UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
|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.
EXPLANATORY NOTE
C&D Technologies, Inc. hereby amends its Annual Report on Form 10-K for the
fiscal year ended January 31, 2006 (the "Form 10-K") (filed on April 10, 2006)
as set forth in this Annual Report on Form 10-K/A (Amendment No. 1) (the "Form
10-K/A"). This Form 10-K/A includes an amendment to the following section of the
Form 10-K:
Pages 27-39. Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. The only change is to correct tabular information
presented on page 32.
Except as described above, no other changes have been made to the original Form
10-K, and this Form 10-K/A does not amend, update or change the financial
statements or any other Items or disclosures in the original Form 10-K. This
Form 10-K/A does not reflect events occurring after the filing of the Form 10-K
or modify or update those disclosures, including any exhibits to the Form 10-K
affected by subsequent events. Information not affected by the changes described
above is unchanged and reflects the disclosures made at the time of the original
filing of the Form 10-K on April 10, 2006. Accordingly, this Form 10-K/A should
be read in conjunction with our filings made with the Securities and Exchange
Commission subsequent to the filing of the original Form 10-K, including any
amendments to those filings.
1
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
2
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.
3
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.
4
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.
5
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:
6
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 1,898 (1,831) 1,455 1,522
- ----------------------------------------------------------------------------------------------------------------
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.
7
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.
8
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.
9
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.
10
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.
11
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
=============================================================================================================================
12
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
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.
13
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.
14
SIGNATURE
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.
May 2, 2006 By: /s/ Ian J. Harvie
----------------------------------
Ian J. Harvie
Vice President and
Chief Financial Officer
15
Item 15. Exhibits and Financial Statement Schedules
(3) Exhibits:
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).
16
EXHIBIT 31.1
CERTIFICATION
I, Jeffrey A. Graves, certify that:
1. I have reviewed this Amendment No. 1 to the annual report on Form 10-K/A
of C&D Technologies, Inc. for the fiscal year ended January 31, 2006;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report.
Date: May 2, 2006 /s/ Jeffrey A. Graves
----------------- ---------------------------------
Jeffrey A. Graves
President and Chief Executive
Officer (Principal Executive
Officer)
A signed original of this certification required by Section 302 has been
provided to C&D Technologies, Inc. and will be retained by C&D Technologies,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
17
EXHIBIT 31.2
CERTIFICATION
I, Ian J. Harvie, certify that:
1. I have reviewed this Amendment No. 1 to the annual report on Form 10-K/A
of C&D Technologies, Inc. for the fiscal year ended January 31, 2006;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report.
Date: May 2, 2006 /s/ Ian J. Harvie
----------------- ---------------------------------
Ian J. Harvie
Vice President Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
A signed original of this certification required by Section 302 has been
provided to C&D Technologies, Inc. and will be retained by C&D Technologies,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
18