes in accounting principle in net income of the
period of the change. SFAS No. 154 requires companies to recognize a change in
accounting principle, including a change required by a new accounting
pronouncement when the pronouncement does not include specific transition
provisions, retrospectively to prior periods' financial statements. The Company
will assess the impact of a retrospective application of a change in accounting
principle in accordance with SFAS No. 154 when such a change arises after the
effective date of February 1, 2006.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Instruments" (SFAS No. 155). This standard allows financial instruments
that have embedded derivatives to be accounted for as a whole (eliminating the
need to bifurcate the derivative from its host) if the holder elects to account
for the whole instrument on a fair value basis. This standard is effective for
all financial instruments acquired or issued by the Company in fiscal year 2008,
and may be applied to hybrid financial instruments previously entered into that
meet certain criteria. The Company will assess the impact of adoption of this
standard on our consolidated operations, financial position or cash flows as new
financing arrangements arise.
F-18
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
2. 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 costs of approximately $400, primarily related to legal
fees and due diligence. Celab is a provider of power conversion products,
predominantly sold into military, CATV and telecommunications applications in
Europe. On June 30, 2004, the Company acquired Datel Holding Corporation and its
subsidiaries (Datel) for approximately $74,800 plus acquisition costs of
approximately $800, primarily related to legal fees, audit fees, due diligence
and appraisals. The purchase price consisted of approximately $66,400 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 was
expensed in the year ended January 31, 2005.
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 original equipment manufacturers (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 was expensed in the year
ended January 31, 2005. This acquisition was funded with the Company's expanded
revolving credit facility.
For the in-process research and development acquired in the Datel and CPS
acquisitions, the technological feasibility of the in-process technology had not
been established as of the acquisition date and the technology had no alternate
future use.
To finance the acquisitions, on June 30, 2004, the Company entered into an
amended and restated revolving credit facility, with a maturity date of June 30,
2009. The facility has been subsequently refinanced. See Note 6, Debt, for
disclosure of the Company's refinancing activities.
See Note 14, Asset Impairments, for disclosure of impairments of acquired
assets.
F-19
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
2. ACQUISITIONS (continued)
The three acquisitions referred to above are included in the Power
Electronics Division (PED) for reporting purposes. The purchase price for these
acquisitions was allocated as follows:
Amount
================================================================================
Assets:
Accounts receivable $ 26,144
Inventories 28,433
Prepaid assets and other current assets 738
Deferred income taxes 1,731
Property, plant and equipment 18,190
Identifiable intangible assets 44,989
Goodwill 48,885
Other non-current assets 461
- --------------------------------------------------------------------------------
Total assets 169,571
- --------------------------------------------------------------------------------
Liabilities:
Short-term debt (1,355)
Accounts payable (12,134)
Accrued liabilities and other current liabilities (5,607)
Income taxes, net (431)
Other current liabilities (3,351)
Deferred income taxes (11,587)
Other long-term liabilities (394)
Long-term debt (7,063)
- --------------------------------------------------------------------------------
Total liabilities (41,922)
- --------------------------------------------------------------------------------
In-process research and development 780
- --------------------------------------------------------------------------------
Total purchase price $128,429
================================================================================
On September 25, 2003, the Company acquired a 240,000 square foot facility
in Reynosa, Mexico, and the equipment in that facility that was historically
used for the manufacture of large, valve regulated lead acid batteries (VRLA
batteries) for standby power applications. In addition, the Company entered into
a worldwide technology license agreement with Matsushita Battery Industrial Co.
Ltd. of Japan for selected patents and know-how relating to the manufacturing
technology for the aforementioned products. The cost of this acquisition,
including the technology agreement, was approximately $13,900 plus $1,000 of
acquisition related costs.
The results of operations of these businesses are included in the
Company's consolidated financial statements from their respective dates of
acquisition.
The allocation of the purchase price resulted in identifiable intangible
assets of $3,936, which are being amortized on a straight-line basis over ten
years. The Company's Reynosa, Mexico, facility produces product for both the
Standby Power and Motive Power divisions.
F-20
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
2. ACQUISITIONS (continued)
Identifiable intangible assets acquired during the years ended January 31,
2005 and 2004, are summarized as follows:
Weighted- Weighted-
Average Average
Years Ended January 31, 2005 Life 2004 Life
==================================================================================================================
Trade names $ 2,400 25 $ -- --
Intellectual property 15,012 9 3,936 10
Customer relationships 27,400 20 -- --
Other 177 2 -- --
- ---------------------------------------------------------------------------- --------
Total intangible assets $ 44,989 $ 3,936
============================================================================ ========
The following unaudited pro forma financial information combines the
consolidated results of operations as if the Datel, Celab 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.
Additional pro forma adjustments include the elimination of CPS divestiture
related costs of $1,200 and a conciliatory claim settlement of $3,500 made by
Celestica, Inc. to preserve a key customer relationship of the parent company.
(Unaudited) (Unaudited)
Years Ended January 31, 2005 2004
===================================================================================================================
Net sales $ 515,011 $ 478,597
Net (loss) income $ (72,244) $ 14,677
Net (loss) income per common share - basic $ (2.85) $ 0.57
Net (loss) income per common share - diluted $ (2.85) $ 0.57
The pro forma net income includes the following significant pre-tax
charges incurred by CPS prior to the acquisition in the year ended January 31,
2005:
Year Ended January 31, 2005
===================================================================================================================
Accrual for inventory obsolescence $ 8,460
Severance and related benefits 2,846
Other costs 1,480
- -------------------------------------------------------------------------------------------------------------------
Total $ 12,786
===================================================================================================================
The pro forma net income includes a gain of $9,200 related to the
forgiveness of a Datel loan in the year ended January 31, 2004.
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.
Pro forma amounts are not presented for the year ended January 31, 2004,
related to the September 25, 2003, Reynosa, Mexico, acquisition, as the
acquisition did not have a material effect on the Company's results of
operations or financial condition due to the insignificant level of operations
during the approximately eight month period ended September 25, 2003, at the
Reynosa facility.
F-21
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
3. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill:
During the year ended January 31, 2006, no goodwill was acquired.
During the year ended January 31, 2005, the Company recorded $10,024,
$28,627 and $10,234 in goodwill in connection with the Celab, Datel and CPS
acquisitions, respectively. Goodwill by reportable segment was adjusted as
follows:
Standby Power Motive
Power Electronics Power 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 -- (803) -- (803)
Effect of exchange rate changes on goodwill (37) (1,282) -- (1,319)
Impairment of goodwill -- (13,674) -- (13,674)
- -----------------------------------------------------------------------------------------------------------------------------
Goodwill, January 31, 2006 $ 59,674 $ 21,777 $ -- $ 81,451
==============================================================================================================================
See Note 14, Asset Impairments, for a discussion of the impairments to
goodwill recognized during the fiscal years ended January 31, 2006 and 2005.
F-22
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
3. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS (continued)
Identifiable Intangible Assets:
Identifiable intangible assets as of January 31, 2006, consisted of the
following:
Gross Accumulated
January 31, 2006 Assets Amortization Net
==================================================================================================================
Trade names $ 20,240 $ (6,322) $ 13,918
Intellectual property 22,444 (8,742) 13,702
Customer relationships 8,900 (704) 8,196
Other 1,872 (746) 1,126
- ------------------------------------------------------------------------------------------------------------------
Total intangible assets $ 53,456 $(16,514) $ 36,942
==================================================================================================================
Identifiable intangible assets as of January 31, 2005, consisted of the
following:
Gross Accumulated
January 31, 2005 Assets Amortization Net
==================================================================================================================
Trade names $ 20,240 $ (5,333) $ 14,907
Intellectual property 25,501 (7,075) 18,426
Customer relationships 27,400 (569) 26,831
Other 2,013 (695) 1,318
- ------------------------------------------------------------------------------------------------------------------
Total intangible assets $ 75,154 $(13,672) $ 61,482
==================================================================================================================
Based on intangibles recorded at January 31, 2006, the annual amortization
expense is expected to be as follows (assuming current exchange rates):
Years Ended January 31, 2007 2008 2009 2010 2011
==================================================================================================================
Trade names $ 988 $ 988 $ 988 $ 988 $ 988
Intellectual property 1,777 1,674 1,612 1,567 1,525
Customer relationships 445 445 445 445 445
Other 34 28 28 28 28
- ------------------------------------------------------------------------------------------------------------------
Total intangible assets $3,244 $3,135 $3,073 $3,028 $2,986
==================================================================================================================
Amortization of identifiable intangibles was $4,703, $3,423 and $2,031 for
the years ended January 31, 2006, 2005 and 2004.
See Note 14, Asset Impairments, for a discussion of the impairments to
identifiable intangible assets recognized during the fiscal years ended January
31, 2006 and 2005.
F-23
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
4. INVENTORIES
Inventories consisted of the following:
Years Ended January 31, 2006 2005
================================================================================
Raw materials $36,828 $31,558
Work-in-process 13,993 13,084
Finished goods 32,982 32,630
- --------------------------------------------------------------------------------
Total $83,803 $77,272
================================================================================
If the first-in, first-out method of inventory accounting had been used
which approximates current cost, inventories would have been $92,237 and $82,151
as of January 31, 2006 and 2005, respectively. There was no inventory decrement
in the years ended January 31, 2006 and 2005.
The Company reserves for excess and obsolete inventory and adjusts the
reserve based upon assumptions of future demand and market conditions. The
excess and obsolete inventory reserve as of January 31, 2006 and 2005 was
$22,507 and $23,967, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted of the following:
Years Ended January 31, 2006 2005
================================================================================
Land $ 4,991 $ 5,552
Buildings and improvements 61,099 63,695
Furniture, fixtures and equipment 212,495 235,671
Construction in progress 8,748 6,256
- --------------------------------------------------------------------------------
287,333 311,174
Less accumulated depreciation 196,292 207,044
- --------------------------------------------------------------------------------
Total $ 91,041 $104,130
================================================================================
For the years ended January 31, 2006, 2005 and 2004, depreciation charged
to operations, including property under capital leases, amounted to $17,093,
$21,238 and $20,395; maintenance and repair costs expensed totaled $13,512,
$12,536 and $10,367; and capitalized interest amounted to $32, $152 and $82,
respectively.
One of the Company's buildings in Leola, Pennsylvania, has been
reclassified as held for sale. The building has been written down to $1,900, its
expected fair value.
See Note 14, Asset Impairments, for a discussion of the impairments to
fixed assets recognized during the fiscal years ended January 31, 2006 and 2005.
F-24
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
6. DEBT
Debt consisted of the following:
Years Ended January 31, 2006 2005*
=====================================================================================================================
Line of Credit Facility, maximum commitment of $75,000 at January 31, 2006;
availability is determined by a borrowing base calculation (effective rate on
a weighted-average basis was 6.21% as of January 31, 2006). Net of
unamortized debt costs of $2,130 as of January 31, 2006 $ 6,013 --
Term Loan; (effective rate on a weighted-average basis was 11.18% as of January
31, 2006). Net of unamortized debt costs of $534 as of January 31, 2006 49,466 --
Convertible Senior Notes; bears interest at 5.25%. Net of unamortized debt costs
of $2,628 as of January 31, 2006 72,372 --
Revolving multi-currency credit facility; maximum commitment of $200,000 at
January 31, 2005 (effective rate on a weighted-average basis was 4.71% as of
January 31, 2005). Net of unamortized debt costs of $941 as of January 31,
2005 -- $128,750
8.4% mortgage payable in monthly installments of $59 payable through July 2007
with a final installment of $4,861 due in August 2007 collateralized by the
Company's Mansfield, Massachusetts, manufacturing facility 5,230 5,487
Multi-currency overdraft facility -- --
Obligations under capital leases with interest rates ranging from 8.1% to 9.2%
collateralized by equipment 1,024 2,156
- ----------------------------------------------------------------------------------------------------------------------
Total debt 134,105 136,393
Less current portion 1,038 1,389
- ----------------------------------------------------------------------------------------------------------------------
Total long-term portion $133,067 $135,004
=====================================================================================================================
* Reclassified for comparative purposes.
On December 7, 2005, the Company completed the refinancing of its former
revolving multi-currency credit facility (Former Credit Agreement) with the
closing of $125,000 principal amount of new credit facilities, consisting of (i)
a $75,000 principal amount Line of Credit Facility (Credit Facility) and (ii) a
$50,000 Term Loan facility (Term Loan).
The Credit Facility consists of a five-year senior revolving line of
credit. The availability under the Credit Facility is determined by a borrowing
base, is collateralized by a first lien on certain assets and initially bears
interest at LIBOR plus 1.75% or Prime plus .25%. As of January 31, 2006, the
maximum availability calculated under the borrowing base was $53,798, of which
$8,143 was funded, and $3,212 was utilized for letters of credit. As provided
under the Credit Facility, excess borrowing capacity will be available for
future working capital needs and general corporate purposes.
The Term Loan is a five and one half year term facility with payment due
in 2011. The facility is collateralized by a second lien on certain assets and
bears interest at LIBOR plus 6.75% or Prime plus 4.50%.
As of January 31, 2006, the Company is in compliance with its financial
covenants. In anticipation of a possible future violation of the leverage ratio
covenant under the Term Loan, and to provide greater flexibility with respect to
this covenant, on March 30, 2006 the Company executed a first amendment to both
of these credit facilities. These amendments modified the definition of EBITDA
of both credit facilities, changed the leverage ratio commencing February 28,
2006 through December 31, 2006 under the Term Loan facility and modified certain
other definitions. In consideration of these changes the Company paid a fee of
$500 to the Term Loan lenders and $38 to the Line of Credit facility lenders.
The Company agreed to grant a security interest in its Leola, Pennsylvania
battery plant and its Mansfield, Massachusetts electronics plant. The Company
also agreed to an increase in the interest rate for the benefit of the Term Loan
lenders of .25% until such time as the leverage ratio falls below 3.0 as defined
in the amended Term Loan agreement.
F-25
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
6. DEBT (continued)
The Credit Facility and Term Loan include a minimum fixed charge coverage
ratio that is measured only when the excess availability as defined in the
agreements is less than $15,000. Both agreements limit restricted payments
including dividends and Treasury Stock purchases to no more than $250 for
Treasury Stock in any one calendar year and $1,750 for dividends for any one
calendar year subject to adjustments of up to $400 per year in the case of the
conversion of debt to stock per the terms of the 5.25% convertible offering.
These restricted payments can only occur with prior notice to the lenders and
provided that there is a minimum of $30,000 in excess availability for a period
of thirty days prior to the dividend. The Term Loan also includes a maximum
leverage ratio.
In connection with refinancing of the Company's credit facilities, the
Company incurred $2,755 in issuance costs which consisted primarily of
investment banker fees, legal and other professional fees. These costs are being
amortized to interest expense over the term of each facility. The unamortized
balance of $2,664 of these costs at January 31, 2006 is included in the
accompanying balance sheet.
The Credit Facility includes a swingline sub-loan facility not to exceed
$7,000. As of January 31, 2006, the Company had $2,658 of letters of credit with
other financial institutions that do not reduce the Company's availability under
its Credit Facility.
The Former Credit Agreement had a maturity date of June 30, 2009, and
included a $50,000 sub limit for loans in certain foreign currencies. The
interest rates were determined by the Company's leverage ratio and were
available at LIBOR plus 1% to LIBOR plus 2.25% or Prime, to Prime plus .75%. The
rates could be adjusted based on the leverage ratio calculated after the
conclusion of each quarter. The Former Credit Agreement required the Company to
pay a fee of .25% to .50% per annum of any unused portion of the Facility, based
on the leverage ratio. During the year ended January 31, 2005, the average fee
paid was .39%. The Former Credit Agreement included a letter of credit facility
not to exceed $25,000, of which $22,238 was available at January 31, 2005. The
Former Credit Agreement included a swingline sub-loan facility of $10,000.
On November 21, 2005 the Company completed the private placement of
$75,000 aggregate principal amount of 5.25% Convertible Senior Notes Due 2025
(Notes). The Company received net proceeds of approximately $72,300 after the
deduction of commissions and offering expenses. The Company used substantially
all of the net proceeds to reduce the balance of its Former Credit Agreement.
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 that those subsidiaries that
may in the future guarantee certain of the Company's other obligations will also
be required to guarantee the Notes.
The Notes require the semi-annual payment of interest on May 1 and
November 1 of each year beginning May 1, 2006 at 5.25% per annum on the
principal amount outstanding. The Notes will mature on November 1, 2025. Prior
to maturity the holders may convert their Notes into shares of the Company's
common stock under certain circumstances. The initial conversion rate is
118.0638 shares per $1,000 principal amount of Notes, which is equivalent to an
initial conversion price of approximately $8.47 per share.
F-26
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
6. DEBT (continued)
At any time between November 1, 2010 and November 1, 2012, the Company may
at its option redeem the Notes, in whole or in part, for cash, at a redemption
price equal to 100% of the principal amount of Notes to be redeemed, plus any
accrued and unpaid interest, including additional interest, if any, if in the
previous 30 consecutive trading days ending on the trading day before the date
of mailing of the redemption notice the closing sale price of the Common Stock
exceeds 130% of the then effective conversion price of the Notes for at least 20
trading days. In addition, at any time after November 1, 2012, the Company may
redeem the Notes, in whole or in part, for cash, at a redemption price equal to
100% of the principal amount of the Notes to be redeemed plus any accrued and
unpaid interest, including additional interest, if any.
A holder of Notes may require the Company to repurchase some or all of the
holder's Notes for cash upon the occurrence of a fundamental change as defined
in the indenture and on each of November 1, 2012, 2015 and 2020 at a price equal
to 100% of the principal amount of the Notes being repurchased, plus accrued
interest, if any, in each case.
If applicable, the Company will pay a make-whole premium on Notes
converted in connection with any fundamental change that occurs prior to
November 1, 2012. The amount of the make-whole premium, if any, will be based on
the Company's stock price and the effective date of the fundamental change. The
indenture contains a detailed description of how the make-whole premium will be
determined and a table showing the make-whole premium that would apply at
various stock prices and fundamental change effective dates based on assumed
interest and conversion rates. No make-whole premium will be paid if the price
of the Common Stock on the effective date of the fundamental change is less than
$7.00. Any make-whole premium will be payable in shares of Common Stock (or the
consideration into which the Company's Common Stock has been exchanged in the
fundamental change) on the conversion date for the Notes converted in connection
with the fundamental change.
The Notes were issued in an offering not registered under the Securities
Act of 1933, as amended (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 and 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 Securities and Exchange Commission
(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
under the Securities Act on or prior to 210 days following the date the Notes
were originally issued. If the Company should fail to meet the registration
obligations described above, the interest rate payable on the Notes will
increase by 0.25% per annum for the first 90 days the Company is not in
compliance with such registration obligations and by an additional 0.25% per
annum from and after the 91st day during which such registration default
continues. As of April 10, 2006, the Company had not filed a shelf registration
statement with the SEC.
In connection with the issuance of the Notes, the Company incurred $2,700
in issuance costs which primarily consisted of investment banker fees, legal and
other professional fees. These costs are being amortized to interest expense
over seven years. The unamortized balance of $2,628 of these costs at January
31, 2006 is included in the accompanying balance sheet.
The total aggregate amount of loans outstanding under the Term Loan,
Credit Facility, Notes and Former Credit Agreement at any point during the year
ended January 31, 2006 and 2005 were $145,673 and $149,778, respectively. For
the years ended January 31, 2006, 2005 and 2004, the outstanding loans under
these credit agreements computed on a monthly basis averaged $134,902, $80,314
and $28,737 at a weighted-average interest rate of 6.03%, 4.64% and 2.00%,
respectively.
F-27
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
6. DEBT (continued)
The Company also has an uncommitted multi-currency overdraft facility.
This is a senior unsecured demand loan facility, which was originally in the
amount of 22 million Pounds Sterling. This senior facility was reduced to 750
thousand Pounds Sterling at the request of the Company in September 2002. There
was no balance on this facility during fiscal years 2006 and 2005.
As of January 31, 2006, the required minimum annual principal reduction of
long-term debt and capital leases including interest for each of the next five
fiscal years is as follows:
Year Ended January 31, Amount
================================================================================
2007 $ 1,038
2008 5,216
2009 --
2010 --
2011 8,143
Thereafter 125,000
- --------------------------------------------------------------------------------
Total $139,397
================================================================================
F-28
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
7. STOCKHOLDERS' EQUITY
Stock Option Plans:
The Company has three stock option plans: the 1996 Stock Option Plan
reserved 2,000,000 shares of Common Stock; the 1998 Stock Option Plan reserved
3,900,000 shares of Common Stock; and the U.K. Stock Option Plan reserved
500,000 shares of Common Stock; for option grants. In addition, stock can be
granted to the Company's non-employee directors in lieu of their annual retainer
or a portion thereof. Incentive stock options are to be granted at no less than
100% of the fair market value on the date of grant, with a term of no more than
ten years after the date of grant. Nonqualified stock options are to be granted
at such price as the Compensation Committee of the Board of Directors deems
appropriate, with a term of no more than ten years after the date of grant. The
options are exercisable upon vesting as determined by the Compensation Committee
at the time the options are granted. On March 1, 2005, the Compensation
Committee of the Board of Directors of the Company authorized and approved,
effective March 1, 2005, and notwithstanding the terms of any stock option
agreements between the Company and any employee, the vesting of all outstanding
non-vested options then held by employees of the Company, which had been granted
by the Company under the 1996 and 1998 Stock Option Plans. All subsequent grants
have been fully vested.
A summary of stock option activity related to the Company's plans is as
follows:
Beginning Granted Exercised Canceled Ending
Balance During During During Balance
Outstanding Year Year Year Outstanding Exercisable
==============================================================================================================================
BALANCE AT
JANUARY 31, 2004
Number of shares 2,501,374 616,297 83,102 293,063 2,741,506 1,703,513
Weighted-average
option price per share $ 23.02 $ 16.32 $ 13.52 $ 26.10 $ 21.47 $ 22.29
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2005
Number of shares 2,741,506 681,702 99,599 191,241 3,132,368 2,018,039
Weighted-average
option price per share $ 21.47 $ 18.60 $ 9.36 $ 23.64 $ 21.10 $ 22.70
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2006
Number of shares 3,132,368 1,467,701 85,300 440,771 4,073,998 4,053,900
Weighted-average
option price per share $ 21.10 $ 7.75 $ 6.83 $ 20.84 $ 16.62 $ 16.62
==============================================================================================================================
F-29
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
7. STOCKHOLDERS' EQUITY (continued)
There were 449,469 and 1,504,554 shares available for future grants of
options under the Company's stock option plans as of January 31, 2006 and 2005,
respectively. The following table summarizes information about the stock options
outstanding at January 31, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
==================================================================================================================
$ 6.00 - 9.13 1,295,445 9.4 years $ 7.53 1,295,445 $ 7.53
$ 9.80 - 14.70 352,524 5.4 years $ 11.58 352,524 $11.58
$ 14.94 - 22.31 1,967,199 6.2 years $ 18.94 1,947,101 $18.96
$ 26.76 - 37.28 400,980 5.1 years $ 33.57 400,980 $33.57
$ 48.44 - 55.94 57,850 4.5 years $ 54.49 57,850 $54.49
- ------------------------------------------------ ------------
Total 4,073,998 7.0 years $ 16.62 4,053,900 $16.62
================================================ ============
Rights Plan:
In February 2000, the Company's Board of Directors declared a dividend of
one common stock purchase right (Right) for each share of Common Stock
outstanding on March 3, 2000, to the stockholders of record on that date. The
description and terms of the Rights are set forth in a Rights Agreement between
the Company and Mellon Investor Services LLC, as rights agent. In fiscal year
2005, an amendment was signed among the Company, Mellon Investor Services LLC
and the Bank of New York whereby Mellon Investor Services LLC resigned as rights
agent. The Company appointed the Bank of New York as successor rights agent.
Upon the occurrence of certain events, each Right will entitle the registered
holder to purchase from the Company one one-hundredth of a share of Common Stock
at a purchase price of $150 per one one-hundredth of a share, subject to
adjustment, as stated in the Rights Agreement. Upon the occurrence of certain
events involving a hostile takeover of the Company, unless the Company's Board
of Directors acts otherwise, each holder of a Right, other than Rights
beneficially owned by the acquiring company, will thereafter have the right to
receive upon exercise: (i) that number of shares of the Company's common stock
having a market value equal to two times the purchase price of the Right or (ii)
that number of shares of common stock of the acquiring company that at the time
of the transaction has a market value of two times the exercise price of the
Right.
8. INCOME TAXES
The components of (loss) income before income taxes and minority interest
were as follows:
Years Ended January 31, 2006 2005 2004
===========================================================================================================
Domestic $(36,851) $(41,704) $20,794
Foreign (11,366) (39,083) 2,975
- -----------------------------------------------------------------------------------------------------------
(Loss) income before income taxes and minority interest $(48,217) $(80,787) $23,769
===========================================================================================================
F-30
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
8. INCOME TAXES (continued)
The provision (benefit) for income taxes as shown in the accompanying
consolidated statements of operations consisted of the following:
Years Ended January 31, 2006 2005 2004
================================================================================
Current:
Federal $ (3,449) $ (337) $ 6,261
State (318) (46) 308
Foreign 3,740 1,213 574
- --------------------------------------------------------------------------------
(27) 830 7,143
- --------------------------------------------------------------------------------
Deferred:
Federal 10,731 (21,352) 1,701
State 2,065 (1,134) 79
Foreign (407) 367 (128)
- --------------------------------------------------------------------------------
12,389 (22,119) 1,652
- --------------------------------------------------------------------------------
Total $ 12,362 $(21,289) $ 8,795
================================================================================
The components of the deferred tax asset and liability as of January 31,
2006 and 2005 were as follows:
Years Ended January 31, 2006 2005
================================================================================
ASSETS
Vacation and compensation accruals $ 4,882 $ 4,712
Bad debt, inventory and return allowances 7,739 5,734
Warranty reserves 2,822 3,109
Postretirement benefits 1,684 1,697
Net operating losses 2,527 671
Derivatives -- 258
Foreign tax credits -- 1,004
Environmental reserves 836 2,056
Other accruals 1,382 1,255
Pension obligation 3,732 --
Research and development tax credits 809 --
Unrepatriated earnings -- 10,461
- --------------------------------------------------------------------------------
Total deferred tax assets 26,413 30,957
- --------------------------------------------------------------------------------
LIABILITIES
Depreciation and amortization (7,200) (16,849)
Pension obligation -- (6,988)
Derivatives (2,853) --
Cumulative translation adjustment -- (3,030)
Unrepatriated earnings (1,610) --
- --------------------------------------------------------------------------------
Total deferred tax liability (11,663) (26,867)
- --------------------------------------------------------------------------------
Valuation allowance* (22,817) (1,538)
- --------------------------------------------------------------------------------
Net deferred tax (liability) asset $ (8,067) $ 2,552
================================================================================
* At January 31, 2005, the Company had established a valuation allowance of
$1,538 for foreign tax credits related to the deferred tax asset related to the
investment in several foreign subsidiaries. This valuation allowance was
reversed when the deferred tax asset related to these investments was written
off during the year ended January 31, 2006. An additional valuation allowance of
$22,817 was established against certain U.S. federal, state and foreign deferred
tax assets due to negative evidence related to C&D's ability to generate
sufficient taxable income to realize these assets. Realization of the Company's
other deferred tax assets is dependent on future taxable income. The Company
believes that it is more likely than not such assets will be realized.
F-31
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
8. INCOME TAXES (continued)
Consistent with Company policy, the Company evaluates the realizability of
all of its tax assets each quarter. As a result of this review, the Company
recorded the following items in the year ended January 31, 2006:
o A write-off of $8,614 in deferred tax assets related to the
investment in certain foreign subsidiaries due to the lack of
positive evidence regarding the realization of these assets in the
foreseeable future. This amount was partially offset by the reversal
of the valuation allowance of $1,538 at January 31, 2005 related to
foreign tax credits associated with unrepatriated earnings from
these subsidiaries.
o The establishment of a valuation allowance of $19,108 against U.S.
federal and state deferred tax assets and a valuation allowance of
$3,709 against certain foreign deferred tax assets due to negative
evidence related to C&D's ability to generate sufficient taxable
income to realize these assets. This negative evidence includes the
significant losses recognized in the fiscal years ended January 31,
2005 and 2006.
As a result of the significant federal net operating loss generated in the
current year, C&D has recorded a prepaid tax asset of $3,381 related to the
expected cash refund resulting from the carry back of the loss generated in
fiscal 2006 to fiscal 2004 and 2005. As a result of this carry back, C&D will
elect to deduct, rather than credit, foreign tax deemed paid by the US entity in
these years. This resulted in a charge of $2,154 as these foreign taxes have
previously been benefited for financial statement purposes as foreign tax
credits.
As of January 31, 2006, the Company had federal net operating loss
carryforwards of approximately $1,871, state net operating loss carryforwards of
$11,230, foreign net operating loss carryforwards of $874 and foreign research
and development tax credits of $800. These losses and credits begin to expire in
varying amounts from December 31, 2009 to January 31, 2026.
Reconciliations of the provision (benefit) for income taxes at the U.S.
statutory rate to the (benefit) provisions for income taxes at the effective tax
rates for the years ended January 31, 2006, 2005 and 2004, respectively, are as
follows:
Years Ended January 31, 2006 2005* 2004*
=============================================================================================================================
U.S. statutory income tax $(16,394) $(28,276) $ 8,319
Effect of:
State tax, net of federal income tax benefit (1,863) (1,018) 317
Write off of deferred tax asset related to the investment in foreign subsidiaries 8,614 -- --
Tax effect of foreign operations 2,149 (63) 69
In-process research and development -- 154 --
Goodwill and intangible asset impairment 4,415 7,146 --
Research and development tax credits (513) -- --
Change in valuation allowance 14,265 854 1,097
Deduction of prior year foreign tax credits 2,154 -- --
Other (465) (86) (1,007)
- -----------------------------------------------------------------------------------------------------------------------------
Total provision (benefit) for income taxes at the effective rate $ 12,362 $(21,289) $ 8,795
=============================================================================================================================
* Reclassified for comparative purposes.
F-32
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
9. COMMITMENTS AND CONTINGENCIES
(A) Operating Leases:
The Company leases certain manufacturing and office facilities and certain
equipment under operating lease agreements. Certain leases contain renewal
options and some have purchase options and generally provide that the Company
shall pay for insurance, taxes and maintenance. As of January 31, 2006, the
Company had future minimum annual lease obligations, net of sublease income,
under leases with noncancellable lease terms in excess of one year as follows:
Years Ended January 31, Amount
- --------------------------------------------------------------------------------
2007 $ 4,292
2008 3,610
2009 3,414
2010 3,199
2011 2,687
Thereafter 3,031
- --------------------------------------------------------------------------------
Total $ 20,233
================================================================================
Total rent expense, net of sublease income, for all operating leases for
the years ended January 31, 2006, 2005 and 2004, was $6,236, $4,957 and $3,700,
respectively.
(B) Contingent Liabilities:
Legal
In January 1999, the Company received notification from the U.S.
Environmental Protection Agency (EPA) of alleged violations of permit effluent
and pretreatment discharge limits at its plant in Attica, Indiana. The Company
submitted a compliance plan to the EPA in April 2002. The Company engaged in
negotiations with both the EPA and U.S. Department of Justice (DOJ) through
March 2003 regarding a potential resolution of this matter. The government filed
suit against C&D in March 2003 in the United States District Court for the
Southern District of Indiana for alleged violations of the Clean Water Act. The
parties have reached a tentative settlement, subject to execution of a Consent
Decree, with an agreed civil penalty of $1,600. Terms of the Consent Decree have
been negotiated and agreed to by the parties. The Company has executed the
Consent Decree and it has been submitted to the EPA and DOJ for signature. The
executed Consent Decree will then be lodged with the Court. In addition to the
civil penalty, the Consent Decree, if finalized in the form submitted to the EPA
and DOJ, will require the Company to submit to the EPA a Compliance Work Plan
for completing implementation of certain compliance measures set forth in the
Consent Decree. These compliance measures will be required to be implemented by
the Company in accordance with a schedule approved by the EPA. Once approved,
the Compliance Work Plan and schedule will become fully enforceable parts of the
Consent Decree. The Consent Decree will also require certain pretreatment
compliance measures, including the continued operation of a wastewater
pretreatment system, which was previously installed at the Attica facility. The
Consent Decree will further require certain National Pollution Discharge
Elimination System (NPDES) compliance measures, including testing, sampling and
reporting requirements relating to a NPDES storm water monitoring system at the
facility. Additionally, the Consent Decree will provide for stipulated penalties
for noncompliance with the requirements of the Consent Decree occurring after
the lodging of the Consent Decree with the Court. The Company does not expect
that the Consent Decree will have a material adverse effect on its business,
financial condition or results of operations.
F-33
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
9. COMMITMENTS AND CONTINGENCIES (continued)
Environmental
The Company is subject to extensive and evolving environmental laws and
regulations regarding the clean-up and protection of the environment, worker
health and safety and the protection of third parties. These laws and
regulations include, but are not limited to (i) requirements relating to the
handling, storage, use and disposal of lead and other hazardous materials in
manufacturing processes and solid wastes; (ii) record keeping and periodic
reporting to governmental entities regarding the use and disposal of hazardous
materials; (iii) monitoring and permitting of air emissions and water discharge;
and (iv) monitoring worker exposure to hazardous substances in the workplace and
protecting workers from impermissible exposure to hazardous substances,
including lead, used in our manufacturing process.
Notwithstanding the Company's efforts to maintain compliance with
applicable environmental requirements, if injury or damage to persons or the
environment arises from hazardous substances used, generated or disposed of in
the conduct of the Company's business (or that of a predecessor to the extent
the Company is not indemnified therefor), the Company may be held liable for
certain damages, the costs of investigation and remediation, and fines and
penalties, which could have a material adverse effect on the Company's business,
financial condition, or results of operations. However, under the terms of the
purchase agreement with Allied Corporation (Allied) for the acquisition (the
Acquisition) of the Company (the Acquisition Agreement), Allied was obligated to
indemnify the Company for any liabilities of this type resulting from conditions
existing at January 28, 1986, that were not disclosed by Allied to the Company
in the schedules to the Acquisition Agreement. These obligations have since been
assumed by Allied's successor in interest, Honeywell (Honeywell).
C&D is participating in the investigation of contamination at several lead
smelting facilities (Third Party Facilities) to which C&D allegedly made scrap
lead shipments for reclamation prior to the date of the acquisition.
Pursuant to a 1996 Site Participation Agreement, as later amended in 2000,
C&D and several other potentially responsible parties (PRPs) agreed upon a cost
sharing allocation for performance of remedial activities required by the United
States EPA Administrative Order Consent Decree entered for the design and
remediation phases at the former NL Industries site in Pedricktown, New Jersey,
Third Party Facility. In April 2002, one of the original PRPs, Exide
Technologies (Exide), filed for relief under Chapter 11 of Title 11 of the
United States Code. In August 2002, Exide notified the PRPs that it would no
longer be taking an active role in any further action at the site and
discontinued its financial participation, resulting in a pro rata increase in
the cost participation of the other PRPs, including C&D, for which C&D's
allocated share rose from 5.25% to 7.79%.
In August 2002, the Company was notified of its involvement as a PRP at
the NL Atlanta, Northside Drive Superfund site. NL Industries, Inc. (NL) and
Norfolk Southern Railway Company have been conducting a removal action on the
site, preliminary to remediation. The Company, along with other PRPs, continue
to negotiate with NL at this site regarding the Company's share of the allocated
liability, which it expects will not have a material adverse effect on its
business, financial condition or results of operations.
The Company is also aware of the existence of contamination at its
Huguenot, New York, facility, which is expected to require expenditures for
further investigation and remediation. The site is listed by the New York State
Department of Environmental Conservation (NYSDEC) on its registry of inactive
hazardous waste disposal sites due to the presence of fluoride and other
contaminants in and underlying a lagoon used by the former owner of this site,
Avnet, Inc., for disposal of wastewater. Contamination is present at
concentrations that exceed state groundwater standards. In 2002, the NYSDEC
issued a Record of Decision (ROD) for the soil remediation portion of the site.
A ROD for the ground water portion has not yet been issued by the NYSDEC. In
2005, the NYSDEC also requested that the parties engage in a Feasibility Study,
which the parties are conducting in accordance with a NYSDEC approved workplan.
In February 2000, the Company filed suit against Avnet, Inc., which has agreed
in principle to bear a substantial share of the costs associated with
investigation and remediation of the lagoon-related contamination. Should the
parties fail to reach a final settlement agreement, the Company will
aggressively pursue available legal remedies. Additionally, should the parties
fail to reach a final settlement agreement, NYSDEC may conduct the remediation
and seek recovery from the parties.
F-34
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
9. COMMITMENTS AND CONTINGENCIES (continued)
C&D, together with Johnson Controls, Inc. (JCI), is conducting an
assessment and remediation of contamination at and near its facility in
Milwaukee, Wisconsin. The majority of the on-site soil remediation portion of
this project was completed as of October 2001. Under the purchase agreement with
JCI, C&D is responsible for (i) one-half of the cost of the on-site assessment
and remediation, with a maximum liability of $1,750 (ii) any environmental
liabilities at the facility that are not remediated as part of the ongoing
cleanup project and (iii) environmental liabilities for any new claims made
after the fifth anniversary of the closing, i.e. March 2004, that arise from
migration from a pre-closing condition at the Milwaukee facility to locations
other than the Milwaukee facility, but specifically excluding liabilities
relating to pre-closing offsite disposal. JCI retained the environmental
liability for the off-site assessment and remediation of lead. In March 2004,
the Company entered into an agreement with JCI to continue to share
responsibility as set forth in the original purchase agreement. The Company
continues to negotiate with JCI regarding the allocation of costs for assessment
and remediation of certain off-site chlorinated volatile organic compounds
(CVOCs) in groundwater.
In January 1999, the Company received notification from the EPA of alleged
violations of permit effluent and pretreatment discharge limits at its plant in
Attica, Indiana. The Company submitted a compliance plan to the EPA in April
2002. The Company engaged in negotiations with both the EPA and DOJ through
March 2003 regarding a potential resolution of this matter. The government filed
suit against C&D in March 2003 in the United States District Court for the
Southern District of Indiana for alleged violations of the Clean Water Act. The
parties have reached a tentative settlement, subject to execution of a Consent
Decree, with an agreed civil penalty of $1,600. Terms of the Consent Decree have
been negotiated and agreed to by the parties. The Company has executed the
Consent Decree and it has been submitted to the EPA and DOJ for signature. The
executed Consent Decree will then be lodged with the Court. In addition to the
civil penalty, the Consent Decree, if finalized in the form submitted to the EPA
and DOJ, will require the Company to submit to the EPA a Compliance Work Plan
for completing implementation of certain compliance measures set forth in the
Consent Decree. These compliance measures will be required to be implemented by
the Company in accordance with a schedule approved by the EPA. Once approved,
the Compliance Work Plan and schedule will become fully enforceable parts of the
Consent Decree. The Consent Decree will also require certain pretreatment
compliance measures, including the continued operation of a wastewater
pretreatment system, which was previously installed at the Attica facility. The
Consent Decree will further require certain NPDES compliance measures, including
testing, sampling and reporting requirements relating to a NPDES storm water
monitoring system at the facility. Additionally, the Consent Decree will provide
for stipulated penalties for noncompliance with the requirements of the Consent
Decree occurring after the lodging of the Consent Decree with the Court. The
Company does not expect that the Consent Decree will have a material adverse
effect on its business, financial condition or results of operations.
In February 2005, the Company received a request from EPA to conduct
exploratory testing to determine if the historical municipal landfill located on
the C&D Attica, Indiana, property is the source of elevated levels of
trichloroethylene detected in two city wells downgradient of the C&D property.
EPA advised that it believes the former landfill is subject to remediation under
the RCRA corrective action program. The Company has submitted an investigation
work plan to EPA, and testing in accordance with the plan is being conducted.
EPA has recently advised that the agency also wants C&D to embark upon a more
comprehensive investigation under an agreed consent order to determine whether
there have been any releases of other hazardous waste constituents from the C&D
Attica facility and, if so, to determine what corrective measure may be
appropriate. The scope of any potential exposure is not defined at this time.
However, the Company does not currently believe that this matter will have a
material adverse effect on its business, financial condition or results of
operations.
F-35
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
9. COMMITMENTS AND CONTINGENCIES (continued)
In March 2005, the FASB released FIN 47, which requires companies to record
a conditional asset retirement obligation (CARO) for any legal obligations to
perform asset retirement activities. The Company evaluated the impact of FIN 47
and determined that it has numerous battery facilities that are classified as
subject to prescribed post-closure cleanup actions, which include requirements
for the disposal of all hazardous wastes within 90 days of facility closure. The
hazardous wastes are contained within wastewater holding tanks. The Company has
no plans or legal requirements to remove or replace the tanks. The Company's
tank cleanup and removal is conditional on closure or sale of the plants. There
is an indeterminate settlement date for the retirement obligation to which the
holding tanks give rise, because the range of time over which the Company may
settle the obligation is unknown and cannot be estimated. The Company will
continue to monitor the measurement of this liability if plans for these
manufacturing sites should change.
The Company accrues reserves for liabilities in its consolidated financial
statements and periodically reevaluates the reserved amounts for these
liabilities in view of the most current information available in accordance with
SFAS No. 5, "Accounting for Contingencies." As of January 31, 2006, accrued
environmental reserves totaled $3,775 consisting of $2,534 in other current
liabilities and $1,241 in other liabilities. During fiscal year 2006, the
Company reversed $3,504 of environmental reserves as a result of revised
estimates associated with two of its facilities. Based on currently available
information, the Company believes that appropriate reserves have been
established with respect to the foregoing contingent liabilities and that they
are not expected to have a material adverse effect on its business, financial
condition or results of operations.
(C) Purchase Commitments:
Periodically the Company enters into purchase commitments pertaining to
the purchase of certain raw materials with various suppliers. The Company
entered into a lead commitment contract for a thirteen-month period ending in
January 2007 at market rates resulting in an estimated commitment of $6,216.
Under a manufacturing supply agreement, the Company is committed to purchase
approximately $1,944 of inventory as of January 31, 2006. No other significant
purchase commitments existed at January 31, 2006, and none are expected to
exceed usage requirements.
10. MAJOR CUSTOMER
No single customer of the Company amounted to 10% or more of the Company's
consolidated net sales for the years ended January 31, 2006, 2005 and 2004.
11. CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to potential concentration
of credit risk consist principally of trade receivables and temporary cash
investments. The Company places its temporary cash investments with various
financial institutions and, generally, limits the amount of credit exposure to
any one financial institution. Concentrations of credit risk with respect to
trade receivables are limited by a large customer base and its geographic
dispersion. The Company performs ongoing credit evaluations of its customers'
financial condition and requires collateral, such as letters of credit, in
certain circumstances.
F-36
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
January 31, 2006 and 2005, were as follows:
2006 2005*
------------------------ -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
==================================================================================================================
Cash and cash equivalents $ 25,693 $ 25,693 $ 26,855 $ 26,855
Debt (excluding capital lease obligations) 133,081 145,456 134,237 134,237
Commodity hedges 6,507 6,507 -- --
Foreign exchange hedges (38) (38) 78 78
Interest rate swaps -- -- (644) (644)
==================================================================================================================
* Reclassified for comparative purposes.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents - the carrying amount approximates fair value
because of the short maturity of these instruments.
The fair value of accounts receivable, accounts payable and accrued
liabilities consistently approximate the carrying value due to the short term
maturity of these instruments and are excluded from the above table.
Long term debt (excluding capital lease obligations) - the fair value of
the Notes was determined using quoted market prices at the balance sheet date.
The carrying value of the Company's remaining long-term debt, including the
current portion, approximates fair value based on the incremental borrowing
rates currently available to the Company for loans with similar terms and
maturity.
Hedging instruments - the estimated fair value of the interest rate swaps
and foreign exchange contracts are based on market prices or current rates
offered for interest rate swaps and foreign exchange contracts with similar
terms and maturities. The ultimate amounts paid or received under these interest
rate swaps and foreign currency contracts, however, depend on future interest
rates and exchange rates.
The Company uses derivative instruments according to a financial risk
management policy in order to manage its exposure to changes in certain
commodity prices and exchange rates. The Company applies hedge accounting by
documenting the relationships of the derivatives to the hedged items and
continuously evaluates their effectiveness.
The Company applies hedge accounting in accordance with SFAS No. 133 as
amended, 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, which are
recognized currently in earnings, act as an economic offset to changes in the
fair value of the underlying hedged item(s). The Company did not apply hedge
accounting to currency forward contracts with a combined fair value of $(38) and
$78 as of January 31, 2006 and 2005. Changes in the fair value of these currency
forward contracts are recorded in other expense, net.
F-37
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Changes in the value of a derivative that is designated as a fair value
hedge, along with offsetting changes in fair value of the underlying hedged
exposure, are recorded in operations each period. Changes in the fair value of a
derivative that is designated as a cash flow hedge are recorded in Accumulated
Other Comprehensive Income. When operations are affected by the variability of
the underlying cash flow, the applicable amount of the gain or loss from the
derivative that is deferred in stockholders' equity is released to operations.
When the terms of an underlying transaction are modified, or when the underlying
hedged item ceases to exist, all changes in the fair value of the instrument are
included in operations each period until the instrument matures. Derivatives
that are not designated as hedges, as well as the portion of a derivative
excluded from the effectiveness assessment and changes in the value of the
derivatives which do not offset the underlying hedged item throughout the
designated hedge period, are recorded in other expense, net each period.
The Company does not use derivatives for speculative purposes, nor is it a
party to leveraged derivatives. The Company is exposed to credit risk related to
its financial instruments in the event of non-performance by the counterparties.
As such, the Company has a policy of only entering into contracts with major
financial institutions. When viewed in conjunction with the underlying and
offsetting exposure that the derivatives are designed to hedge, the Company has
not sustained a material loss from these instruments nor does it anticipate any
material adverse effect on its net income or financial position in the future
from the use of derivatives.
Interest rate risk - The Company may from time to time use interest rate
swaps to maintain certain proportions of fixed versus variable rate debt per
policy. The Company does not have any interest rate swaps outstanding as of
January 31, 2006. On January 31, 2005, the Company had a notional amount of
$30,000 outstanding with a fair value of $(644) which was classified as a cash
flow hedge. Therefore, changes in the fair value, net of taxes, were recorded in
Accumulated Other Comprehensive (Loss) Income.
Commodity risk - In fiscal year 2006, the Company began to enter into
hedges with financial institutions to mitigate its exposure to the volatility of
the price of lead, which is the primary raw material component of its Power
Systems division. The Company uses forward contracts to fix the price of a
portion of its purchases according to its policies. The notional amount of the
lead forward contracts as of January 31, 2006 was $23,204. At January 31, 2006,
these forward contracts had a market value of $6,507, which was recorded in
Accumulated Other Comprehensive Income. During fiscal year 2006 the Company
settled lead forward contracts for cash proceeds of $1,201, which was either
recorded as a reduction of cost of goods sold to the extent that Inventory was
sold; otherwise, it was deferred in Accumulated Other Comprehensive (Loss)
Income. Effective February 23, 2006, one of the Company's financial
counterparties exercised its right to terminate 25.6 million pounds of lead
forward contracts, representing approximately $10,375 in notional value lead
forward contracts. This settlement resulted in cash proceeds of $3,099. The
settlement does not change the head accounting for these forward contracts, with
the gain in Comprehensive (Loss) Income continuing to be released to earnings
during fiscal 2007 in the month in which the hedged item is recognized in cost
of sales.
The net market value of the Company's lead contracts was $6,507 at January
31, 2006. There were no lead contracts at January 31, 2005.
Commodity and interest rate derivatives are designated as cash flow hedges
of anticipated lead purchases and scheduled interest payments, respectively. The
fair values of these derivatives are accumulated in Other Comprehensive Income
in Stockholders' Equity and are released to earnings during the period in which
the hedged items impact earnings.
Effective for fiscal year 2006, the Company adopted a lead hedging policy.
The Company has entered into non-deliverable forward contracts with certain
financial counterparties to hedge its exposure to the fluctuations in the price
of lead, the primary raw material component used in the Power Systems division.
The Company employs hedge accounting in the treatment of these contracts.
Changes in the value of the contracts are marked to market each month and the
gains and losses are recorded in Other Comprehensive (Loss) Income until they
are released to the income statement through cost of goods sold in the same
period as is the hedged item (lead).
F-38
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Foreign exchange risk - The Company uses currency forwards or options to
hedge certain foreign currency denominated receivables or payables, primarily in
Canadian Dollars, Pounds Sterling, Euros, Yen and Mexican Pesos. These hedges
offset the changes in the underlying assets or liabilities until the items are
relieved from the balance sheet.
Foreign exchange derivatives have been designated as fair value hedges.
The changes in the fair value of the hedges are recorded in earnings immediately
and offset a comparable gain or loss in an underlying asset or liability.
The notional values of the foreign exchange contracts are as follows:
Currency, at January 31 2006 2005
================================================================================
Pounds Sterling $ 23,072 $ 706
Canadian Dollars 4,321 3,281
Yen 1,011 1,350
Euros 953 1,056
Mexican Pesos 87 --
F-39
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
13. EMPLOYEE BENEFIT PLANS
The Company has various noncontributory defined benefit pension plans,
which cover certain employees in the United States. Certain employees of the
Japanese subsidiary of Datel, Inc., acquired on June 30, 2004, are also covered
by a defined benefit pension plan.
The Company's funding policy for the domestic plans is to contribute
annually an amount that can be deducted for federal income tax purposes. Pension
benefits for the Company's defined benefit plans are generally based on
employees' years of service and qualifying compensation during the years of
employment. Plan assets are invested in commingled trust funds consisting
primarily of equity and U.S. Government securities. The Company's funding policy
for the Japanese plan is to make contributions in accordance with Japanese laws
and regulations. The Japanese plan is qualified under Japanese income tax
regulations, and the related contributions and premiums are tax deductible.
The Company also provides certain health care and life insurance benefits
for retired employees who meet certain service requirements (postretirement
benefits) through two plans. One of these plans was amended on April 1, 2005 to
decrease the life insurance benefits for retirees.
Benefit payments for the Company's domestic and foreign pension and post
retirement plans are expected to be paid as follows:
Pension Postretirement
Years Ended January 31, Plans Plans
================================================================================
2007 $ 3,051 $ 266
2008 3,163 274
2009 3,270 299
2010 3,354 339
2011 3,538 399
2012 - 2016 21,071 2,144
F-40
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
13. EMPLOYEE BENEFIT PLANS (continued)
The tables that follow provide a reconciliation of the changes in the
plans' benefit obligations and fair value of assets for the years ended January
31, 2006 and 2005, and a statement of the funded status as of January 31, 2006
and 2005. The measurement dates are December 31, 2005 and 2004.
Pension Benefits Postretirement Benefits
------------------------ -------------------------
2006 2005 2006 2005
===================================================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 72,650 $ 66,374 $ 4,554 $ 4,322
Service cost 1,805 1,759 195 158
Interest cost 4,088 3,911 253 207
Plan amendments -- -- (653) 805
Special termination benefits -- 3 -- --
Actuarial loss (gain) 2,638 2,076 517 (682)
Acquisition -- 1,390 -- --
Exchange rate adjustment (194) 43 -- --
Benefits paid (3,267) (2,906) (358) (256)
- -------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 77,720 $ 72,650 $ 4,508 $ 4,554
===================================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 64,551 $ 58,676 $ -- $ --
Actual return on plan assets 1,002 3,322 -- --
Acquisition -- 1,009 -- --
Employer contributions 894 4,422 358 256
Exchange rate adjustment (120) 28 -- --
Benefits paid (3,267) (2,906) (358) (256)
- -------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 63,060 $ 64,551 $ -- $ --
===================================================================================================================
Reconciliation of funded status:
Funded status $(14,660) $ (8,099) $ (4,508) $ (4,554)
Unrecognized actuarial loss (gain) 29,670 24,679 248 (269)
Unrecognized prior service cost 80 124 (122) 539
Contributions made after measurement date
but before the end of the fiscal year 5 3 -- --
- -------------------------------------------------------------------------------------------------------------------
Net amount recognized
at measurement date at end of year $ 15,095 $ 16,707 $ (4,382) $ (4,284)
===================================================================================================================
Amounts recognized in the statement of financial position
consist of:
Prepaid pension cost $ 19,128 $ 20,875 $ -- $ --
Intangible asset 80 -- -- --
Accumulated Other Comprehensive Income 24,661 -- -- --
Contributions made after measurement date
but before the end of the fiscal year 5 4 -- --
Accrued benefit liability (28,779) (4,172) (4,382) (4,284)
- -------------------------------------------------------------------------------------------------------------------
Net amount recognized at end of fiscal year* $ 15,095 $ 16,707 $ (4,382) $ (4,284)
===================================================================================================================
As of January 31, 2006, prepaid benefit cost is presented net of the
accrued benefit liability in Other Liabilities. Prepaid benefit cost is included
in intangible and other assets, net and the accrued benefit liability is
included in other liabilities as of January 31, 2005.
F-41
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
13. EMPLOYEE BENEFIT PLANS (continued)
Pension Benefits Postretirement Benefits
-------------------------------------- --------------------------------
2006 2005 2004 2006 2005 2004
=============================================================================================================================
Components of net periodic benefit cost:
Service cost $ 1,805 $ 1,759 $ 1,513 $ 195 $ 158 $ 172
Interest cost 4,088 3,912 3,823 253 207 252
Expected return on plan assets (5,141) (4,886) (4,122) -- -- --
Amortization of prior service costs 14 18 19 8 920 115
Recognized actuarial loss/(gain) 1,766 1,488 1,409 -- (2) (3)
Curtailment 29 -- -- -- -- --
Special termination benefit -- 3 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 2,561 $ 2,294 $ 2,642 $ 456 $ 1,283 $ 536
=============================================================================================================================
Weighted-average assumptions
used to determine benefit
obligation as of January 31*:
Discount rate 5.52% 5.67% 6.00% 5.60% 5.75% 6.00%
Rate of compensation increase*** 4.36% 4.36% 4.00-4.95% N/A N/A N/A
Weighted-average assumptions
used to determine net cost for
the periods ended January 31**:
Discount rate 5.67% 5.92% 7.00% 5.75% 6.00% 7.00%
Expected long-term
rate of return on plan assets 8.12% 8.36% 8.50% N/A N/A N/A
Rate of compensation increase*** 4.36% 4.39% 4.00-4.95% 4.45% 4.45% N/A
* Determined as of the end of the year.
** Determined as of the beginning of the year.
*** Rate relates to certain employees. Some covered employees have benefits
unrelated to rate of pay.
The Company considered various corporate bond indices rated "Aa" or higher
with a duration that is consistent with the plans' liabilities to determine the
discount rates at each measurement date. The change in the discount rate is
consistent with the changes in the benchmarks considered for the same periods.
To develop the expected long-term rate of return on plan assets
assumption, the Company considered the historical returns and the future
expectations for returns for each asset class, as well as the target asset
allocation of the pension portfolio and the payment of plan expenses from the
pension trust. This resulted in the selection of the 8.5% expected long-term
rate of return on plan assets assumption for domestic plans and .5% for the
Japanese plan.
The Company sponsors two postretirement benefit plans for certain
employees in the United States; the Company contributions to one of them are
fixed so there is no material trend rate assumption. The other plan has a cap on
benefits in place. The impact of a change in the assumed health care cost trend
rate is zero as the per capita claims costs have exceeded the cap since 2004.
The reported postretirement benefit obligation does not reflect the effect of
the Medicare Prescription Drug Improvement and Modernization Act of 2003. C&D
provides prescription drug benefits to some Medicare-eligible retirees, but is
not expected to qualify for the tax-free federal subsidy.
The accumulated benefit obligation of the domestic and Japanese pension
plans was $71,259 and $66,043 for fiscal years 2006 and 2005, respectively.
F-42
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
13. EMPLOYEE BENEFIT PLANS (continued)
For fiscal year 2006, the accumulated benefit obligation exceeded the plan
assets for the four domestic plans and the Japanese plan. The projected benefit
obligation, accumulated benefit obligation, and fair value of plan assets for
these plans were $77,720, $71,259 and $63,060, respectively for fiscal year
2006.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the one domestic pension plan and the Japanese pension
plan, with accumulated benefit obligations in excess of plan assets, were
$9,383, $7,036 and $4,645, respectively for fiscal year 2005.
The pension plans, domestic and Japanese, have the following asset
allocations, as of their measurement dates:
Actual Percentage of
Plan Assets at
December 31,
------------------------
2005 2004
================================================================================
ASSET CATEGORY
Equity Securities - Domestic 30.90% 58.00%
Equity Securities - International 10.70% 8.80%
- --------------------------------------------------------------------------------
Total 41.60% 66.80%
================================================================================
Debt Securities 49.30% 25.40%
Other 9.10% 7.80%
- --------------------------------------------------------------------------------
Total 100.00% 100.00%
================================================================================
The Pension Plans' investment policy includes the following asset guidelines:
Domestic Japanese
Plans Plan
Policy Policy
Asset Allocation Policy Guidelines Target* Target**
================================================================================
ASSET CLASS
Fixed Income 53.00% 0.00%
Domestic Equity 29.10% 0.00%
International Equity 10.40% 0.00%
Other * 7.50% 100.00%
*A small percentage of the largest pension plan assets are invested in a
broadly diversified alternative investment which consists of 30-40 hedge funds
of different styles and asset types (equity long/short, sovereign debt and
mortgage hedging, etc.).
**The plan assets of the Japanese pension plan are invested in the general
assets of a Japanese insurance company. The investment profile of the Japanese
insurance company is 60% to 80% debt securities, 5% to 20% equity securities, a
maximum of 10% real estate and a maximum of30% other.
The asset allocation policy was developed in consideration of the
long-term investment objective of ensuring that there is an adequate level of
assets to support benefit obligations to plan participants. A secondary
objective is minimizing the impact of market fluctuations on the value of the
plans' assets. Equity securities - Domestic include Company common stock in the
amounts of $2,023 (3.3% of total domestic plan assets) and $4,524 (7.1% of total
domestic plan assets) at December 31, 2005 and 2004, respectively.
Assuming that the actual return on plan assets is consistent with the
expected rate of 8.12% for the domestic plans for fiscal year 2007, and that
interest rates remain constant, the Company would not be required to make any
contributions to its domestic pension plans for fiscal year 2007. The Company
expects to make discretionary contributions totaling approximately $1,520 to one
of its domestic pension plans and to make contributions of approximately $61 to
the Japanese plan. The Company
F-43
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
13. EMPLOYEE BENEFIT PLANS (continued)
also expects to make contributions totaling approximately $266 to the two
domestic Company sponsored postretirement benefit plans.
In addition to the broad asset allocation described above, the following
policies apply to individual asset classes for the domestic plans:
Fixed income investments for the domestic plans are oriented toward
investment grade securities rated "Baa" or higher, with a small
exposure to high yield and emerging markets debt. They are
diversified among individual securities and sectors. The average
maturity is similar to that of the broad U.S. bond market. For the
Japanese plan, fixed income investments held by the Japanese
insurance company are principally in Yen denominated bonds of high
quality ratings.
Equity investments for the domestic plans are diversified among
individual securities, industries and economic sectors.
International equity investments are also diversified by country.
Most securities held are issued by companies with large market
capitalizations. Investment in the Company's stock is permissible up
to a maximum of 10% at the time of investment. For the Japanese
plan, a majority of the equity securities held by the Japanese
insurance company are invested in mature industries and companies
with long operating histories and with market capitalization of at
least $1,000,000. Only securities traded on national public markets
in industrial nations are eligible for the Japanese plan.
Certain employees are eligible to participate in various defined
contribution retirement plans. The Company's contributions under the plans are
based on either specified percentages of employee contributions or specified
percentages of the employees' earnings. The Company's expense was $1,490, $1,577
and $2,174 for the years ended January 31, 2006, 2005 and 2004, respectively.
The Company has Supplemental Executive Retirement Plans (SERPs) that cover
certain executives. The SERPs are non-qualified, unfunded deferred benefit
compensation plans. Expenses related to these SERPs, which were actuarially
determined, were $389, $767 and $581 for the years ended January 31, 2006, 2005
and 2004, respectively. The liability for these plans was $3,873 and $3,635 as
of January 31, 2006 and 2005, respectively, and was included in other
liabilities.
The Company has a Deferred Compensation Plan that covers certain senior
management employees and non-employee members of the Company's Board of
Directors. With the exception of administration costs, which are paid by the
Company, this non-qualified plan is funded entirely by participants through
voluntary deferrals of compensation. Income deferrals made by participants under
this plan are deposited in individual trust (known under current tax law as a
rabbi trust) accounts. The Company follows the provisions of EITF 97-14,
"Accounting for Deferred Compensation Arrangement Where Amounts Earned Are Held
in a Rabbi Trust and Invested." The EITF requires (i) the accounts of the rabbi
trust be consolidated with the accounts of the Company; (ii) the Company stock
be classified and accounted for in equity, in a manner similar to the way in
which treasury stock is accounted for; (iii) the diversified assets be accounted
for in accordance with GAAP for the particular asset; and (iv) the deferred
compensation obligation be classified as a liability and adjusted with a
corresponding charge (or credit) to compensation cost, to reflect changes in the
fair value of the amount owed to the participant. At January 31, 2006 and 2005,
the liability for the Company's Deferred Compensation Plan was $718 and $953,
respectively, and was included in other liabilities.
F-44
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
14. ASSET IMPAIRMENTS
During the fiscal years 2006 and 2005, the Company identified facts
suggesting that long-lived assets and goodwill within the each of its operating
divisions may be impaired. 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 and determined that the carrying value of its long-lived assets within
those identified 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 goodwill by division 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
reporting unit to its carrying amount, including goodwill. As the carrying
amount of the 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 reporting unit.
During the fourth quarter of fiscal year 2006, the Company recorded
impairment charges of $2,641 related to its Huguenot, New York facility. The
impairment charges result from the Company's identification of inadequate
discounted cash flows to support the book value of buildings and equipment over
their remaining useful life. The impairment charges consisted of $2,047 in
Buildings and Improvements and $594 in Machinery and Equipment. These charges
were included in Cost of Sales.
The Company completed an impairment review with respect to the third
quarter of fiscal year 2006 and found in connection with its preparation and
review of the Company's financial statements that an impairment existed with
respect to certain identifiable intangible assets of the PED as of October 31,
2005, due to a decline in financial projections of customer relationships. These
factors included the realization that for each of the three quarters to date of
fiscal year 2006, operating results in PED 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, 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.
As a result of the impairment tests, as of October 31, 2005, the Company
recorded a pre-tax charge of $2,161 related to the fixed assets at its Tucson
location and $20,045 of intangible assets for PED. The charges were included in
Cost of Sales and Operating Expenses, respectively. Given the indicators noted
above and the existence of an impairment of PED's long-lived assets, the Company
completed a goodwill analysis and determined there to be an impairment. The
Company recorded a pre-tax charge of $13,674 for PED goodwill.
The Company completed its fiscal year 2005 annual impairment review with
in the fourth quarter of fiscal year 2005 and found in connection with its
preparation and review of its financial statements that a pre-tax impairment of
$74,233 was required in the PED as of January 31, 2005. No impairment to
goodwill existed in any other division as of January 31, 2005.
In addition, it was determined that an impairment existed with respect to
certain intellectual property of the PED as of January 31, 2005, due to a
decline in financial projections of certain products. As a result, the Company
recorded a pre-tax non-cash impairment charge of $464 included in research and
development expense in fiscal year 2005.
F-45
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
14. ASSET IMPAIRMENTS (continued)
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 MSE 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 $1,400, its expected fair value, resulting in a loss of $114.
F-46
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
15. QUARTERLY FINANCIAL DATA (unaudited)
Quarterly financial data for the years ended January 31, 2006 and 2005,
follow:
First Second Third Fourth
Year Ended January 31, 2006 Quarter Quarter Quarter Quarter
===================================================================================================
Net sales $ 122,821 $ 123,076 $ 126,966 $ 124,544
Gross profit 21,751 23,437 17,799 19,921
Operating (loss) income (1,141) 2,781 (37,831) (1,560)
Net (loss) income (1,709) 1,050 (59,983) (20)
Net (loss) income per common share - basic (0.07) 0.04 (2.36) 0.00
Net (loss) income per common share - diluted (0.07) 0.04 (2.36) 0.00
The results for the third quarter of fiscal year 2006 included pre-tax
charges for impairment of identifiable intangible assets, goodwill and fixed
assets of $20,045, $13,674 and $2,161 due to the existence of recurring realized
and anticipated operating results below forecasted results in the PED. The
results for the fourth quarter of fiscal year 2006 included pre-tax charges for
impairment of fixed assets of $2,641 at the Company's Huguenot, New York
facilities, and a reversal of $3,504 for environmental reserves as a result of
revised estimates associated with two of its facilities that had been accrued in
the third quarter of fiscal year 2005..
First Second Third Fourth
Year Ended January 31, 2005 Quarter Quarter Quarter Quarter
===================================================================================================
Net sales $ 85,805 $ 93,627 $ 112,732 $ 122,574
Gross profit 16,541 19,521 8,908 21,688
Operating income (loss) 3,838 6,667 (9,399) (75,266)
Net income (loss) 2,004 3,206 (7,353) (57,350)
Net income (loss) per common share - basic 0.08 0.13 (0.29) (2.26)
Net income (loss) per common share - diluted 0.08 0.13 (0.29) (2.26)
The results for the third quarter of fiscal year 2005 reflect impairment
charges of $9,602 relating to the Company's Leola, Pennsylvania, and Huguenot,
New York, facilities and related estimated environmental clean-up and impaired
equipment decontamination charges at these two facilities in the amount of
$3,881.
The results for the fourth quarter of fiscal year 2005 included a pre-tax
goodwill impairment charge of $74,233 related to the Company's completed annual
impairment review.
F-47
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
16. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company has the following three reportable business segments:
The Standby Power Division manufactures and markets integrated reserve
power systems and components for the standby power market, which includes
telecommunications, uninterruptible power supplies (UPS), cable and utilities.
Integrated reserve power systems monitor and regulate electric power flow and
provide backup power in the event of a primary power loss or interruption. The
Standby Power Division also produces the individual components of these systems,
including reserve batteries, power rectifiers, system monitors, power boards and
chargers. Major applications of these products include wireless and wireline
telephone infrastructure, cable television (CATV) signal powering, corporate
data center powering and computer network backup for use during power outages.
The Power Electronics Division manufactures and markets custom, standard
and modified-standard electronic power supply systems, including DC to DC
converters, for large OEMs of telecommunications and networking equipment, as
well as office and industrial equipment. In addition, as a result of recent
acquisitions, the division also manufactures power conversion products sold into
military and CATV applications as well as digital panel meters and data
acquisition components.
The Motive Power Division manufactures complete systems and individual
components (including power electronics and batteries) to power, monitor, charge
and test the batteries used in electric industrial vehicles, including fork-lift
trucks, automated guided vehicles and airline ground support equipment. These
products are marketed to end users in a broad array of industries, dealers of
fork-lift trucks and other material handling vehicles and, to a lesser extent,
OEMs.
Summarized financial information related to the Company's business
segments for the years ended January 31, 2006, 2005 and 2004, is shown below:
Standby Power
Year Ended January 31, 2006 Power Electronics Motive Power Consolidated
===========================================================================================================
Net sales $ 256,272 $186,305 $ 54,830 $ 497,407
Operating income (loss) $ 12,640 $(40,521) $( 9,870) $ (37,751)
Year Ended January 31, 2005
===========================================================================================================
Net sales $ 245,794 $111,546 $ 57,398 $ 414,738
Operating income (loss) $ 9,211 $(71,703) $(11,668) $ (74,160)
Year Ended January 31, 2004
===========================================================================================================
Net sales $ 232,687 $ 39,080 $ 53,057 $ 324,824
Operating income (loss) $ 30,280 $ 1,109 $ (4,711) $ 26,678
For the year ended January 31, 2006, PED recorded non-cash pre-tax charges
for impairment of identifiable intangible assets, goodwill and fixed assets of
$20,045, $13,674 and $2,161 due to the existence of recurring realized and
anticipated operating results below forecasted results in the Power Electronics
Division. Motive Power Division recorded an impairment of fixed assets of
$2,641.
For the year ended January 31, 2005, the Power Electronics Division
recorded a non-cash pre-tax goodwill impairment charge of $74,233 related to the
Company's completed annual impairment review.
Many of the Company's facilities manufacture products for more than one
segment. Therefore, it is not practicable to disclose asset information (assets,
expenditures for long-lived assets) on a segment basis.
F-48
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
16. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA (continued)
Long-lived assets are comprised of property, plant and equipment,
over-funded pensions, investments, deposits and notes receivable.
Summarized financial information related to the geographic areas in which
the Company operated at January 31, 2006, 2005 and 2004, and for each of the
years then ended is shown below:
Years Ended January 31, 2006 2005 2004
================================================================================
Net sales*:
United States $331,081 $305,742 $268,149
Other countries 166,326 108,996 56,675
- --------------------------------------------------------------------------------
Consolidated totals $497,407 $414,738 $324,824
================================================================================
Long-lived assets:
United States $ 59,139 $ 93,796 $100,386
China 15,627 14,862 11,548
Mexico 15,062 15,121 11,037
Other countries 2,721 2,732 1,393
- --------------------------------------------------------------------------------
Consolidated totals $ 92,549 $126,511 $124,364
================================================================================
* Net sales by geographic area is determined by the location of the
customer.
17. 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:
Years Ended January 31, 2006 2005
=========================================================================================
Balance at beginning of year $ 8,303 $ 9,759
Opening balance sheet liability of acquired companies -- 393
Current year provisions 6,429 3,872
Expenditures (7,098) (5,725)
Effect of foreign currency translation (4) 4
- -----------------------------------------------------------------------------------------
Balance at end of year $ 7,630 $ 8,303
=========================================================================================
As of January 31, 2006, accrued warranty obligations of $7,630 include
$4,020 in current liabilities and $3,610 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.
18. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Years Ended January 31, 2006 2005
=========================================================================================
Cumulative translation adjustment $ 5,358 $ 5,661
Accumulated net unrealized holding gain (loss) on derivatives 7,427 (386)
Minimum pension liability adjustment (24,661) --
- -----------------------------------------------------------------------------------------
Total accumulated other comprehensive (loss) income $(11,876) $ 5,275
=========================================================================================
F-49
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
19. SUBSEQUENT EVENT
On April 3, 2006, the Company entered into an agreement with Celestica
Hong Kong Limited, an affiliate of Celestica (Celestica), to terminate the
existing agreement for manufacture dated September 30, 2004, by which Celestica
manufactures DC to DC and AC to DC power supplies for the Company. The Company
plans to have completed the wind down of manufacturing operations with Celestica
by the end of September 2006. The production of these power supplies will be
transferred to other contract manufacturers.
On April 6, 2006, the Company announced further actions associated with
the revitalization of its Motive Power Products business. These actions include
launching new products to open access to several unaddressed markets, the
planned closure of our Huguenot, New York facility and relocation of production
to Reynosa, Mexico and the establishment of new distribution centers to service
the Company's customer base.
F-50
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE II.
VALUATION AND QUALIFYING ACCOUNTS
for the years ended January 31, 2006, 2005 and 2004
(Dollars in thousands)
Additions
Additions Charged
Balance at Charged to to Balance at
Beginning Costs & Other Translation Deductions End of
of Period Expenses Accounts Adjustment (a) Period
===========================================================================================================================
Deducted from Assets
Allowance for doubtful accounts:
Year ended January 31, 2006 $ 2,018 $ 1,027 $ -- $ 6 $ 162 $ 2,889
Year ended January 31, 2005 1,476 32 751(b) -- 241 2,018
Year ended January 31, 2004 1,906 -- -- -- 430 1,476
Valuation allowance for deferred tax assets:
Year ended January 31, 2006 $ 1,538 $14,265 $ 7,014(c) $ -- $ -- $22,817
Year ended January 31, 2005 1,097 855 -- -- 414 1,538
Year ended January 31, 2004 -- -- 1,097 -- -- 1,097
- ----------
(a) Amounts written-off, net of recoveries and reserve reversals.
(b) Additions totaling $751 relate to business acquisitions.
(c) Additions totaling $7,014 were charged to Other Comprehensive Income.
S-1